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How share-based payment transactions are accounted for under IFRS 2 and ASC 718

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Share-based payments link employee or counterparty compensation to the entity’s equity instruments or share value. They align interests but introduce complex accounting for fair value measurement, vesting conditions, and settlement methods. Under IFRS (IFRS 2 – Share-based Payment) and US GAAP (ASC 718 – Compensation – Stock Compensation), the goal is to recognize expense over the vesting period for the fair value of equity or liability awards granted in exchange for services or goods, ensuring alignment between cost recognition and value transfer.

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How share-based payments arise.

Share-based payments can take many forms:

  • Equity-settled: employees receive shares or options on shares of the entity.

  • Cash-settled: employees receive cash based on the share price.

  • Share-based payments with non-employees: consultants or suppliers paid partly in shares.

  • Hybrid or net-settlement arrangements: part in equity, part in cash to cover withholding tax.

The accounting depends on settlement type, grant date fair value, and vesting conditions. Awards may vest based on service period, market performance (e.g., share price target), or non-market performance (e.g., EBITDA growth).

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Recognition and measurement under IFRS 2.

1) Grant date fair value. At the grant date, measure the fair value of the equity instruments granted and fix it for subsequent expense recognition (equity-settled awards). For cash-settled awards, remeasure at each reporting date until settlement.

2) Recognition of expense.Recognize the total fair value of awards as an expense over the vesting period (the period in which employees render service), with a corresponding increase in equity (equity-settled) or liability (cash-settled).

3) Vesting conditions.

  • Service conditions: affect the timing of expense but not fair value.

  • Non-market performance conditions: not included in fair value; reflect through expected vesting adjustments.

  • Market conditions: included in fair value at grant date; do not adjust for later outcomes.

4) Equity-settled example (IFRS).Grant of 10,000 share options to employees on January 1.Fair value per option: 8. Vesting period: 3 years.

At grant date (no entry, only recognition over service):

Each year, recognize one-third of total cost (10,000 × 8 = 80,000 total).

  • Year 1:

    • Debit: Compensation Expense 26,667

    • Credit: Equity – Share-based Payment Reserve 26,667

  • Year 2:

    • Debit: Compensation Expense 26,667

    • Credit: Equity – Share-based Payment Reserve 26,667

  • Year 3:

    • Debit: Compensation Expense 26,666

    • Credit: Equity – Share-based Payment Reserve 26,666

If employees leave before vesting, reverse expense for unvested portion unless market condition prevents adjustment.

5) Cash-settled example (IFRS).If the entity promises cash equal to the value of 10,000 shares after 3 years:

  • Measure liability at fair value each period.

  • Recognize cumulative expense to reflect services to date.

End of Year 1 (FV of liability 25,000):

  • Debit: Compensation Expense 25,000

  • Credit: Liability for Cash-settled Award 25,000

Subsequent years: remeasure liability and adjust through P&L until settlement.

6) Modifications and cancellations.If terms are modified to increase fair value, recognize incremental fair value over remaining vesting period. If awards are cancelled, accelerate expense for services rendered and reverse unvested amounts.

7) Tax effects.Under IFRS, deferred tax on deductible differences between tax base (intrinsic value when deductible) and accounting carrying amount is recognized in equity or P&L consistent with original entry.

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Recognition and measurement under US GAAP (ASC 718).

1) Grant date measurement.ASC 718 aligns closely with IFRS 2 for grant date fair value, using option-pricing models (Black-Scholes, binomial). However:

  • Service and performance conditions affect expense recognition but not grant-date fair value.

  • Market conditions included in valuation, similar to IFRS.

2) Expense recognition.Recognize expense over vesting period with corresponding credit to APIC (equity-settled) or liability (cash-settled).Forfeitures are accounted for as they occur (post-ASU 2016-09), simplifying earlier estimation requirements.

3) Cash-settled vs equity-settled.Liability awards remeasured at each reporting date through P&L until settlement; equity awards fixed at grant date.

4) Modifications.For modifications that increase fair value, recognize incremental compensation cost; for reductions, continue recognizing original fair value unless cancellation and regrant occur.

5) Tax accounting (ASC 718-740 interaction).Recognize deferred tax asset (DTA) for expected tax deduction. Upon settlement, record excess tax benefits or deficiencies in P&L (post-ASU 2016-09), rather than in APIC as before.

6) Example (US GAAP – equity-settled options).Grant of 10,000 options at fair value 8, vesting over 3 years.

