Strategic Business Reporting (International) · Share-based payment

IFRS 2 Modifications, Cancellations and Settlements of Share Awards

Updated 11 October 2026 · Fact-checked

Under IFRS 2, an equity-settled award is measured at grant-date fair value. Modifications that increase fair value or the number of instruments add an expense for the increment. Reductions in value are ignored. A cancellation or settlement is treated as acceleration: the remaining expense is recognised immediately.

Understand Modifications, Cancellations and Settlements

IFRS 2 measures an equity-settled award at its grant-date fair value and spreads that cost over the vesting period. Companies sometimes change the deal after grant. They may cut the exercise price (repricing), shorten the vesting period, add more options, or cancel the award. IFRS 2 asks one question: does the change benefit the employee?

The starting point is that you must recognise at least the original grant-date fair value, as if the modification had not happened. The expense is based on the number of instruments that ultimately vest. The exceptions are a cancellation or settlement during the vesting period, and a reduction in the number of instruments granted, which is treated as a cancellation. Both are covered below. This is the floor. If management makes the terms worse for the employee, you do not reduce the expense.

If the modification is beneficial, you add the extra cost. A modification is beneficial if it increases the fair value of the instrument, or increases the number of instruments granted, or improves vesting conditions (for example, removes or eases a vesting condition). The incremental fair value is the fair value of the modified instrument minus the fair value of the original instrument, both measured at the modification date. You recognise this extra amount over the period from the modification date to the end of the modified vesting period.

A cancellation or settlement during the vesting period is treated as acceleration of vesting. You recognise immediately the amount that would otherwise have been recognised over the remaining vesting period. Any payment to employees on cancellation is treated as a repurchase of equity: deduct it from equity, up to the fair value of the equity instruments at the repurchase date. Any excess over that fair value is an expense. If the entity or the counterparty can choose whether to meet a non-vesting condition and it is not met, this is also treated as a cancellation. Forfeiture because an employee leaves or a service or performance condition is not met is not a cancellation.

If the entity cancels an award and grants a new one in its place, and identifies the new award as a replacement on the grant date, you treat it as a modification of the original award. The incremental fair value is the new award's fair value minus the net fair value of the cancelled award, both at the date the replacement is granted.

Key rules to remember

Minimum expense: Total expense ≥ grant-date fair value of original award × number of instruments that ultimately vest; Applies to modifications of equity-settled awards, whether the terms are improved or made worse. It does not apply if the award is cancelled or settled, or if the number of instruments is reduced (treated as a cancellation).
Incremental fair value: Incremental FV = FV of modified instrument at modification date − FV of original instrument at modification date; Measured per instrument. Multiply by the number expected to vest. If positive, recognise over the period from modification date to end of the modified vesting period.
Non-beneficial modification: Reduction in fair value, fewer instruments or tougher vesting terms: continue to recognise original expense; Exception: if the change reduces the number of instruments granted, treat that reduction as a cancellation.
Cancellation or settlement: Expense on cancellation = grant-date FV × number of instruments expected to vest (full vesting period) − amount already recognised; Accelerate the remaining expense into the period of cancellation. Do not reverse amounts already recognised.
Payment on cancellation: Payment up to FV of instruments at cancellation date → debit equity; excess → debit expense; Applies to equity-settled awards settled in cash.

How to solve Modifications, Cancellations and Settlements questions

Use this order for any question on a change to a share award. It keeps the incremental and original expenses separate.

1Identify the type of award (equity-settled or cash-settled) and the type of change: modification, replacement, cancellation or settlement. This note covers equity-settled awards.
2Decide whether the change is made by the entity or is a forfeiture caused by the employee leaving or failing a condition. Forfeiture is not a cancellation.
3If it is a modification, test whether it is beneficial: higher fair value, more instruments or easier vesting. If not beneficial, ignore it and continue the original charge.
4Calculate the original expense: grant-date FV × best estimate of number expected to vest × proportion of vesting period elapsed, less amounts already charged.
5If beneficial, calculate incremental FV at the modification date (new FV minus old FV, per instrument). Spread it from the modification date to the end of the modified vesting period, using the updated number expected to vest.
6If it is a cancellation or settlement, accelerate: recognise the balance of the unrecognised grant-date expense immediately.
7Account for any cash paid on cancellation: debit equity up to the FV at that date, and any excess to profit or loss.
8Write the journals and total expense for the year. State your reasoning in the scenario's context, as the professional skills marks reward this.

Quickest way: Three-question shortcut

When to use it: Use this in the exam when the scenario is long and you need the right treatment fast.

Q1: Did the entity cancel or settle? If yes, accelerate the remaining original expense now, then deal with any cash paid.
Q2: If it is a modification, is it beneficial? If no, nothing changes. If yes, work out incremental FV at the modification date.
Q3: Over what period? Original expense continues over the original period. Incremental expense runs from modification date to the end of the modified vesting period.
Write one table: original charge, incremental charge, total for the year. Then do the journal.

