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IFRS 2

Share-based Payment

IFRS 2 requires an entity to recognise share-based payment transactions in its financial statements, including transactions with employees or other parties settled in cash, other assets, or equity instruments of the entity, measured at fair value and expensed (or capitalised, where another Standard requires) over the period services are received. [S1]

Effective 2005-01-01Related: IAS 32 · IFRS 9 · IAS 19 · IAS 12

Overview

IFRS 2 applies whenever an entity receives goods or services in exchange for its own equity instruments, or incurs a liability based on the price of its own (or another group entity's) equity instruments. [S1] Three categories of transaction are addressed: equity-settled share-based payment transactions (settled by issuing shares or share options), cash-settled share-based payment transactions (settled by paying cash based on the value of shares or options, such as share appreciation rights), and transactions with a choice of settlement in cash or equity instruments. [S2] The core principle is that the fair value of what is received (goods or services) or, if that cannot be reliably measured (typically for employee services), the fair value of the equity instruments granted, is recognised as an expense (or asset, where capitalisation criteria under another Standard are met) over the vesting period.

Why it matters

Share-based payment is one of the few areas where an entity recognises a real economic cost (diluting existing shareholders, or a real cash cost for cash-settled schemes) that never appears as an actual cash outflow at the time services are received. Nigerian technology start-ups, financial services firms and increasingly listed companies use share options and similar schemes to attract and retain talent without an immediate cash cost, but under IFRS 2 this is not a free lunch in the accounts: failing to recognise the fair value expense understates staff costs and overstates profit, sometimes materially, for growth companies relying heavily on equity compensation.

Scope

Applies to all share-based payment transactions, whether or not the entity can identify specifically some or all of the goods or services received, including transactions with employees and with parties other than employees (suppliers, consultants) settled in equity instruments, cash based on the value of equity instruments, or with a choice of settlement form. It does not apply to transactions where an entity acquires goods as part of the net assets acquired in a business combination within IFRS 3's scope (though replacement share-based payment awards issued as part of a business combination have specific IFRS 2/IFRS 3 interaction guidance), nor to contracts for the purchase of goods within the scope of own-use contracts, nor generally to transactions with shareholders acting purely in their capacity as shareholders rather than as counterparties to a share-based payment arrangement.

Key definitions

term: Share-based payment transaction
definition: A transaction in which the entity receives goods or services as consideration for equity instruments of the entity, or acquires goods or services by incurring liabilities for amounts based on the price of the entity's shares or other equity instruments.
term: Equity-settled share-based payment transaction
definition: A transaction in which the entity receives goods or services as consideration for its own equity instruments (including shares or share options).
term: Cash-settled share-based payment transaction
definition: A transaction in which the entity acquires goods or services by incurring a liability to transfer cash or other assets for amounts based on the price (or value) of the entity's shares or other equity instruments.
term: Grant date
definition: The date at which the entity and another party (including an employee) agree to a share-based payment arrangement, being when they both have a shared understanding of the terms and conditions and the entity confers the rights on the counterparty.
term: Vesting conditions
definition: Conditions that determine whether the entity receives the services entitling the counterparty to receive the share-based payment, comprising service conditions and performance conditions.
term: Fair value
definition: For equity-settled transactions with employees, generally measured at the fair value of the equity instruments granted at grant date (using an option pricing model where market prices are unavailable), reflecting market (but not necessarily non-market) vesting conditions.

Recognition

An entity recognises goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received, with a corresponding increase in equity (for equity-settled transactions) or a liability (for cash-settled transactions). If the goods or services do not qualify for recognition as an asset, they are recognised as an expense. For transactions with employees, services are typically recognised over the vesting period, since the employee's service over that period is presumed to correspond to the consideration for the equity instruments or cash to be received.

Initial measurement

For equity-settled transactions with employees (and others providing similar services), the transaction is measured at the fair value of the equity instruments granted at grant date, since the fair value of the employee services received typically cannot be reliably estimated directly. For equity-settled transactions with non-employees, the transaction is measured (rebuttably presumed) at the fair value of the goods or services received, unless that fair value cannot be reliably estimated, in which case fair value is measured by reference to the equity instruments granted. For cash-settled transactions, the liability is initially (and subsequently) measured at the fair value of the liability, using an appropriate option pricing model where the liability is linked to options or share appreciation rights.

