How Share-Based Payments With Market Conditions Are Valued Under IFRS 2 and ASC 718

Share-based payments with market conditions—such as awards vesting based on share price targets, total shareholder return (TSR), or performance relative to peer indices—represent one of the most advanced and model-intensive areas of compensation accounting.

Under IFRS 2 – Share-Based Payment and ASC 718 – Compensation—Stock Compensation, market-condition awards require valuation at grant-date fair value using sophisticated models such as Monte Carlo simulations, lattice frameworks, scenario-based stochastic modeling, and volatility-adjusted pricing structures. Unlike non-market conditions, market conditions are not revised or reversed after grant date, regardless of whether they are met.

These awards influence compensation expense patterns, equity classification, tax impacts, volatility assumptions, and comparability across executive compensation frameworks.

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Share-based payments with market conditions involve vesting requirements tied to share price, TSR, index performance, or relative market movement.

A market condition exists when vesting depends on:

• achieving a target share price

• outperforming a peer group TSR

• meeting a volatility-adjusted price barrier

• achieving performance linked to an equity index

• sustaining a minimum or maximum TSR range

• achieving relative TSR over a defined period

Examples:

• Awards vest if the company’s share price reaches 50.

• PSUs (Performance Share Units) vest if TSR exceeds the median of a peer group.

• Awards vest only if the stock outperforms the MSCI sector index over 3 years.

• Options vest if the share price remains above a barrier for 180 days.

Market conditions do not affect the number of awards expected to vest; instead, they are embedded directly into the grant-date fair value.

This distinction separates market conditions from non-market conditions (e.g., EBITDA targets), which affect vesting estimates but are not included in valuation.

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IFRS 2 requires grant-date fair value measurement using models that incorporate expected volatility, correlation with peers, risk-free rates, and probability of achieving market targets.

Under IFRS 2:

• Awards with market conditions must incorporate those conditions into the grant-date fair value, typically via Monte Carlo simulation.

• Subsequent changes in expectations regarding probability of achieving the market target do not change the recognized expense.

• Expense is recognized even if the market condition is never met, provided service conditions are satisfied.

• IFRS requires equity-settled awards to be measured at grant date and not remeasured afterward.

Required valuation inputs include:

• expected volatility (entity and peers)

• expected correlation (for relative TSR)

• risk-free rates

• expected dividend yields

• expected life of award

• number of simulations (e.g., 10,000 iterations)

• probability distribution of share prices

For options with barriers or performance triggers, stochastic model paths determine the likelihood of vesting.

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ASC 718 follows similar principles but introduces additional guidance around employee service periods, performance conditions, and classification.

Under US GAAP:

• Market conditions must be incorporated into grant-date fair value.

• Like IFRS, market conditions do not affect the number of awards expensed, provided service conditions are met.

• ASC 718 provides explicit guidance on distinguishing market, performance, and service conditions.

• For equity-classified awards, measurement is fixed at grant date, similar to IFRS.

• Liability-classified awards are remeasured at each reporting date until settlement.

GAAP emphasizes:

• explicit evaluation of derived service period

• specialized handling of graded vesting

• potential use of lattice models for complex vesting patterns

• mandatory use of observable market data where available

Compared to IFRS 2, ASC 718 contains more prescriptive rules on employee-related conditions and expense attribution methods.

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Key Differences Between IFRS 2 and ASC 718 for Market-Condition Awards

Area	IFRS 2	ASC 718
Measurement	Grant-date fair value	Grant-date fair value
Expense Recognition	Not adjusted for market-condition outcomes	Similar treatment; market conditions ignored for estimate of vesting
Remeasurement	No remeasurement for equity awards	Liability awards remeasured until settlement
Models Used	Monte Carlo, stochastic simulations	Monte Carlo, lattice, scenario models
Service Period	Straight-line or graded depending on terms	More prescriptive guidance on derived service periods
Peer-Group TSR	Requires correlation assumptions	Same requirement but with additional disclosure rules

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Journal entries illustrate grant-date recognition, expense attribution, and settlement of share-based payments with market conditions.

On grant date (equity-settled)

• Debit: Share-Based Payment Expense

• Credit: Equity – Share-Based Payment Reserve

Expense is recognized over the service period, regardless of whether the market condition is met.

For liability-settled awards

• Debit: Share-Based Payment Expense

• Credit: Share-Based Payment Liability(Remeasured at each reporting date)

Upon vesting and share issuance

• Debit: Equity – Share-Based Payment Reserve

• Credit: Share Capital / Treasury Shares

If market condition is not met but service condition is met

Expense remains recognized because the market condition is embedded within fair value.

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Share-based market-condition valuation affects compensation cost, volatility assumptions, shareholder dilution, and comparability across executive pay programs.

Key effects:

• Higher upfront fair values due to Monte Carlo valuation

• Greater sensitivity to volatility and correlation assumptions

• Increased compensation expense relative to non-market awards

• Potential mismatch between compensation expense and actual vesting outcomes

• Influence on metrics such as EPS, ROE, and share-based dilution

• Increased scrutiny from auditors, regulators, and shareholders

Investors often examine:

• valuation methodologies

• peer-group selection

• sensitivity analyses for volatility and correlations

• expensing patterns relative to performance outcomes

Market-condition awards are commonly used in long-term incentive plans for executives due to their strong alignment with shareholder interests.

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Operational challenges include model selection, assumption consistency, data sourcing, peer-group volatility, and internal controls over valuation.

Common challenges:

• Sourcing reliable historical share price data

• Estimating forward-looking volatility consistent with market conditions

• Selecting appropriate peer groups for TSR benchmarking

• Ensuring consistent correlation matrices across simulations

• Managing the high computational demands of Monte Carlo valuation

• Documenting assumptions for audit scrutiny

• Aligning valuation practice with compensation committee strategy

• Handling multi-jurisdiction tax effects on share-based awards

High-quality documentation is essential, especially for public companies subject to investor and regulatory review.

Accurate fair-value modeling ensures transparent and compliant reporting of compensation structures tied to shareholder value creation.

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