Common mistakes in Modifications, Cancellations and Settlements

Remeasuring the whole award at the modification-date fair value.
Students confuse equity-settled awards with cash-settled awards, which are remeasured each year.
Fix: For equity-settled awards, keep the grant-date FV. Only the incremental amount uses modification-date values.
Reducing the expense when the exercise price is raised or the vesting terms are made tougher.
It feels logical that a worse deal means a lower cost.
Fix: Ignore non-beneficial changes to value or vesting terms. Keep at least the original grant-date charge, based on the number that ultimately vest. A cut in the number of instruments is the exception: treat it as a partial cancellation.
Spreading the incremental fair value over the whole original vesting period from the grant date.
Students apply the usual vesting-period pattern automatically.
Fix: Incremental cost runs from the modification date to the end of the modified vesting period only.
Treating employees leaving as a cancellation and accelerating the expense.
The word 'cancelled' is used loosely in scenarios.
Fix: Forfeiture through failure of a service or performance vesting condition is not a cancellation. Adjust the estimate of the number vesting instead.
Charging the whole cash payment on cancellation to profit or loss.
Students forget that the payment is treated as repurchase of equity.
Fix: Debit equity up to the fair value of the instruments at the cancellation date. Only the excess goes to profit or loss.
Computing incremental FV using grant-date values for the old award.
The original award is thought of as having a fixed value.
Fix: Both old and new instruments are valued at the modification date. The difference between them is the increment.

Worked examples

Example 1

On 1 January 20X1, Rani Co grants 100 share options to each of 300 employees, vesting after 3 years of service. Grant-date fair value is $12 per option. At 31 December 20X1 and 20X2, management expects 90% of employees to remain until the end of year 3. On 1 January 20X3 the share price has fallen, and the exercise price is cut. Fair value of an option under the old terms is $4 and under the new terms is $7. The vesting period is unchanged. In 20X3, 255 employees in fact remain and are entitled to the options. Calculate the expense in each of the years 20X1, 20X2 and 20X3.

Show the solution

Original charge: 300 × 100 × 90% = 27,000 options expected to vest. Total original cost = 27,000 × $12 = $324,000.
20X1 expense = $324,000 × 1/3 = $108,000. Cumulative $108,000.
20X2: expectation unchanged, so cumulative = $324,000 × 2/3 = $216,000. Expense = $108,000.
Modification on 1 January 20X3 is beneficial. Incremental FV = $7 − $4 = $3 per option.
Final number vesting: 255 × 100 = 25,500 options.
Original cost for 20X3: cumulative total = 25,500 × $12 = $306,000. Less $216,000 already charged = $90,000.
Incremental cost: 25,500 × $3 = $76,500. The remaining vesting period from the modification date is one year, so all of it is charged in 20X3.
Total 20X3 expense = $90,000 + $76,500 = $166,500.

Answer: Expense: 20X1 $108,000; 20X2 $108,000; 20X3 $166,500 (original $90,000 plus incremental $76,500). Total cost recognised in equity = $108,000 + $108,000 + $166,500 = $382,500.

Example 2

On 1 January 20X1, Tanvi Co grants 1,000 options to each of 50 senior managers, vesting after 4 years of service. Grant-date fair value is $10 per option. At 31 December 20X2 the entity expected all 50 managers to stay. Expense for 20X1 and 20X2 has been recognised on this basis. On 1 January 20X3 the entity cancels the scheme because of falling profits. It pays each manager $3 per option in cash. The fair value of an option at 1 January 20X3 is $2. No managers have left. Show the accounting for 20X3.

Show the solution

Total grant-date cost = 50 × 1,000 × $10 = $500,000.
Charge to end of 20X2 = $500,000 × 2/4 = $250,000 (recognised in equity).
Cancellation by the entity during vesting is treated as acceleration. Recognise the unrecognised balance now: $500,000 − $250,000 = $250,000. Dr Profit or loss $250,000, Cr Equity $250,000. Equity now holds $500,000.
Cash paid = 50,000 options × $3 = $150,000.
Fair value of the options at the cancellation date = 50,000 × $2 = $100,000. Debit equity with this amount.
Excess of payment over fair value = $150,000 − $100,000 = $50,000. Debit profit or loss.
Journal: Dr Equity $100,000, Dr Profit or loss $50,000, Cr Cash $150,000.

Answer: Total charge to profit or loss in 20X3 = $250,000 + $50,000 = $300,000. Equity falls by $100,000 on the repurchase, leaving $400,000 in equity from the scheme. Cash paid is $150,000.

Exam tips

Look for the date words: grant date, modification date, cancellation date. Each triggers a different fair value. Label them in your answer.
Show incremental fair value as a one-line calculation. Marks are usually earned for the difference and the period over which it is spread.
Always say whether the change is beneficial and why. One sentence of reasoning earns the mark even when the numbers go wrong.
When a scenario mentions a cash payment on cancellation, split it into the equity part and the excess. Examiners often test this split.
Link to professional skills: if repricing follows a share-price fall, comment on whether management is rewarding poor performance and on the effect on reported profit, and mention the ethical angle where relevant.

Practice questions from Share-based payment

Modifications, Cancellations and Settlements in other exams

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

Modifications, Cancellations and Settlements: frequently asked questions

What is incremental fair value in IFRS 2?

It is the fair value of the modified instrument minus the fair value of the original instrument, both measured at the modification date. If it is positive, you recognise it as an extra expense over the period from the modification date to the end of the modified vesting period.

Do you reduce the expense if share options are repriced downward in value?

No. For equity-settled awards you must still recognise at least the original grant-date fair value, based on the number of instruments that ultimately vest. Changes that reduce the fair value of the award are ignored. A reduction in the number of instruments is the exception: treat it as a cancellation of those instruments.

How is a cancellation different from employees leaving?

A cancellation or settlement is a decision by the entity, and the remaining expense is accelerated. If the entity or the employee can choose whether to meet a non-vesting condition and it is not met, that is also treated as a cancellation. Employees leaving, or not meeting a service or performance condition, is forfeiture. For forfeiture you update the estimate of how many awards will vest, with no acceleration.

How do you treat a cash payment made to employees on cancellation of options?

Treat it as a repurchase of an equity interest. Debit equity up to the fair value of the instruments at the repurchase date. Any excess over that fair value is an expense in profit or loss.