How Share-Based Payments with Cash Alternatives Are Measured under IFRS 2 and ASC 718

Graziano Stefanelli
7 hours ago
5 min read

Some compensation plans allow employees or executives to choose between shares and cash, or require the company to settle in cash under certain conditions. These hybrid awards—known as share-based payments with cash alternatives—must be carefully classified as equity-settled, cash-settled, or compound instruments.

Under IFRS (IFRS 2) and US GAAP (ASC 718), classification determines how the award is measured and remeasured, where changes in fair value go, and how the expense unfolds over the vesting period. The two frameworks are conceptually aligned but differ in detail—particularly in handling employee choice, company discretion, and modifications that change settlement type.

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How cash-alternative awards arise

Typical arrangements include:

Employees can elect shares or cash equal to the fair value of those shares.
The company can decide at settlement whether to issue shares or pay cash.
Performance share units that automatically settle in cash if the entity lacks enough authorized shares.
Phantom shares indexed to equity but always paid in cash.

The structure blends equity participation with liquidity protection and complicates accounting, since classification must capture the economic obligation rather than only the legal form.

Example:An employee is granted 1,000 units that can be settled either in shares or cash equal to the share price on vesting. The grant-date share price is €10.

If shares are delivered, it’s an equity award. If cash is paid, it’s a financial liability.

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IFRS 2 classification principles

IFRS 2 distinguishes three cases:

Employee has the choice (alternative settlement):
- If the employee can choose between shares or cash, the award is a compound instrument—part equity, part liability.
Entity has the choice:
- If the entity can choose, the award is equity-settled unless there is a present obligation to settle in cash (for example, a past practice that creates a constructive obligation).
Mandatory cash settlement:
- Pure cash-settled award → treat as a liability measured at fair value at each reporting date.

Measurement for compound awards

At grant date:

Measure the liability component at the fair value of the cash-settlement alternative.
Measure the equity component as the residual (total fair value of award minus liability component).

Over the vesting period:

Recognize expense for both components, with liability remeasured each period and equity fixed.
On settlement, adjust for any differences between actual and expected settlement type.

Example (employee choice):Grant-date fair value of 1,000 units:

Fair value if settled in cash = €10,000.
Fair value if settled in shares = €11,000.
Probability-weighted fair value (equal probability) = €10,500.

Liability component (cash) = €10,000 × 0.5 = €5,000Equity component (residual) = €10,500 − €5,000 = €5,500

Entries during vesting (say 50% vested at year-end):

Dr Compensation Expense 5,250
Cr Liability – Cash Alternative 2,500
Cr Equity – Share-Based Payment Reserve 2,750

Subsequent years: remeasure the liability portion at current fair value.

If the employee ultimately chooses cash:

Dr Liability – Cash Alternative xx
Cr Cash xx

(Equity portion remains in equity, no reversal.)

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ASC 718 classification principles

US GAAP uses similar criteria but focuses more on entity control of the settlement method:

Entity-controlled choice: treat as equity unless it has a past practice of cash settlement or intent/obligation to pay cash.
Employee-controlled choice: treat as liability for the portion expected to be settled in cash and equity for the remainder.
Obligatory cash-settled plans: always liability-classified.

Once classified:

Equity awards → measure at grant-date fair value, expense straight-line or graded over vesting, no remeasurement.
Liability awards → remeasure at each reporting date until settlement; expense based on cumulative fair value.

Example (employee choice, same data as IFRS):Grant-date fair value: $10 per unit; 1,000 units.Expected 40% cash, 60% shares.

Liability = 1,000 × $10 × 40% = $4,000
Equity = 1,000 × $10 × 60% = $6,000

At year-end, if share price rises to $14 and probability of cash settlement rises to 70%:

Remeasure liability: 1,000 × $14 × 70% = $9,800
Recognize cumulative expense adjustment:
- Dr Compensation Expense 5,800
- Cr Liability – Cash-Settled Awards 5,800

If paid in cash:

Dr Liability 9,800
Cr Cash 9,800

If settled in shares:

Reclassify liability to equity on vesting:
- Dr Liability 9,800
- Cr Equity 9,800

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Comparative framework — IFRS vs US GAAP

