IFRS 2: Guide to Share-Based Payment

Q: Who does IFRS 2 apply to?

IFRS 2 applies to all entities including listed and unlisted entities that enter into share-based payment arrangements with employees or third parties.

Q: How is Fair Value determined under IFRS 2?

The fair value of shares is determined using models such as binomial models, that are based on market data and assumptions at the grant date.

Q: What is meant by 'Vesting Period'?

This functions like the waiting period during which conditions must be satisfied before the counterparty becomes entitled to the share-based payment.

Q: Are Share-based payments irreversible if any employee leaves?

Suppose that an employee leaves before vesting, or the vesting conditions are not met, the related expense is reversed.

Q: How does IFRS 2 practically impact financial statements?

IFRS 2 affects both the Income Statement (Through Expenses) and equity or liabilities, depending on the type of settlement. IFRS 2 enhances transparency and shows the true cost of equity-based compensation.

Q: Are Startups or SMEs required to apply IFRS 2?

This is dependent on whether an SME applies full IFRS. However, those using IFRS for SMEs follow a simplified, less complex approach with reduced disclosure requirements.

IFRS 2: Share-Based Payment

IFRS Guide>>

June 19, 2025

IFRS 2 is a vital standard in accounting that ensures share-based payments – like stock options and equity incentives – are fairly recognized in a company’s financial statements.

Whether settled in equity or cash, these transactions must be accounted for transparently to reflect the real cost to the entity.

In this article, we take a deep dive into IFRS 2 – Share-Based Payment, breaking down its core principles, key provisions, and reporting requirements.

We’ll also walk through a real-world case study of IFRS 2 adoption and address some frequently asked questions to clear up common misconceptions.

Let’s dive in and unpack what IFRS 2 really means for your financial reporting!

What is IFRS 2?

IFRS 2 – Share-Based Payment is a standard issued by the International Accounting Standards Board (IASB).

It requires companies to recognize share-based payments in their financial statements, whether in the form of equity instruments or cash settled based on the entity’s share price.

Common share-based payment transactions include:

Stock options
Share grants
Share appreciation rights (SARs)

The goal is to reflect the fair value of these payments in the income statement and in equity or liabilities.

Why IFRS 2 Matters in Accounting

Before IFRS 2, many entities didn’t properly account for share-based payments, leading to inconsistent and misleading financial statements.

IFRS 2 improves:

Fair Value Recognition: Transactions measured at grant-date fair value.
Transparency: Users can see the true economic cost.
Consistency: Uniform rules across industries.
Reliability: Compensation expenses and obligations are clearly reported.

Brief History of IFRS 2

Event	Details
Issued	February 2004 by IASB
Effective Date	Date 1 January 2005
2008 Amendment	Clarified scope
2009 Update Incorporated	Incorporated IFRIC 8 & 11
2016 Update	Addressed classification of cash vs equity settlements, vesting conditions, and tax obligations.

To comply with IFRS 2, companies must:

Main Provisions of IFRS 2

1. Equity-Settled Share-Based Payments

Companies issue shares or options to employees or suppliers in exchange for services or goods.

Recognize at fair value on the grant date.
Expense recognized over the vesting period.

Example:

A Company issues shares worth Ksh 2.3M for inventory valued at Ksh 2M.

Answer:

Hence, equity would be increased by Ksh 2 Million and inventory increased by Ksh 2 Million.
Journal Entry:

Inventory (Asset) ↑ Ksh 2M
Equity ↑ Ksh 2M

N/B: Fair value of goods received is used unless it cannot be reliably measured.

2. Cash-Settled Share-Based Payments

Entity pays cash equivalent to share value increase.

Recognized as a liability, measured each reporting period.

Example:

FinTech Africa Ltd grants 50,000 SARs.
Year-end fair value per SAR = KES 15
Total liability = 50,000 × 15 = KES 750,000
1/3 vested = KES 250,000 recorded as expense

3. Share-Based Payments with Cash or Equity Alternatives

When either party can choose between equity or cash:

Classification is based on substance and terms of the contract.
May involve split accounting if both components exist.

Requirements of IFRS 2

Identify all share-based payment arrangements
Measure fair value at the grant date
Allocate expenses over the vesting period
Account for modifications or cancellations
Make detailed disclosures in financial statements

Required Disclosures

IFRS 2 – Share-Based Payment requires entities to include detailed disclosures in their financial statements to promote transparency, comparability, and informed analysis of share-based payment transactions.

