This free, guided checker walks your finance team through the key decision points for IFRS 2 Grant Date Fair Value and ESOP Vesting Conditions. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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IFRS 2.2 brings into scope transactions in which the entity receives employee services as consideration for its own equity instruments; equity-settled awards are measured at the fair value of the instruments granted (IFRS 2.10-11). Check the plan rules for cash-settlement features, net-settlement clauses, or employee put rights, which can pull the award into cash-settled accounting under IFRS 2.30. Awards of parent equity to subsidiary employees follow the group rules in IFRS 2.43A-43D instead.
Apply cash-settled accounting under IFRS 2.30 or the group share-based payment rules in IFRS 2.43A-43D, as the settlement terms require.
Official guidance: IFRS issued standards
Grant date is the date the entity and the counterparty agree to the arrangement with a shared understanding of its terms and conditions, and any required approval has been obtained (IFRS 2 Appendix A). Weigh board or compensation committee minutes, offer letters, and the date employees could reasonably understand the exercise price and vesting terms; if the award is subject to shareholder approval, grant date is when that approval is obtained. Services received before grant date are still expensed from service commencement date using an estimated fair value, trued up once grant date occurs (IFRS 2.IG4).
Fix grant date under the IFRS 2 Appendix A definition (shared understanding plus approval); if services begin earlier, expense them from service commencement using an estimated fair value per IFRS 2.IG4.
Official guidance: IFRS issued standards
Measure the equity instruments at grant-date fair value based on market prices if available, taking into account the award's terms and conditions (IFRS 2.16); where market prices are not available, apply a valuation technique consistent with generally accepted option-pricing methodologies (IFRS 2.17, IFRS 2.B5). The model must reflect at least exercise price, option life, current share price, expected volatility, expected dividends, and the risk-free rate (IFRS 2.B6), with expected life adjusted for employee early-exercise behaviour (IFRS 2.B16-B18). Unlisted entities also need a supportable grant-date share value underlying the model.
Obtain a grant-date fair value using a valuation technique that meets IFRS 2.17 and reflects the IFRS 2.B6 inputs before recognizing any expense.
Official guidance: IFRS issued standards
Classification drives the accounting: service and non-market performance conditions are excluded from grant-date fair value and instead adjust the number of awards expected to vest (IFRS 2.19-20); market conditions and non-vesting conditions are built into grant-date fair value (IFRS 2.21, IFRS 2.21A). Use the Appendix A definitions - a performance condition requires a service period plus a performance target, while a target the employee need not serve for is a non-vesting condition. Misclassifying a market TSR hurdle as non-market (or vice versa) changes both the valuation and the reversal behaviour of the expense.
Classify each condition against the IFRS 2 Appendix A definitions before applying the recognition rules in IFRS 2.19-21A.
Official guidance: IFRS issued standards
IFRS 2.21 requires market conditions - targets tied to the share price or total shareholder return - to be taken into account in estimating grant-date fair value; the entity then recognizes expense for awards where all other vesting conditions are satisfied, regardless of whether the market hurdle is achieved. In practice this means a Monte Carlo model that discounts fair value for the probability of missing the hurdle, and no expense reversal if the share price underperforms. Reversing expense for a failed TSR hurdle while employees still serve is the classic misapplication.
Incorporate the market condition into grant-date fair value and recognize expense irrespective of the hurdle outcome, as IFRS 2.21 requires.
Official guidance: IFRS issued standards
Under IFRS 2.19, vesting conditions other than market conditions are not taken into account in grant-date fair value; instead the entity recognizes expense based on the number of awards expected to vest and revises that estimate until vesting date, with a true-up of cumulative expense (IFRS 2.20). If a non-market condition is missed, all expense for those awards reverses - the opposite of the market-condition outcome under IFRS 2.21. Evidence the expected-vesting estimate with current performance against target and historical forfeiture data each reporting period.
Remove non-market conditions from the valuation and reflect them in the number of awards expected to vest, truing up cumulative expense per IFRS 2.19-20.
Official guidance: IFRS issued standards
If an award vests immediately, the expense is recognized in full at grant date (IFRS 2.14); otherwise services are accounted for as they are rendered over the vesting period (IFRS 2.15), with the expected length of a performance-based period estimated at grant date (IFRS 2.15(b)). Awards that vest in installments are treated as separate grants, each with its own fair value and vesting period, effectively front-loading the expense (IFRS 2.IG11). Exit- or IPO-contingent awards need care: the vesting period runs to the expected date the condition and service requirement are both met.
Determine the vesting period and tranche structure - treating graded installments as separate grants per IFRS 2.IG11 - before building the expense schedule.
Official guidance: IFRS issued standards
IFRS 2.15 requires the entity to account for the services as they are rendered during the vesting period, which for a single-tranche service award produces an even (straight-line) charge. Graded-vesting awards are treated as a series of separate grants under IFRS 2.IG11, so the aggregate pattern is accelerated rather than straight-line over the full term - averaging a four-year graded award straight-line over four years understates early-period expense. Document the tranche-by-tranche schedule and how estimated forfeitures and expected vesting flow through it.
Rebuild the expense schedule so the charge tracks services rendered over each tranche's vesting period per IFRS 2.15 and IFRS 2.IG11.
Official guidance: IFRS issued standards
For equity-settled awards, fair value is fixed at grant date (IFRS 2.11) and never remeasured for subsequent share-price changes; only the expected number of awards for service and non-market performance conditions is updated (IFRS 2.19-20). After vesting date no adjustment to total equity is made, even if vested options lapse unexercised (IFRS 2.23). Repricings and other changes in terms are handled as modifications - recognize at least the original grant-date fair value plus any incremental fair value (IFRS 2.26-27, IFRS 2.B43).
Lock the grant-date fair value and reverse any share-price-driven remeasurement; account for changed terms only as a modification under IFRS 2.26-27.
Official guidance: IFRS issued standards
Option-pricing models must reflect the factors in IFRS 2.B6: exercise price, option life, current share price, expected volatility, expected dividends, and the risk-free rate for the option's expected term. Support expected volatility with historical and, where available, implied volatility (IFRS 2.B22-B25), and shorten expected life for early-exercise and post-vesting behaviour (IFRS 2.B16-B18); unlisted entities need peer-group volatility and a supportable underlying share value. These inputs feed the IFRS 2.47(a) disclosure of how fair value was measured, so they must be documented at grant date, not reconstructed later.
Document and independently review each IFRS 2.B6 model input at grant date, including an expected life adjusted for early-exercise behaviour (IFRS 2.B16-B18).
Official guidance: IFRS issued standards
IFRS 2.44-45 require a description of each arrangement, including vesting conditions and maximum term, plus a rollforward of options outstanding with weighted-average exercise prices and the weighted-average remaining contractual life. IFRS 2.46-47 require disclosure of how grant-date fair value was measured - the model used and the volatility, life, dividend, and risk-free inputs - and IFRS 2.50-51 require the total expense and the effect on the entity's financial position. Reconcile the note to the equity-settled reserve movement and the participant register before sign-off.
The equity-settled ESOP measurement, recognition, and IFRS 2.44-52 disclosures are complete; retain the grant-date valuation file and vesting schedules. Complete the share-based payment note - arrangement terms (IFRS 2.45(a)), option rollforward (IFRS 2.45(b)), valuation methodology (IFRS 2.46-47), and period expense (IFRS 2.51).
Official guidance: IFRS issued standards
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