Subsequent measurement

For equity-settled transactions, the fair value determined at grant date is not subsequently remeasured for changes in share price; instead, the number of equity instruments expected to vest is estimated and revised for the effect of non-market vesting conditions (such as service or non-market performance conditions), with a cumulative catch-up adjustment recognised each period, while market conditions (such as a share price target) are reflected in the grant-date fair value itself and not adjusted for subsequently. For cash-settled transactions, the liability is remeasured to fair value at each reporting date and at settlement, with changes recognised in profit or loss. For transactions with a choice of settlement, the instrument is generally treated as a compound financial instrument, split between a liability component (the cash alternative) and, if applicable, an equity component.

Presentation

The cumulative expense (or asset) for equity-settled share-based payment transactions is recognised with a corresponding credit directly in equity (typically a separate share-based payment or share option reserve), not as a liability. The expense for cash-settled transactions is recognised with a corresponding liability, remeasured each period until settlement. Where share-based payment expense relates to employees who are key management personnel, it forms part of the compensation disclosed under IAS 24.

Disclosure checklist

A description of each type of share-based payment arrangement, including general terms and conditions, such as vesting requirements, the maximum term of options granted, and the method of settlement.
The number and weighted average exercise prices of share options for each of: outstanding at the beginning and end of the period, granted, forfeited, exercised, and expired during the period, and exercisable at the end of the period.
The weighted average share price at the date of exercise for options exercised during the period.
For equity instruments granted during the period, the fair value of those instruments at measurement date and information about how that fair value was determined, including the option pricing model used and the inputs to that model.
The total expense recognised for the period arising from share-based payment transactions, split between equity-settled and cash-settled transactions.
For cash-settled share-based payment liabilities: the total carrying amount at the end of the period, and the total intrinsic value of vested liabilities.

Practical treatment

The practical discipline is obtaining a defensible grant-date fair value, which for unlisted Nigerian companies (the majority of entities granting share options) means engaging a suitably qualified valuer to apply an appropriate option pricing model (e.g. Black-Scholes or a binomial model), since there is no quoted market price to use directly. Vesting condition tracking (who is still in service, whether non-market performance targets are being met) needs to be maintained each period to true up the expense, and market conditions (like a target share price) must not be re-estimated once baked into the grant-date fair value. See nigeria_notes for the Nigerian legal and tax overlay on employee share schemes, which differs materially from the IFRS 2 accounting treatment itself.

Common mistakes

Failing to recognise any expense for employee share options because no cash changes hands at grant date, when IFRS 2 requires recognition of the fair value of services received (or equity instruments granted) as an expense over the vesting period regardless of whether cash is paid.
Remeasuring the grant-date fair value of an equity-settled award for subsequent share price movements, when only the number of instruments expected to vest (for non-market conditions) should be revised, not the fair value itself.
Confusing market conditions (built into grant-date fair value, never revisited) with non-market vesting conditions (revised each period based on expectations of vesting), and treating both the same way.
Treating a cash-settled share appreciation right as if it were an equity-settled award, omitting the ongoing fair value remeasurement through profit or loss that cash-settled awards require.
Recognising the cumulative equity-settled expense as a liability rather than directly within equity.
Assuming Nigerian tax withholding treatment of an employee share scheme determines its IFRS 2 accounting classification or measurement, when the two are entirely separate questions.

Links with other standards

code: IAS 32
relationship: IAS 32's liability/equity classification principles inform whether a share-based payment arrangement (particularly one with a choice of settlement) is treated as equity-settled, cash-settled, or a compound instrument.
code: IFRS 9
relationship: Cash-settled share-based payment liabilities are remeasured to fair value each period in a manner similar to certain financial liabilities, though the specific measurement guidance is IFRS 2's own, not IFRS 9's general financial liability model.
code: IAS 19
relationship: Share-based payment expense for employees is a form of employee benefit, and where key management personnel receive share-based payment, IAS 24 (informed by IAS 19's benefit categories) requires disclosure of that compensation component.
code: IAS 12
relationship: A tax deduction related to share-based payment (where available under local tax law) can create a deferred tax asset that may exceed the cumulative IFRS 2 remuneration expense recognised, requiring careful IAS 12 measurement of any excess directly in equity.

