IFRS 2 Share-based Payment – Accounting for Employee Share Options and Equity Awards
1️⃣ Introduction: Understanding IFRS 2 Share-based Payment
IFRS 2 Share-based Payment defines how entities recognise and measure transactions in which goods or services are received in exchange for shares, share options, or cash linked to share price.
In Singapore, many growing firms reward staff and directors with equity-linked incentives. As a result, IFRS 2 Share-based Payment ensures those transactions are recorded consistently and transparently, helping investors understand the true cost of compensation.
2️⃣ Purpose and Scope
IFRS 2 applies to all share-based payment transactions, whether:
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Equity-settled – the entity issues shares or options.
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Cash-settled – the entity pays cash based on share price changes.
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Transactions with choice of settlement – either cash or shares.
It covers both employee-related and non-employee arrangements (for example, consultants paid in shares). Therefore, any exchange involving equity instruments must follow IFRS 2.
3️⃣ Recognition Principle
An entity recognises the goods or services received when it obtains them.
At the same time, it recognises a corresponding increase in equity (for equity-settled) or liabilities (for cash-settled).
If the goods or services are received over time, the expense is recognised throughout the vesting period, matching cost with service.
4️⃣ Measurement of Equity-Settled Share-based Payments
For employee share options and similar awards:
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Measure the fair value of the equity instruments at the grant date.
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Recognise the expense over the vesting period.
For non-employees, measure the fair value of goods or services at the date received.
The fair-value measurement uses option-pricing models such as Black-Scholes or binomial models, considering expected volatility, risk-free rate, and option life.
Example:
uSafe Accounting Pte. Ltd. grants 1 000 share options to staff on 1 Jan 2025. Each option’s fair value is SGD 2. Over three years, the company recognises SGD 667 per year as share-based expense, increasing equity accordingly.
5️⃣ Measurement of Cash-Settled Share-based Payments
Cash-settled plans (for instance, share-appreciation rights) create a liability.
The liability is measured at fair value at each reporting date until settlement, with changes recognised in profit or loss.
Consequently, volatility in share price directly affects the expense each year.
6️⃣ Modifications, Cancellations, and Settlements
When an award is modified, IFRS 2 Share-based Payment requires the entity to recognise at least the original grant-date fair value.
Any incremental fair value resulting from modification is recognised over the remaining vesting period.
If the plan is cancelled or settled early, recognise immediately any unrecognised expense.
7️⃣ Disclosure Requirements
Entities must disclose information that allows users to understand:
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The nature and extent of share-based payment arrangements.
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How fair value was determined.
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The impact on profit or loss and financial position.
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Reconciliation of outstanding options at the beginning and end of the period.
As a result, financial statements show both the dilution effect and total compensation cost of share-based payments.
8️⃣ Key Judgements and Challenges
Applying IFRS 2 requires careful judgement in:
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Selecting appropriate valuation models.
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Estimating expected volatility and forfeiture rates.
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Determining vesting conditions (service or performance-based).
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Accounting for modifications and cancellations consistently.
Therefore, documentation of assumptions and sensitivity analysis supports audit review and transparency.
9️⃣ Common Errors
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Measuring awards at intrinsic value instead of fair value.
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Ignoring service conditions during vesting.
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Failing to re-measure cash-settled liabilities each year.
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Omitting detailed disclosure of valuation methods.
Avoiding these mistakes ensures alignment with IFRS 2 Share-based Payment and strengthens investor confidence.
🔟 Best Practices
✅ Work closely with HR and valuation specialists when structuring share-based plans.
✅ Review market data regularly to update volatility and risk-free assumptions.
✅ Keep a reconciliation schedule of grants, forfeitures, and exercises.
✅ Use clear transition words such as therefore, in addition, and as a result to improve flow and readability.
As a result, firms can apply IFRS 2 Share-based Payment smoothly and communicate incentive costs transparently.
Conclusion
IFRS 2 Share-based Payment ensures that the cost of employee and equity-linked incentives is measured at fair value and reported clearly.
Therefore, by applying this standard, Singapore companies enhance corporate governance, support fair disclosure, and strengthen stakeholder trust.
Disclaimer: This article is for informational purposes only and does not constitute any professional advice. Feel free to contact us to consult with our professional advisors team for personalized advice and guidance.
Sources: https://www.ifrs.org/issued-standards/list-of-standards/ifrs-2-share-based-payment/
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