Strategic Business Reporting (International) · Share-based payment

Equity-settled Share-based Payment Transactions under IFRS 2

Updated 11 October 2026 · Fact-checked

An equity-settled share-based payment is where you pay for goods or services with shares or options. Measure employee awards at grant-date fair value, never remeasure it, and spread the cost over the vesting period. Each year, expense = expected vesting number × fair value × time proportion, less amounts already charged. Credit equity.

Understand Equity-settled Share-based Payment Transactions

Companies often pay staff with share options instead of cash. IFRS 2 says this is still a cost. The employees give services, and the company pays for them with its own equity. So you must record an expense and a matching increase in equity.

For employees, you measure the award at the fair value of the equity instruments at grant date. Grant date is when both parties agree the terms. You use an option pricing model or a given value. This fair value is fixed. You do not update it for later share price changes. (For non-employees, you normally measure at the fair value of the goods or services received.)

The cost is spread over the vesting period, which is the time employees must serve to earn the award. If the award vests after three years of service, you charge about one third each year, based on your best estimate of the final outcome.

The estimate changes each year. You look at conditions. Service conditions and non-market performance conditions (for example, profit or sales targets) affect the number of awards you expect to vest. You adjust the expected number of instruments. Market conditions (for example, a target share price) are different. They are built into the fair value at grant date. You do not adjust the expense for whether they are met, as long as the employee completes the service period. Non-vesting conditions are also built into fair value.

Each year's change is a catch-up. You calculate the cumulative expense to date and deduct what you charged before. The difference goes to profit or loss (or is capitalised if the services create an asset). The credit goes to a separate component of equity. At the end, if the awards vest, nothing is reversed. If they lapse after vesting, the equity may be transferred within equity, but the expense is not reversed.

Key rules to remember

Cumulative expense at end of year: Number of awards expected to vest × fair value per award at grant date × (years elapsed ÷ total vesting period); Use the best estimate of awards at each year end. Fair value is fixed at grant date.
Annual expense: Cumulative expense to date − cumulative expense charged in prior years; This can be negative if estimates fall, giving a credit to profit or loss.
Journal entry: Dr Employee expense (P&L) ; Cr Equity (share-based payment reserve); If the cost relates to an asset, debit the asset instead where the standard allows.
Market conditions: Included in grant-date fair value; no later adjustment to expense if the condition is missed; Expense is still recognised if the service condition is met.
Non-market vesting conditions: Adjust the expected number of awards each year; final total is based on awards that actually vest; Service and non-market performance conditions are not in the fair value.

How to solve Equity-settled Share-based Payment Transactions questions

Use this method for any equity-settled question. Lay out the workings in a short table, year by year.

1Identify the grant date, the vesting period and the fair value per option at grant date. Ignore later fair values.
2Classify each condition: service, non-market performance, market, or non-vesting. Decide which affect the number of awards and which affect fair value.
3Estimate how many employees and options you expect to vest at each year end, using the information in the scenario.
4Calculate the cumulative expense: expected options × fair value × years elapsed ÷ vesting period.
5Subtract the expense charged in earlier years to get the current year charge.
6Write the journal: Dr Expense, Cr Equity. State where each amount appears in the financial statements.
7Comment briefly on any judgement, such as estimating leavers or whether a target will be met, to earn applied and professional skills marks.

Quickest way: Cumulative table method

When to use it: Use this when the question gives several years of leaver or target estimates and asks for the charge each year.

Draw columns: Year, Expected options, Fair value, Time fraction, Cumulative, Charge for year.
Fill expected options as employees × options each × expected vesting percentage.
Multiply across to get the cumulative figure, then subtract the prior cumulative figure.
Check that the final cumulative figure equals actual vested options × fair value.
Put the final charge in equity as the credit; the closing reserve equals the cumulative expense.

Common mistakes in Equity-settled Share-based Payment Transactions

Remeasuring the fair value at each year end.
Students link it to other IFRS standards that use current fair value.
Fix: For equity-settled awards, fix the fair value at grant date and never update it. Only the expected number of awards changes.
Adjusting the expense for a missed market condition.
Market and non-market conditions look similar to students.
Fix: If the condition is share price based, it is already in fair value. Keep the expense if the employee serves the required period, even if the price target is missed.
Charging the full annual expense instead of the difference from cumulative expense.
Students forget that estimates change and that earlier charges exist.
Fix: Always calculate cumulative expense to date, then deduct amounts charged previously.
Crediting a liability instead of equity.
Confusion with cash-settled schemes.
Fix: Equity-settled schemes credit equity. A liability is for cash-settled schemes, remeasured each year.
Using the wrong time proportion when the vesting period is not the same as the life of the option.
Students use the contract term instead of the service period.
Fix: Spread over the period from grant date to vesting date, not to the end of the option's life.
Giving only calculations in a written exam.
Students treat it as a pure numbers topic.
Fix: Explain why the cost arises, why the grant-date value is used and the effect on profit and equity, linked to the scenario.