CFO checklist

Obtain an independent, defensible grant-date fair value valuation for equity-settled awards, particularly for unlisted company shares or options.
Track vesting condition satisfaction (service and non-market performance conditions) each period to true up the cumulative expense.
Confirm market conditions are reflected only in the grant-date fair value and are never revisited for remeasurement.
Distinguish equity-settled from cash-settled awards clearly, applying the correct subsequent measurement (no remeasurement vs. fair value remeasurement through profit or loss) to each.
Maintain the full IFRS 2 disclosure set (option movements, weighted average exercise prices, fair value inputs) for each scheme.
Engage Nigerian employment law and tax advisers separately on the CAMA/SEC and personal income tax treatment of employee share schemes, since these are distinct from the IFRS 2 accounting treatment.

FAQs

q: We granted share options to employees at no cost to them — do we need to recognise any expense?
a: Yes. IFRS 2 requires the fair value of the options granted (determined at grant date using an appropriate option pricing model) to be recognised as an expense over the vesting period, with a corresponding increase in equity, even though no cash is paid by the entity or the employee at grant.
q: Our share options vest only if the company's share price reaches a target within three years — do we adjust the expense if that target isn't met?
a: No. A share price target is a market condition, which is factored into the grant-date fair value of the option itself (via the option pricing model) and is not revisited; the cumulative expense is still recognised over the vesting period based on that grant-date fair value, regardless of whether the market condition is ultimately met, provided the employee completes the required service period.
q: We offer employees share appreciation rights settled in cash based on our share price — how does this differ from a share option?
a: A cash-settled share appreciation right creates a liability (not an equity increase), which is remeasured to fair value at each reporting date and at settlement, with all changes in fair value recognised in profit or loss, unlike an equity-settled option where the grant-date fair value is fixed and not remeasured.

Nigeria application notes

Regulatory overlay

IFRS 2 applies in full to Nigerian public interest entities under the FRCN Act 2011 mandate. [S3] Nigerian company law creates a specific tension for employee share-based compensation schemes: Section 146 of CAMA 2020 generally prohibits the issuance of shares at a discount, while the SEC Code of Corporate Governance recognises an exception for share option schemes, and this inconsistency has been flagged as needing clearer regulatory guidance; for public companies, CAMA also requires an independent valuer to determine the true value of non-cash consideration for shares, adding a further layer of complexity to implementing share option schemes. [S4]

Tax interaction (Nigeria)

The Lagos State Internal Revenue Service has issued a public notice indicating that employee share options (typically offered at prices below market value) are subject to personal income tax compliance requirements under the Personal Income Tax Act, treating the discount as a taxable benefit; it is not clear how other Nigerian states treat ESOPs for personal income tax purposes, and any gain on eventual sale of the underlying shares may separately be treated as a capital gain. [S5][S6] None of this personal income tax or capital gains tax treatment changes the IFRS 2 accounting expense, which is recognised regardless of the employee's own personal tax position; a deferred tax asset may arise for the entity separately if a corresponding tax deduction is available to it under the Nigeria Tax Act 2025, subject to current NRS practice. [S_TAX1][S_TAX2] Nigerian rates, thresholds, exemptions, incentives and filing rules referenced in this file (including CIT, VAT, withholding tax categories and rates, personal income tax treatment, and the small-company threshold) should be independently verified against the Nigeria Tax Act 2025, the Nigeria Tax Administration Act 2025, the Personal Income Tax Act, CAMA/SEC requirements, and current NRS/state IRS practice at the reporting or filing date, since thresholds, rates and reliefs are subject to periodic revision and to sector- or entity-specific qualifying conditions. This file does not constitute legal or tax advice. [S_TAX1][S_TAX2]

FX considerations

Where a Nigerian subsidiary's employees receive share-based payment awards over the shares of a foreign parent (common in multinational group structures operating in Nigeria), the Nigerian subsidiary recognises the IFRS 2 expense (with a corresponding credit to equity, treated as a capital contribution from the parent, if the subsidiary has no obligation to settle the award itself) based on the grant-date fair value determined in the parent's functional currency, translated into naira at the exchange rate applicable to the period the expense relates to; for cash-settled awards paid by the Nigerian entity itself but linked to a foreign parent's share price, the remeasured foreign-currency liability is retranslated at each closing rate, adding naira volatility to the share-price-driven remeasurement.

