IFRS 2 provides that equity-settled share-based payment transactions are, in principle, measured at the fair value of the goods or services received; if that fair value cannot be estimated reliably, they are measured indirectly by reference to the fair value of the equity instruments granted. Cash-settled share-based payment transactions, by contrast, are measured at the fair value of the liability, which is remeasured at the end of each reporting period until settlement.

Measurement in Equity-Settled Transactions

The Standard provides that, for equity-settled share-based payment transactions, the entity measures the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which case the entity measures their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.

The Case of Transactions With Employees

The Standard provides that, to apply this principle to transactions with employees and others providing similar services, the entity measures the fair value of the services received by reference to the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of the services received. The fair value of those equity instruments is measured at grant date.

Measurement in Cash-Settled Transactions

The Standard provides that, for cash-settled share-based payment transactions, the entity measures the goods or services acquired and the liability incurred at the fair value of the liability, and that, until the liability is settled, the entity remeasures the fair value of the liability at the end of each reporting period and at the date of settlement, recognising any changes in fair value in profit or loss for the period.

Illustrative Example (with Assumed Figures)

Suppose an entity grants its employees share appreciation rights, a cash-settled transaction, and the fair value of this liability at the end of the first reporting period is 60,000 monetary units, rising to 85,000 monetary units at the end of the following reporting period, before settlement. The entity recognises the difference of 25,000 monetary units (85,000 − 60,000) as an additional expense in profit or loss for the second period, as a result of remeasuring the liability at fair value. This is a purely illustrative example.

Why Does Each Type of Transaction Affect Profit or Loss Differently?

In equity-settled transactions, the fair value of the equity instruments granted is measured only once, at grant date, and is not remeasured later even if the market value of the entity's share subsequently changes, which makes the expense recognised for these transactions a largely fixed amount, typically spread over the vesting period. In cash-settled transactions, by contrast, the liability recognised is remeasured at fair value at the end of each reporting period and at the date of settlement, so that any increase or decrease in that fair value is reflected directly in profit or loss for subsequent periods, making the effect of this type of transaction on profit or loss more volatile than that of equity-settled transactions.

Legal References

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