Worked examples

Example 1

On 1 April 20X1, Meru Ltd grants 100 share options to each of its 200 employees. The options vest on 31 March 20X4 if employees remain in service. Fair value at grant date is ₹60 per option. At 31 March 20X2, Meru expects 10% of employees to leave before vesting. At 31 March 20X3, it expects 8% to leave. At 31 March 20X4, 17 employees had left in total. Calculate the expense each year and the closing equity reserve.

Show the solution

Total options if all stay: 200 × 100 = 20,000. Fair value per option is ₹60.
Year to 31 March 20X2: expected vesting 90% × 20,000 = 18,000 options. Cumulative expense = 18,000 × ₹60 × 1/3 = ₹3,60,000. Charge = ₹3,60,000.
Year to 31 March 20X3: expected vesting 92% × 20,000 = 18,400 options. Cumulative = 18,400 × ₹60 × 2/3 = ₹7,36,000. Charge = ₹7,36,000 − ₹3,60,000 = ₹3,76,000.
Year to 31 March 20X4: employees remaining = 200 − 17 = 183. Options = 183 × 100 = 18,300. Cumulative = 18,300 × ₹60 = ₹10,98,000. Charge = ₹10,98,000 − ₹7,36,000 = ₹3,62,000.
Journal each year: Dr Employee expense, Cr Equity. Closing reserve equals the cumulative expense.

Answer: Expense: ₹3,60,000 (20X2), ₹3,76,000 (20X3), ₹3,62,000 (20X4). Equity reserve at 31 March 20X4 is ₹10,98,000.

Example 2

Kavya plc grants 1,000 options to each of 50 senior managers on 1 January 20X1. Options vest after three years if the managers stay and if the share price reaches ₹500 at the vesting date. Grant-date fair value is ₹40 per option, and this already reflects the share price target. All 50 managers are expected to stay, and none leave. At 31 December 20X3 the share price is ₹430. Explain the accounting and calculate the total expense.

Show the solution

The share price target is a market condition. It is included in the grant-date fair value of ₹40. It does not change the number of options expected to vest.
The service condition is the only vesting condition that affects the number of awards. All 50 managers stay, so 50 × 1,000 = 50,000 options vest as far as service goes.
Total expense = 50,000 × ₹40 = ₹20,00,000, spread over three years at ₹6,66,667 a year (rounded; the final year takes the remainder to reach ₹20,00,000).
Missing the ₹500 target at 31 December 20X3 does not reverse the expense, because the service condition was met.
Journal each year: Dr Employee expense, Cr Equity. Total credit to equity after three years is ₹20,00,000.

Answer: Total expense is ₹20,00,000 over three years, with no reversal even though the share price target was missed.

Exam tips

Highlight the grant date and the vesting period first. Many questions hide them in the narrative.
State clearly whether each condition is a market or non-market condition, and say what that means for the expense. Examiners reward this reasoning.
Show a cumulative working so that part marks are available if one estimate is wrong.
In a written answer, explain why the cost is recognised as services are received and why the fair value is not updated.
If the scenario mentions an ethical or earnings management concern, such as optimistic leaver estimates, comment on it for professional skills marks.

Practice questions from Share-based payment

Equity-settled Share-based Payment Transactions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Equity-settled Share-based Payment Transactions: frequently asked questions

What is the journal entry for equity-settled share-based payment?

Debit employee expense in profit or loss and credit equity. The credit usually goes to a separate share-based payment reserve. The amount each year is the change in cumulative expense.

How is share option expense calculated over the vesting period?

Multiply the expected number of options that will vest by the grant-date fair value, then by the fraction of the vesting period that has passed. Deduct expense already recognised. The result is the charge for the year.

What is the difference between a market and non-market condition in IFRS 2?

A market condition relates to the share price, such as a target price. It is built into the grant-date fair value and is not trued up if it is missed. A non-market condition, such as a profit target or service, changes the number of awards expected to vest.

Do you reverse the expense if options lapse unexercised after vesting?

No. Once the vesting conditions are met, the expense stays. Lapse after vesting may be shown as a transfer within equity, but profit or loss is not reversed.