Studying this technical article and answering the related questions can count towards your verifiable CPD if you are following the unit route to CPD and the content is relevant to your learning and development needs. One hour of learning equates to one unit of CPD. We'd suggest that you use this as a guide when allocating yourself CPD units.

This article was first published in the July/August 2017 international edition of Accounting and Business magazine.

IFRS 2, Share-based Payment, is currently sitting on the list of research projects drawn up by the International Accounting Standards Board (IASB), and is one of the more complex of the IFRS Standards.

Part of this complexity arises from the use of the grant-date fair value measurement model. This is used in arrangements that are settled in shares or in share options (equity-settled schemes). To understand the potential issues this causes, we need to take a step back and review the different elements within IFRS 2.

Share-based payments fall into two categories: transactions with third parties, and transactions with employees.

For transactions with third parties, such as suppliers, the share-based payment is recorded at the fair value of the service performed, which is then spread over the period until the options vest. One well-known example of this transaction related to David Choe, the graffiti artist who decorated the offices of Facebook in 2005. In payment for the work, Choe accepted share options, taking the chance that these might be worth more than the US$60,000 he would normally have charged.

At the date of Facebook’s initial public offering years later, the shares were valued in the region of US$200m. However, Facebook would have simply expensed the US$60,000, spread from the period the work was done until the date the options vested. As this case shows, the amount to be expensed by an entity represents the value of the service received rather than the value of the options given to the third party. 

A similar principle applies to share-based payment transactions with employees. These are calculated by looking at the value of the service given by the employee. Under IFRS 2, this is valued using the fair value of the option granted to the employee.

Potential issues arise because two different types of transaction can be used to remunerate employees:

  • equity-settled schemes, where the employee receives the benefit in the form of equity, such as shares or share options
  • cash-settled schemes, where the employee receives cash linked to the share price of the entity at a certain period.

According to IFRS 2, all share-based payments should be recognised in financial statements using fair value over the period in which the entity received the service. However, the two types of transaction use different fair value measures (see box).

Criticisms of 'grant date'

There have been numerous criticisms of the use of the grant-date fair value, such as:

  • It produces less relevant information, as it is not updated to reflect the changes in the option value. It does not reflect the value that will be given to the employee at the vesting of the scheme.
  • Issues arise when dealing with ‘underwater’ share options. If the exercise price of an option exceeds the fair value, this will give these options a negative intrinsic value and they are unlikely to be exercised. The fair value is still expensed over the period based on the original fair value at the grant date, despite these items having no value at the reporting date.
  • It is inconsistent with the treatment of cash-settled schemes and other employee-based accounting, such as IAS 19, Employee Benefits, which update the service costs annually while also remeasuring liability at each reporting date (see box).

The IASB addressed these issues when deciding on the model to be applied at the introduction of IFRS 2. Some of the key reasons for applying the grant-date fair value model are given below:

It reflects the value of the service, rather than the option – the fair value of the services received is not affected by subsequent changes in the fair value of the equity instrument received in exchange. A change in the value of an option in year two is unrelated to the value of the service provided by the employee in year one. 

  • Equity being transferred is conceptually different from the payment of cash. The IASB decided to use the principles that apply to equity transactions under the Conceptual Framework for Financial Reporting – this means that equity is not remeasured but remains at the fair value initially applied to it.
  • Using the grant-date fair value model introduces less volatility into the financial statements than using a reporting-date fair value model, as the fair value is fixed and therefore produces a more predictable annual expense.

Alternative models

If the grant-date fair value model were to be removed, current accounting practices applied in IFRS 2 and IAS 19 provide us with two alternatives, which are already in existence.

One alternative could be to apply the reporting-date fair value model, as used in cash-settled schemes. The use of a reporting-date fair value model would appear to reduce the inconsistency between the two valuations, making the numbers more comparable. While the IASB has chosen to apply the grant-date fair value, giving the reasons above, this decision could be revisited in the future with a view to providing a consistent accounting practice across IFRS 2.

Another option could be to apply the service-date measurement model, in a manner similar to IAS 19. Under this model, the service cost would be measured at the reporting date, but there would be no remeasurement of expenses recognised in previous periods. The annual expense (but not the cumulative expense) would be recorded considering the reporting-date fair value.

The table above shows how applying these alternatives to a three-year equity-settled scheme would alter the amounts recognised if the fair value of 1,000 options were $120 at grant date, $150 at the end of year one, $180 at the end of year two, and $225 at the end of year three.

The IASB acknowledges the complexity of IFRS 2, while believing it is working adequately. It has stated that it will be difficult to reduce this complexity without looking at the use of the grant-date fair value model. 

Due to the challenging nature of the application of IFRS 2, the IASB has said it will not make minor, narrow-scope amendments, suggesting that this will result in IFRS either remaining in its current form, or having significant changes to the grant-date fair value. No changes are expected any time soon, but it will be interesting to see if this issue remains on the IASB research agenda following the completion of the Financial Instruments with Characteristics of Equity project. 

Adam Deller is a financial reporting specialist and lecturer

Swipe to view table

Measuring fair value

  Equity-settled schemes Cash-settled schemes
Fair value model used Grant-date fair value Reporting-date fair value
How it works

The fair value of the option at the grant date is calculated to work out the total expense relating to the option.

This is spread over the vesting period.

The fair value is remeasured at the end of each reporting period. The cumulative expense recognised is based on the reporting-date fair value, spread over the vested period to date.

Swipe to view table

Impact of different measures of fair value

  Year 1 expense Year 2 expense Year 3 expense Cumulative expense
Grant date 


(120 x 1/3)


(120 x 1/3)


(120 x 1/3)

Reporting date


(150 x 1/3)


(180 x 2/3 – 50)


(225 x 3/3 – 120)

Service date


(150 x 1/3)


(180 x 1/3)


(225 x 1/3)