IFRS 2 Share-Based Payments: A Practical Guide for UK Companies
IFRS 2 requires a company to recognise the cost of shares, options or share-linked cash it gives in return for goods or services. The cost goes through the income statement, usually over the period the person has to earn the award. For equity-settled awards it is measured once, at the grant date. For cash-settled awards it is remeasured until settlement. This guide covers scope, grant date fair value, vesting conditions, a worked example and the mistakes we see most often.
TL;DR
IFRS 2 covers equity-settled, cash-settled and settlement-choice awards, not just employee option plans.
Equity-settled awards are fixed at grant date fair value. Cash-settled awards are remeasured to fair value at every reporting date until settled.
Service and non-market performance conditions change the number of awards expected to vest. Market conditions sit inside the fair value and are not reversed.
The accounting expense is not the tax deduction, so deferred tax needs its own workings.
Settle the grant date, the valuation and the vesting assumptions in writing before the first period-end, not at audit.
Table of Contents
What IFRS 2 covers
The standard applies where an entity receives or acquires goods or services and pays with its own equity, with cash based on its share price, or with a choice between the two. UK-adopted IFRS 2 lists the exclusions. These include dealings with someone acting as an equity holder, and equity issued in a business combination in exchange for control of the acquiree.
For a startup, that means more than the headline employee option pool. Shares or warrants given to a consultant, an adviser or a supplier can also be in scope. So can phantom share schemes that pay cash linked to value.
One framework point before you start. IFRS 2 applies to companies reporting under UK-adopted IFRS. If you prepare accounts under FRS 102, confirm which framework governs your reporting before you apply it. Our note on FRS 102 Section 1A changes is a useful starting point for small companies.
Equity-settled and cash-settled: two different accounting paths
The settlement type decides everything that follows.
Feature | Equity-settled | Cash-settled |
Other side of the expense | Increase in equity | Liability |
Measurement | Grant date fair value, not remeasured for market conditions | Fair value, remeasured at each reporting date until settlement |
Later changes in value | Do not change the cost | Flow through profit or loss |
Typical example | Share options for employees | Share appreciation rights paid in cash |
The treatment in the table follows the UK-adopted text of the standard. Tolley’s guidance draws the same line and notes that market conditions are built into the valuation and not reversed.
The practical consequence is volatility. A cash-settled scheme in a company whose value is rising produces a growing liability and a growing charge. An equity-settled scheme produces a charge that is set at the start and only changes with the number of awards expected to vest.
Grant date and grant date fair value
The grant date is the date the company and the counterparty reach a shared understanding of the terms and conditions of the arrangement. IFRS 2 as published by the IFRS Foundation defines it that way. It is not automatically the date of the board minute, the date on the option agreement or the date you first mention a scheme to staff.
It matters because it is the date on which fair value is measured. That fair value is estimated from the market price of the equity instruments, taking account of market conditions, using an appropriate valuation model.
For a private company there is no quoted price, so the work is in the inputs. Typically you need:
A defensible value for the underlying share at grant date, often supported by a recent funding round or an independent valuation.
The exercise price and the expected term of the option.
Assumptions about volatility, dividends and the risk-free rate, where the chosen model needs them.
Any market condition, such as a target share price or an exit event, built into the valuation.
Keep the grant date evidence in one file: the approved terms, the communication to the recipient and the valuation. Auditors ask for all three.
Vesting conditions and how they change the numbers
A vesting condition is what the recipient must satisfy to earn the award. They fall into three groups, and each is treated differently.
Service conditions, such as staying employed for four years.
Non-market performance conditions, such as hitting a revenue or EBITDA target.
Market conditions, such as a share price or valuation target.
Conditions other than market conditions are handled by adjusting the number of instruments expected to vest. Market conditions are included in grant date fair value, and the company still recognises the services from a counterparty who satisfies the other conditions, whether or not the market condition is met. The UK-adopted standard sets this out. KPMG’s October 2023 handbook says the same for equity-settled awards: the estimate of instruments expected to vest is revised for service and non-market performance conditions.
This catches people out. If an exit-price target is missed but the employee stayed the full four years, the expense is still recognised. If the employee leaves in year two, the expense for those awards is reversed.
