Strategic Business Reporting (International) · Share-based payment

IFRS 2 Scope and Types of Share-based Payment

Updated 11 October 2026 · Fact-checked

IFRS 2 applies when an entity receives goods or services and pays for them with its own shares, share options, or cash based on its share price. The three types are equity-settled, cash-settled and choice of settlement. You classify the deal first, then identify grant date and vesting conditions.

Understand IFRS 2 Scope and Types of Share-based Payment

Companies often pay staff, directors and suppliers with shares or share options instead of cash. This keeps cash in the business and ties rewards to company performance. Without a standard, the cost of these deals would never reach profit or loss. IFRS 2 fixes that. It says the goods or services received are an expense (or an asset) and must be recognised.

Scope. IFRS 2 covers transactions where an entity receives goods or services and pays with its own equity instruments, or with cash or other assets whose amount depends on the price of its shares. It applies to employees and to non-employees such as suppliers and consultants. It also covers group schemes, where a parent grants shares to employees of a subsidiary. It does not cover shares issued in a business combination under IFRS 3, or certain contracts to buy or sell non-financial items that fall under IFRS 9.

There are three types:

Equity-settled: the entity receives goods or services and issues its own equity instruments (shares or options). The credit goes to equity.
Cash-settled: the entity receives goods or services and pays cash (or other assets) based on the price of its shares, for example share appreciation rights. The credit is a liability.
Choice of settlement: either the entity or the counterparty can choose between cash and equity settlement. The accounting depends on who holds the choice.

Key dates and terms matter because they drive measurement. Grant date is when the entity and the other party agree to the arrangement and both share a common understanding of its terms. Approval, such as from shareholders, must be in place if it is needed. Vesting date is when the counterparty becomes entitled to the cash or equity. The vesting period runs from grant date to vesting date.

Vesting conditions are conditions that decide whether the entity receives the services and so whether the counterparty earns the award. A service condition requires the employee to stay for a set period. A performance condition also requires a target, such as a profit, sales or share-price target, during the service period. A market condition is a performance condition linked to the share price, such as a target share price. Conditions that are not vesting conditions are non-vesting conditions, for example a requirement to save regularly or a condition outside the employee's service. These all affect how you measure and recognise the expense, which is covered in the next topics.

Key rules to remember

Equity-settled double entry: Dr Expense (or asset) ; Cr Equity; Spread over the vesting period. Measured at the grant date fair value of the equity instruments for employee awards.
Cash-settled double entry: Dr Expense (or asset) ; Cr Liability; Liability is remeasured at fair value at each reporting date until settlement, with changes in profit or loss.
Vesting period: Vesting period = grant date to vesting date; The expense is spread over this period.
Service condition: Service condition = employee must stay for a specified period; A vesting condition. Leavers affect the number of awards expected to vest.
Performance condition: Performance condition = service condition + a specified target; A market condition is a performance condition tied to the share price.
Choice of settlement: Counterparty has choice → compound instrument; Entity has choice → liability if it has a present obligation to settle in cash, otherwise equity; Entity-choice cases are a judgement; check the substance of past practice or stated policy.

How to solve IFRS 2 Scope and Types of Share-based Payment questions

Use this order for any scope or classification question on IFRS 2.

1Read the scenario and find what the entity receives: goods or services.
2Identify what the other party gets in return: shares, options, cash based on share price, or a choice.
3Check scope: is it a business combination under IFRS 3 or a financial instrument contract outside IFRS 2? If so, IFRS 2 does not apply.
4Classify the deal as equity-settled, cash-settled or choice of settlement, and say who holds the choice.
5Identify the grant date by finding when both sides agree the terms and any approval is obtained.
6List the vesting conditions and label each: service, performance, market or non-vesting.
7State the double entry (credit equity or liability) and the impact on profit or loss and the statement of financial position, linked to the scenario.

Quickest way: Classify in 30 seconds

When to use it: When the question asks you to explain or classify a scheme before any calculation.

Ask: what does the employee receive? Shares or options means equity-settled.
Ask: is the payout cash linked to the share price? Then cash-settled.
Ask: can anyone choose cash or shares? Then choice of settlement.
Write the credit side: equity or liability.
Mark the grant date, vesting date and each condition type in one line each.