SME practical note

Nigerian start-ups and SMEs increasingly offer informal 'sweat equity' or share option arrangements to founders and key employees without engaging a valuer or documenting vesting terms formally; Outliers recommends formalising scheme documentation (vesting conditions, exercise price, contractual term) and obtaining at least a reasoned, documented fair value estimate before financial statements are prepared, since informal or undocumented schemes are difficult to account for defensibly under IFRS 2 and are also the schemes most likely to run into the CAMA/SEC discount-on-shares tension described above.

Common Nigerian pitfalls

Structuring an employee share option scheme without resolving the CAMA Section 146 versus SEC Code tension on issuing shares at a discount.
Assuming no IFRS 2 expense is required because the scheme is informal or undocumented, rather than estimating and recognising a defensible fair value regardless.
Conflating the personal income tax treatment of the employee's option benefit with the entity's own IFRS 2 accounting expense, treating them as the same question.
Failing to obtain an independent valuation of non-cash share consideration for a public company, as CAMA 2020 requires, when implementing a share-based scheme.

FRC pronouncements

No FRCN pronouncement specific to IFRS 2 accounting has been identified; the relevant FRCN context is its overarching mandate to promote IFRS compliance, operating alongside the CAMA/SEC company law framework governing how Nigerian share option schemes may legally be structured. [S3][S4]

Worked examples

Equity-settled share options with a service condition

A Nigerian technology company grants 100 share options each to 50 employees, conditional only on the employees remaining in service for three years. The grant-date fair value of each option, determined using an option pricing model, is ₦2,000. At the end of year 1, the company estimates 45 employees will complete the three-year service period.

Facts

Workings

Total fair value of options expected to vest: 45 employees x 100 options x ₦2,000 = ₦9,000,000

Cumulative expense to recognise over the 3-year vesting period, spread evenly: 9,000,000 / 3 years = 3,000,000 per year

Year 1 expense: 3,000,000 (one-third of the total expected cost, based on the revised estimate of 45 employees vesting)

Journal entries

Recognise the year 1 share-based payment expense based on the estimated number of options expected to vest.

Account	Dr (₦)	Cr (₦)
Share-based payment expense (profit or loss)	3,000,000
Share option reserve (equity)		3,000,000

Cash-settled share appreciation rights

A Nigerian company grants share appreciation rights (SARs) to an executive, entitling the executive to a cash payment based on the increase in the company's share value above ₦500 per share over a two-year service period, on 1,000 notional shares. At the end of year 1, the fair value of the liability (using an option pricing model) is estimated at ₦800,000.

Facts

Workings

Since the SARs are cash-settled, a liability is recognised and remeasured to fair value at each reporting date, with the cumulative liability recognised over the vesting period based on the proportion of the vesting period elapsed and the current fair value estimate.

Year 1 liability and expense (one-half of the two-year vesting period elapsed): 800,000 x 1/2 = 400,000 (illustrative allocation of the year-end fair value over the vesting period elapsed to date).

Journal entries

Recognise the year 1 expense and liability for cash-settled share appreciation rights, based on the proportion of the vesting period elapsed and the current fair value of the liability.

Account	Dr (₦)	Cr (₦)
Share-based payment expense (profit or loss)	400,000
Share-based payment liability (cash-settled)		400,000

Sources & citations

[S1]IFRS 2 Share-based Payment — IFRS Foundationaccessed 2026-07-18
[S2]IFRS 2 — Share-based Payment (standard summary) — IAS Plus, Deloitteaccessed 2026-07-18
[S3]IFRS - Use of IFRS Standards by jurisdiction: Nigeria — IFRS Foundationaccessed 2026-07-18
[S4]Company Law issues around employee share-based compensation in Nigeria — Lexologyaccessed 2026-07-18
[S5]Employee Stock Option Plans (ESOPs) For Startups In Nigeria — Mondaqaccessed 2026-07-18
[S6]Employees Share Based Compensation: Tax and Financial Reporting Perspectives — Andersen Nigeriaaccessed 2026-07-18
[S_TAX1]Nigeria Tax Act, 2025 has been signed – highlights — EY Globalaccessed 2026-07-18
[S_TAX2]Nigeria's 2025 Tax Reform Acts Explained: Key Changes — Baker Tilly Nigeriaaccessed 2026-07-18

Last reviewed 2026-07-18 · Reviewer: Rafiu Olawuyi, FCA (Author / Technical Reviewer)