Basic idea:

Share based payment really covers a lot of areas.

Senario1: If you are going to purchase something but you are not paying cash but instead you are paying in shares or share options and you can use IFRS2.

Senario2: If you are going to give some incentive to the management of your company saying to them if you work for me for the next 10 years then I will give you shares/share options then you can also use IFRS2 to account for it.

The issue with senario1 is about measurement of the value. Because you are going to pay in shares/options and if you can establish the fair value of the item you bought(usually in selling price) then you should use the fair value of the item you bought otherwise you can use the fair value of the shares.

The issue with senario2 is about recognition and measurement of the expense.


If you think about it that you are trying to give incentive to management by offering them shares at the end of 5(say) years they have worked for you, the shares you are going to give to them actually cost you nothing because you’re just giving shares to them so does the company have to recognize the related expense to the financial statement?


Well, IFRS2 says because management has worked for the company and the company is going to give shares usually at a low price to the management but otherwise they could trade it in the stock market at a higher price so company should recognize an expense relating to it.

Some companies may also argue that recognizing the share based payment expense will double hit the EPS because as expenses are recognized and shares are issued then EPS will be twice lower. But as long as management has provided the service for you and you earn the revenue then you should recognize the expense and also you are going to give them shares and of course you have to take them into account into the FS as well for PRUDENCE concept.


The question is how can we measure the expense?


Step1: identify the type of scheme. Pay (settle) in shares or cash?


Step2: follow the formula:

Obligation= number of rights expected to vest X FV X timing ratio



The total expense we should recognize at the end of the vesting period.

There may be changes in the expense we recognize each year because of our estimates and any changes in them would be a change in accounting estimate and this would be accounted for under IAS8 by just using prospective adjusting method. In order words, just provide for it.


number of rights expected to vest:

number of people left the company+no of people expected to leave next year


Fair value (FV)

If it’s settled in shares then FV should use the value at grant date because it has been written into the contract.

If it’s settled in cash which means the company will pay cash to the employees based on the future share price. So if the share price at the end of the vesting period(the end that employee has worked for the company)is $50m then CR liability 50m. so the Fair value here will be the FV of options at the end of each year.

Timing ratio=year end / vesting period