Topic	IFRS (IFRS 2)	US GAAP (ASC 718)
Classification control	Based on who controls settlement method (employee/entity)	Same, but GAAP emphasizes entity’s control and past practice
Compound treatment (employee choice)	Split into equity and liability components	Split by expected settlement pattern
Measurement date (equity)	Grant date (fixed)	Grant date (fixed)
Measurement date (liability)	Remeasured each reporting date	Remeasured each reporting date
Reclassification on settlement	Reclassify liability to equity or settle in cash	Reclassify or settle based on actual outcome
Expense pattern	Straight-line or graded over vesting	Similar
Disclosure focus	Breakdown of equity/liability portions, assumptions, expected settlement	Same, plus sensitivity and reconciliation of liability awards

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Worked example — dual-settlement performance shares

Facts:

2,000 units granted, fair value at grant = €15.
Vest in 3 years, settled in shares unless company elects cash.
Company usually pays cash to conserve equity.

IFRS analysis: Entity choice with constructive obligation → liability-settled because past practice creates expectation of cash payment.

At grant:

No separate equity component; treat as cash-settled.

End of Year 1 (share price €16, 33% vested):

Liability = 2,000 × 16 × 33% = €10,560
Dr Compensation Expense 10,560
Cr Liability – Cash-Settled Awards 10,560

End of Year 2 (share price €18, 67% vested):

New liability = 2,000 × 18 × 67% = €24,120
Increase since prior = 13,560
Dr Compensation Expense 13,560
Cr Liability – Cash-Settled Awards 13,560

End of Year 3 (fully vested, share price €20):

Liability = 2,000 × 20 = €40,000
Final adjustment: Dr Compensation Expense 15,880 / Cr Liability 15,880
Settlement: Dr Liability 40,000 / Cr Cash 40,000

Under US GAAP, the same pattern applies if company discretion and historical practice create a presumption of cash settlement.

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Disclosure requirements

IFRS 2.44–52 and ASC 718-10-50 both require:

Description of plan types and settlement alternatives.
Weighted-average fair value per award at grant.
Fair-value methodology (option pricing, Monte Carlo, etc.).
Liability award reconciliation: opening, additions, remeasurements, payments.
Expense recognized, total carrying amount, and assumptions about expected volatility, dividend yield, and risk-free rate.

Example note (IFRS):

At December 31, 2025, the Group recognized a liability of €3.4 million for cash-settled share-based payments with alternative settlement features. The weighted-average fair value per unit at year-end was €17. Changes in fair value of €1.2 million were recognized as compensation expense during the year.

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Journal entries summary

IFRS (employee choice, compound instrument):

Grant date split:
- Dr Compensation Expense xx
- Cr Liability – Cash Alternative xx
- Cr Equity – SBP Reserve xx
Remeasure liability portion:
- Dr Compensation Expense xx
- Cr Liability – Cash Alternative xx
Settlement in cash:
- Dr Liability xx
- Cr Cash xx
Settlement in shares:
- Dr Liability xx
- Cr Equity xx

US GAAP:

Initial recognition based on expected settlement mix.
Periodic remeasurement of liability portion.
Reclassify or settle based on actual outcome.

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Impact on financial performance and ratios

Earnings volatility: Liability awards create fair value remeasurement each period; equity awards remain fixed at grant-date fair value.
Leverage and equity: IFRS liability classification reduces equity; GAAP temporary classification effects depend on practice.
EBITDA: Non-cash compensation still affects operating profit; analysts often adjust for fair-value swings.
EPS dilution: Only equity-settled portions dilute shares outstanding.

Understanding the economic substance of hybrid awards prevents misclassification that could distort equity and profitability.

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Operational considerations

Inventory all stock-based compensation plans and identify settlement discretion.
Document past practices and constructive obligations to determine classification.
Maintain a fair-value model consistent with market volatility and expected life assumptions.
Automate remeasurement for liability awards using share-price feeds and vesting schedules.
Review plan modifications promptly; a change from equity to cash settlement triggers immediate remeasurement and potential expense acceleration.

Consistent classification and valuation of cash-alternative share-based payments under IFRS 2 and ASC 718 ensure that compensation costs reflect the true economic burden of equity-linked remuneration.

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DATA STUDIOS

.....[datastudios.org]