How to account for Share-based Payments under IFRS 2 and ASC 718: Equity-settled and cash-settled awards

Share-based payments are widely used as employee compensation and incentive mechanisms. They include instruments such as stock options, restricted share units, and performance-based equity awards. Accounting for these transactions under IFRS 2 (Share-based Payment) and ASC 718 (Compensation—Stock Compensation) requires recognizing the fair value of the award, allocating expense over the vesting period, and distinguishing between equity-settled and cash-settled arrangements. While the frameworks are conceptually aligned, there are differences in valuation methods, modification accounting, and classification thresholds, especially for performance conditions and tax treatment.

Share-based payments are measured at fair value and expensed over the vesting period.

Under both IFRS 2 and ASC 718, entities must recognize share-based payment expense in profit or loss when employees render services in exchange for awards.

• Initial measurement:

  • Equity-settled: Measured at grant-date fair value of the equity instrument granted.

  • Cash-settled: Measured at fair value of the liability, remeasured at each reporting date.

• Expense recognition:

  • Allocated on a straight-line or graded vesting basis over the vesting period.

  • Based on the number of awards expected to vest, adjusted for forfeitures under differing rules in each standard.

Aspect	IFRS 2	ASC 718
Measurement date	Grant date (for equity-settled)	Grant date (for equity-settled)
Vesting period treatment	Straight-line or graded acceptable	Same, but more flexibility in method
Forfeitures	Estimate forfeitures upfront	Option to account for actual forfeitures

Equity-settled share-based payments are recognized in equity, not remeasured.

Equity-settled arrangements include awards where the entity issues its own equity instruments. Common examples are stock options or restricted shares that vest based on time or performance.

• Initial recognition:

  • Fair value measured at grant date using models such as Black-Scholes or binomial methods.

  • For non-market vesting conditions (e.g., service or performance), the impact is reflected via adjustments to number of awards expected to vest.

• Expense recognition:

  • Once vesting conditions are met, no remeasurement occurs.

  • If the award is forfeited due to failure to meet service or performance conditions, previously recognized expense is reversed (IFRS) or adjusted based on actual forfeitures (US GAAP, depending on policy).

Key characteristics	Treatment
Fair value measured at grant date	Yes
Remeasurement after grant date	No
Credit entry	Equity (usually additional paid-in capital)

Cash-settled share-based payments are treated as liabilities and remeasured until settlement.

In cash-settled arrangements, the entity incurs a liability to pay cash based on the value of its equity instruments (e.g., stock appreciation rights or phantom shares).

• Initial recognition:

  • Measure fair value of the liability at the grant date.

  • Remeasure each reporting date and at settlement.

• Expense recognition:

  • Recognize expense over the vesting period.

  • Changes in fair value of the liability are recognized in profit or loss.

Aspect	IFRS 2	ASC 718
Liability treatment	Revaluation required	Revaluation required
Classification	Liability (no equity entry)	Liability (unless share settlement is probable)
Fair value model	Often uses intrinsic or option pricing	Same, with consistent remeasurement

Modifications and cancellations are treated differently depending on the outcome.

When an award is modified, IFRS 2 and ASC 718 require evaluation of whether the change is beneficial or detrimental to the employee. The standards treat these modifications as follows:

• IFRS 2:

  • If modified to increase fair value, the incremental value is added to expense.

  • If modified to reduce fair value, the original grant-date fair value continues to be expensed (no reversal).

• ASC 718:

  • Similar approach, but with more detailed guidance on evaluating modification types (repricing, acceleration, cancellation).

  • Requires recalculating total compensation cost if the modification affects the vesting outcome or award classification.

Cancellations (by either party) are generally treated as accelerated expense recognition for any unrecognized portion of the award, unless replaced with a new award.

Performance and market conditions influence vesting and expense recognition.

Awards may vest based on:

• Service conditions (e.g., 3 years of employment)

• Performance conditions (e.g., reaching sales targets)

• Market conditions (e.g., stock price hitting a threshold)

• IFRS 2:

  • Performance and service conditions affect the number of awards expected to vest, not the fair value.

  • Market conditions are incorporated into the fair value at grant date and are not adjusted for later outcomes.

• ASC 718:

  • Similar approach but more granular distinctions:

    • Nonmarket conditions affect vesting estimates

    • Market conditions affect initial valuation only

Tax effects and withholding considerations differ across the standards.

Tax treatment of share-based compensation can significantly affect deferred tax accounting.

• ASC 718:

  • Tax benefits are recognized as deferred tax assets based on the compensation cost recognized.

  • Excess tax benefits or deficiencies are recognized in the income statement (post-ASU 2016-09).

• IFRS 2 (with IAS 12):

  • Similar deferred tax treatment, but:

    • Tax deduction is based on intrinsic value (not grant-date fair value)

    • More nuanced treatment of unrecognized tax benefits and valuation allowances

Disclosures must detail the nature, terms, and valuation of awards.

Both standards require comprehensive disclosures that include:

• Nature and type of share-based payment arrangements

• Number of awards granted, exercised, forfeited, expired

• Weighted-average exercise prices and remaining contractual terms

• Fair value assumptions (volatility, expected life, dividend yield, interest rates)

• Expense recognized in the period

• Tax impact and deferred tax assets recognized

Disclosure area	IFRS 2	ASC 718
Tabular reconciliation	Required	Required
Fair value inputs disclosed	Required	Required
Expense disclosure	In P&L or OCI, depending on item	In P&L

Key differences between IFRS 2 and ASC 718 in share-based payment accounting.

Topic	IFRS 2	ASC 718
Model type	Principles-based	More rules-based
Expense remeasurement	No (equity-settled); Yes (cash-settled)	Same
Forfeiture policy	Estimate upfront	Policy choice: actual or estimated
Performance conditions	Excluded from fair value; adjust quantity	Same, with more guidance
Modification accounting	Incremental cost added; no reversals	Full recomputation possible in some cases
Deferred tax recognition	Based on intrinsic value of award	Based on recognized compensation cost
Disclosure format	Detailed, but allows narrative	Detailed, often tabular

Accounting for share-based payments requires careful application of fair value models, expense allocation logic, and performance-based vesting assessments. While IFRS 2 and ASC 718 are conceptually aligned, the differences in forfeiture estimates, tax impacts, and classification thresholds can lead to different timing and magnitude of expenses and deferred tax entries across reporting frameworks.

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