These disclosures fall into three core areas:

1. Impact on Profit or Loss and Financial Position

Entities must disclose the total expenses recognized for share-based payments during the reporting period, broken down by:

Equity-settled transactions
Cash-settled transactions
Transactions with cash or equity alternatives

They must also report:

The carrying amount of liabilities for cash-settled arrangements
The effect of any modifications, cancellations, or settlements

2. Nature and Extent of Share-Based Payments

Companies must describe:

The types of share-based payment arrangements in place (e.g. stock options, SARs)
Key terms and conditions such as vesting periods, exercise prices, and expiration dates
Movement reconciliation: number of options granted, forfeited, exercised, or expired
Whether transactions involve employees or third parties

3. Fair Value Measurement

IFRS 2 mandates disclosure of:

The valuation model used (e.g. Black-Scholes, binomial)
Key assumptions, including expected volatility, dividends, and interest rates
How fair value was determined for both goods/services received and instruments granted
Basis for remeasuring cash-settled liabilities at fair value

Case Study: Applying IFRS 2

Scenario

In January 2025, TechInnovate Ltd, a fast-growing Kenyan tech company, introduces a share-based payment plan to incentivize and retain its core team.

The company grants 1,000 stock options to each of its 10 employees, totaling 10,000 options under the scheme.

Terms of the Grant:

Vesting Period: 3 years (cliff vesting – options fully vest after 3 years of service)
Exercise Price: KES 50 per share
Grant-Date Fair Value of Each Option: KES 20

Objective:

To reward employees while aligning their long-term interests with the company’s growth and market valuation.

Application of IFRS 2 – Equity-Settled Share-Based Payment

1. Determine Total Grant Value:

Total fair value of options at grant date:
10,000 options × KES 20 = KES 200,000
This is the amount that will be recognized as an expense over the 3-year vesting period.

2. Annual Accounting Treatment

Since vesting is based on continued employment over 3 years, the total expense is spread evenly.
Annual Expense:

KES 200,000 ÷ 3 = KES 66,667 per year

3. Prepare Journal Entries (End of Year 1–3)

Year 1 Entry (2025):

Debit: Employee Benefit Expense – KES 66,667
Credit: Equity – Share Option Reserve – KES 66,667

Year 2 Entry (2026):

Debit: Employee Benefit Expense – KES 66,667
Credit: Equity – Share Option Reserve – KES 66,667

Year 3 Entry (2027):

Debit: Employee Benefit Expense – KES 66,667
Credit: Equity – Share Option Reserve – KES 66,667

4. Impact on Financial Statements

Profit or Loss: Annual increase in expenses, reducing reported profit
Equity: Cumulative increase in equity under “Share Option Reserve” (KES 200,000 by year 3)

5. Real-World Insight

By year 3, TechInnovate’s team members are fully vested and motivated. The company hasn’t spent cash upfront, but the economic cost is captured transparently. This helps investors and auditors clearly see the true cost of compensation in the company’s books.

FAQs on IFRS 2

1. Who does IFRS 2 Apply to?

IFRS 2 applies to all entities including listed and unlisted entities that enter into share-based payment arrangements with employees or third parties.

2. How is Fair Value determined under IFRS 2?

The fair value of shares is determined using models such as binomial models, that are based on market data and assumptions at the grant date.

3. What is meant by “Vesting Period”?

This functions like the waiting period during which conditions must be satisfied before the counterparty becomes entitled to the share-based payment.

4. Are Share-based payments irreversible if any employee leaves?

Suppose that an employee leaves before vesting, or the vesting conditions are not met, the related expense is reversed.

5. How does IFRS 2 practically impact financial statements?

IFRS 2 affects both the Income Statement (Through Expenses) and equity or liabilities, depending on the type of settlement.
IFRS 2 enhances transparency and shows the true cost of equity-based compensation.

6. Are Startups or SMEs required to apply IFRS 2?

This is dependent on whether an SME applies full IFRS.
However, those using IFRS for SMEs follow a simplified less complex approach with reduced disclosure requirements.

Conclusion

IFRS 2 ensures that share-based payments are properly reflected in accounting and financial statements, improving transparency and consistency.

Whether equity or cash-settled, these transactions can significantly affect reported profits and should be treated with care.

Compliance with IFRS 2 is not just a requirement – it’s a strategic necessity for accurate, trusted reporting.

Need Help with IFRS 2 Compliance?

At Mugo & Co., we help businesses implement and maintain compliance with IFRS standards. Our experts offer:

Valuation of share-based payments
Employee stock option accounting
Full financial statement preparation and review

Contact Us today to ensure your reporting is IFRS 2 compliant, audit-ready, and investor-friendly.

Disclaimer

This article is for informational purposes only and does not constitute accounting or legal advice. For tailored guidance, consult a qualified professional or reach out to Mugo & Co.

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