  • Year 1:

    • Debit: Compensation Expense 26,667

    • Credit: APIC – Stock Compensation 26,667

  • Year 2:

    • Debit: Compensation Expense 26,667

    • Credit: APIC – Stock Compensation 26,667

  • Year 3:

    • Debit: Compensation Expense 26,666

    • Credit: APIC – Stock Compensation 26,666

If the entity recognizes a tax deduction on exercise of 100,000 (cash received 200,000):

  • Debit: Cash 200,000

  • Credit: Common Stock/Share Premium 200,000


    Record tax benefit if deduction exceeds accounting expense:

  • Debit: Deferred Tax Asset / Income Tax Payable

  • Credit: Income Tax Expense (excess benefit).

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Comparative table: IFRS vs US GAAP.

Aspect

IFRS (IFRS 2)

US GAAP (ASC 718)

Measurement date for equity awards

Grant date

Grant date

Vesting conditions

Service/non-market: affect quantity; market: in fair value

Same

Fair value model

Option-pricing models (e.g., Black-Scholes)

Same

Forfeitures

Estimate expected forfeitures each period

Recognize as they occur (simplified)

Tax effects

Deferred tax through equity or P&L consistent with original recognition

Deferred tax asset; excess tax benefits/deficiencies through P&L

Cash-settled awards

Liability remeasured at each reporting date

Liability remeasured each reporting date

Group share-based payments

Based on which entity receives service and issues shares

Same conceptual outcome under ASC 718-10

Modifications

Recognize incremental fair value if higher

Recognize incremental fair value if higher

Disclosures

Extensive (quantity, FV, weighted average exercise price, movements)

Same, plus additional SEC tabular requirements

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Presentation and disclosures.

Example (IFRS presentation):

Statement of Financial Position

Amount (USD)

Equity – Share-based Payment Reserve

80,000

Deferred Tax Asset (on unexercised awards)

16,000

Income Statement Extract

Amount (USD)

Staff Costs – Share-based Payments

80,000

Disclosure highlights (both frameworks):

  • Nature and extent of share-based payment arrangements.

  • Number, weighted-average exercise price, and fair value of instruments.

  • Movements: granted, exercised, forfeited, expired.

  • Methods and assumptions used for valuation.

  • Expense recognized during the period.

  • Tax benefits or deficiencies recognized.

  • For cash-settled plans: liability reconciliation.

Example movement schedule:

Options

Number

Wtd Avg Exercise Price (USD)

Outstanding at Jan 1

20,000

12.00

Granted

10,000

15.00

Forfeited

(2,000)

13.00

Exercised

(5,000)

11.00

Outstanding at Dec 31

23,000

13.80

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Journal entries for common scenarios.

1) Grant and recognition over vesting (equity-settled):

  • Debit: Compensation Expense xx

  • Credit: Equity – Share-based Payment Reserve xx

2) Vesting completed, options exercised:

  • Debit: Cash (exercise price) xx

  • Debit: Equity – Share-based Payment Reserve xx

  • Credit: Share Capital / APIC xx

3) Cash-settled liability remeasurement (IFRS/GAAP):

  • Debit/Credit: Compensation Expense xx

  • Credit/Debit: Liability xx

4) Forfeiture before vesting:

  • Debit: Equity – Share-based Payment Reserve xx

  • Credit: Compensation Expense xx

5) Modification increasing fair value:

  • Debit: Compensation Expense (incremental FV) xx

  • Credit: Equity / Liability xx

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Impact on financial performance and ratios.

Share-based compensation affects EBITDA and EPS even though it involves no cash outflow.

  • Higher non-cash expense reduces reported profit but leaves cash flow unchanged.

  • Diluted EPS reflects potential share dilution from options and RSUs.

  • Liability-classified awards create volatility due to remeasurement each period.

  • Analysts often adjust EBITDA to exclude share-based costs for comparability but monitor equity dilution separately.

Deferred tax effects influence effective tax rate volatility depending on share price movements at exercise.

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Operational considerations.

Entities must maintain centralized tracking of all share awards—grant details, vesting schedules, terminations, exercises, and modifications. Integration between HR, legal, and finance systems is essential. Key controls include:

  • Approval of new grants and modifications.

  • Validation of fair value models and key assumptions (volatility, expected term, dividend yield).

  • Timely adjustment for forfeitures and tax consequences.

  • Disclosure completeness across consolidated entities, especially for group awards.

Consistent application of IFRS 2 and ASC 718 ensures transparent recognition of the true cost of equity compensation and aligns reported performance with shareholder dilution effects.

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