Recognising the expense over the vesting period
The company recognises the services as they are received over the vesting period. It uses its best estimate of the number of instruments expected to vest, revises that estimate when new information appears, and trues up to the number that actually vested on the vesting date. The standard itself describes this. If an award carries no service condition, KPMG’s handbook says the expense is recognised immediately.
A worked example
This is an illustration with made-up numbers, not a client case.
A company grants 100,000 options to employees. The grant date fair value is £2.00 per option. They vest after four years of service, with no performance condition.
Year 1: management expects 90% to vest. Cumulative cost is 100,000 × 90% × £2.00 × 1/4 = £45,000. Charge: £45,000, with a matching credit to equity.
Year 2: staff turnover rises and management now expects 80% to vest. Cumulative cost should be 100,000 × 80% × £2.00 × 2/4 = £80,000. Charge for the year: £80,000 less £45,000 = £35,000.
Years 3 and 4: the same catch-up logic applies, finishing at the number that actually vested.
The £2.00 never changes. Only the headcount assumption does. That is why a leaver schedule belongs in your year-end file.
Non-vesting, modification and cancellation
If an award fails because a non-market vesting condition is not met, nothing is recognised cumulatively for those instruments. A modification that increases total fair value, or otherwise benefits the employee, is recognised. A cancellation or settlement during the vesting period is treated as accelerated vesting, except a cancellation by forfeiture because vesting conditions are not met. All of this comes from the UK-adopted standard.
The trap here is repricing. Lowering the exercise price on underwater options to retain staff is a modification, and it creates extra cost you must measure. Check the accounting before the board approves the change, not after.
IFRS 2 versus UK tax
The accounting charge and the tax deduction do not match. IFRS 2 spreads an expense across the vesting period. For UK corporation tax, the deferred tax asset is based on the expected future deduction, often linked to intrinsic value at exercise or vesting, as Tolley’s guidance explains.
So a deferred tax asset can swing with the share price even though the equity-settled charge is fixed. If your accounts include deferred tax, build that workings file at the same time as the IFRS 2 schedule. Our article on deferred tax for UK SMEs and startups covers the record-keeping side.
Our view
Most of the IFRS 2 problems we meet are not valuation problems. They are paperwork problems. A founder promises equity in a conversation, the formal terms follow months later, and nobody can say which date was the grant date. Then the valuation is done retrospectively and the leaver assumptions are guesses.
We work with founders and growing companies, and our team includes professionals with backgrounds in top firms in the UK and the Middle East. Our advice is simple. Treat the grant like a contract milestone. Agree the terms, record the date, get the valuation, set the vesting assumptions and put the journals in the ledger that period. Do it with the same digital tools you use for bookkeeping, so the equity charge sits next to payroll and not in a spreadsheet nobody owns.
It also pays to line IFRS 2 up with the rest of your reporting. If you are acquiring a business, replacement awards interact with purchase price allocation, and if you consolidate subsidiaries, the charge needs to land in the right entity. Smaller companies often pair the technical work with wider accounting and compliance services so the reporting hangs together.
— Shoaib
How we can help
Our accounting packages for founders, startups and small businesses are published at £99 to £199 per month. They cover day-to-day bookkeeping, VAT, payroll, tax planning and returns, accounts preparation and year-end reporting, and audit readiness checks. Share-based payment accounting is part of our specialist advisory work on IFRS. If you are about to grant options or already have awards in issue, see our accounting services for founders and growing businesses and tell us what you are planning.
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FAQ
Does IFRS 2 apply to share options given to consultants?
Yes, if the options are given in exchange for goods or services. IFRS 2 is not limited to employees. Where the services cannot be measured directly, the cost is generally derived from the fair value of the equity instruments granted.
What is the difference between grant date and vesting date?
The grant date is when you and the recipient share an understanding of the terms. The vesting date is when the recipient has met the conditions and earns the award. Fair value is fixed at the first date for equity-settled awards, and the expense is spread up to the second.
Do market conditions affect how many awards vest in my accounts?
No. Market conditions, such as a target share price, are included in the grant date fair value. You do not revise the expense if the target is missed, provided the recipient met the other conditions such as service.
Is the IFRS 2 expense tax deductible?
Not as such. The accounting charge is spread over the vesting period, while the UK tax deduction usually depends on the scheme and the value at exercise or vesting. The difference is dealt with through deferred tax, so take advice on your specific scheme from a tax adviser.
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