Common mistakes in IFRS 2 Scope and Types of Share-based Payment

Treating share appreciation rights as equity-settled because they refer to shares.
The word share appears, so students assume equity.
Fix: Check what is delivered. If the payout is cash based on the share price, it is cash-settled and creates a liability.
Using the date the scheme is announced or the vesting date as the grant date.
Grant date sounds like the date of award or the date of payment.
Fix: Grant date is when both parties agree the terms and any needed approval is obtained. Check for pending shareholder approval.
Treating a share-price target as a non-market performance condition.
All targets look alike.
Fix: A condition linked to the share price is a market condition. Other targets, such as profit or sales, are non-market performance conditions.
Saying IFRS 2 applies only to employees.
Most examples involve staff options.
Fix: IFRS 2 also covers suppliers and other non-employees, and group schemes.
Applying IFRS 2 to shares issued to acquire a business.
Shares are issued in exchange for something, so it looks similar.
Fix: Shares issued as consideration in a business combination fall under IFRS 3, not IFRS 2.
Ignoring who has the choice in a choice-of-settlement deal.
Students treat all choice deals the same way.
Fix: If the counterparty chooses, account for a compound instrument with a liability and an equity component. If the entity chooses, judge whether it has a present obligation to settle in cash.

Worked examples

Example 1

On 1 April 20X1 Zara Ltd gives 100 senior managers options over 1,000 shares each if they stay for three years. The board agreed the terms and told the managers on that date. Shareholder approval was received on 30 June 20X1. Another scheme gives 50 directors a cash bonus on 31 March 20X4 equal to the rise in the share price over three years on 10,000 notional shares each. Classify both schemes and identify the grant date of the first.

Show the solution

Scheme 1: managers receive share options in return for services. This is equity-settled, so the credit goes to equity.
Grant date: the managers were told on 1 April, but shareholder approval was required. Grant date is when approval is obtained, so 30 June 20X1.
Vesting condition in Scheme 1: staying for three years is a service condition only. The vesting date is three years of service from the start of the vesting period.
Scheme 2: directors receive cash based on the share price rise. This is cash-settled and creates a liability.
Scheme 2 is remeasured at fair value at each reporting date until settlement, with changes in profit or loss.

Answer: Scheme 1 is equity-settled with grant date 30 June 20X1 and a service condition. Scheme 2 is cash-settled, with a liability remeasured at each reporting date.

Example 2

Beta plc offers 20 employees 5,000 options each, vesting after three years if they remain in service and if the share price reaches ₹400 by the end of year three. The employees also must save part of their salary each month into a savings plan throughout the period, or the options lapse. Identify and classify each condition.

Show the solution

Remaining in service for three years is a service condition. It is a vesting condition.
The share price reaching ₹400 is a performance condition linked to the share price, so it is a market condition.
Saving part of salary each month is a requirement the employee can choose to meet, and it does not relate to services delivered or a performance target. It is a non-vesting condition.
Market and non-vesting conditions are reflected in the fair value of the option at grant date.
The service condition is handled by estimating how many employees will stay.

Answer: Service for three years: service condition. ₹400 share price: market condition (a performance condition). Monthly saving: non-vesting condition.

Exam tips

Always state the credit side: equity for equity-settled, liability for cash-settled. Markers look for it.
Define grant date in the context of the scenario. Look for pending approvals or unagreed terms.
Label each condition by name. Use the words service, market, non-market performance or non-vesting.
Use the scenario's facts when you explain the classification. This earns professional skills marks for analysis and application.
Check scope first when the scenario mentions an acquisition or shares used to buy a business.

Practice questions from Share-based payment

IFRS 2 Scope and Types of Share-based Payment in other exams

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

IFRS 2 Scope and Types of Share-based Payment: frequently asked questions

What is the scope of IFRS 2?

IFRS 2 covers transactions in which an entity receives goods or services and pays with its own equity instruments, or with cash or other assets based on the price of its shares. It includes employees, non-employees and group schemes. Shares issued in a business combination are outside its scope.

What is the difference between equity-settled and cash-settled share-based payment?

In equity-settled deals the entity issues its own shares or options, and the credit goes to equity. In cash-settled deals the entity pays cash based on the share price, and the credit is a liability. The liability is remeasured at each reporting date.

What is the difference between a service condition and a performance condition?

A service condition only requires the employee to stay for a set period. A performance condition also requires a target, such as profit, sales or share price, to be met. A share-price target is a market condition.

What is the grant date in IFRS 2?

It is the date the entity and the other party agree to the arrangement and share an understanding of its terms. If approval is needed, such as from shareholders, grant date is when that approval is obtained.