In a recent webinar, Robert Kirk explained that share-based payment is treated as a form of remuneration under Section 26 of FRS 102. The accounting depends primarily on whether the arrangement is equity-settled or cash-settled. Accountants must also consider vesting conditions, fair value measurement, modifications, cancellations and disclosures, with several clarifications applying under the Periodic Review 2024 amendments.
Why share-based payment accounting matters
The starting point is straightforward: giving an employee shares or share options in return for their services is a form of remuneration.
That means the employer generally recognises an expense for the services received. The more difficult question is what happens on the other side of the accounting entry.
For an equity-settled arrangement, the credit is recognised within equity. For a cash-settled arrangement, it creates a liability.
This distinction affects not only the initial accounting but also subsequent measurement.
The latest edition of FRS 102 incorporates the Periodic Review 2024 amendments. Most of those amendments apply for accounting periods beginning on or after 1 January 2026, with early application permitted subject to the conditions in the standard.
1. Start by identifying how the award will be settled
Section 26 covers different forms of share-based payment, but two are particularly important in practice.
With an equity-settled arrangement, an employee may receive shares or options over shares. The expense is normally recognised with a corresponding credit to equity.
With a cash-settled arrangement, such as certain share appreciation rights, the corresponding amount is recognised as a liability.
This difference becomes particularly important after initial recognition. A cash-settled liability is remeasured at each reporting date and at settlement, with changes in fair value recognised in profit or loss.
Arrangements offering cash or equity alternatives require separate consideration under Section 26 rather than an assumption that one treatment automatically applies.
2. The vesting period determines when employee services are recognised
Many employee share schemes do not vest immediately. An employee might, for example, need to remain with the business for three or four years before becoming entitled to exercise an option.
Where an award is conditional on completing a specified service period, the accounting expense is recognised as those services are provided over the vesting period.
The distinction between market and non-market vesting conditions is important.
A service condition, such as remaining employed for a specified period, affects the estimate of the number of awards expected to vest. The estimate is revised as circumstances change.
A non-market performance condition, such as achieving a specified profit target, is dealt with in a similar way when estimating the instruments expected to vest.
Market conditions, such as achieving a particular share price, instead form part of the fair value measurement. They are not subsequently adjusted simply because the target is or is not achieved.
That distinction can materially affect the accounting charge.
3. Equity-settled awards are measured using grant-date fair value
For employee awards, directly measuring the value of the individual employee services received will usually be impractical.
The accounting therefore uses the fair value of the equity instruments granted, measured at the grant date.
That grant-date principle matters. Accountants should not simply replace the original fair value with a later value because the company's share price or circumstances have changed.
Valuation can nevertheless become challenging where there is no readily observable market price.
The hierarchy discussed in the webinar starts with an observable market price where one is available. Entity-specific observable information, such as a recent transaction in the company's shares or an independent valuation, may also provide evidence.
Where that information is unavailable, an option pricing model may be required. Inputs can include the share price, exercise price, expected volatility, option life, expected dividends and risk-free interest rate.
The valuation therefore requires judgement as well as bookkeeping.
4. Cash-settled awards require continuing remeasurement
Cash-settled arrangements have a different measurement consequence.
FRS 102 requires the liability to be measured at fair value and remeasured at each reporting date until it is settled. Movements in that liability are recognised in profit or loss.
This means the expense can continue changing as the fair value of the award changes.
Share appreciation rights illustrate the point. An employee may become entitled to a cash amount linked to an increase in the company's share price rather than receiving the shares themselves.
The liability at a reporting date therefore needs to reflect the value of the outstanding rights at that date, alongside the proportion of the relevant service period completed.
5. Do not automatically reverse an equity-settled expense when options are not exercised
One feature of equity-settled share-based payments can initially appear counter-intuitive.
Once the employee has provided the services required for the award to vest, the expense does not simply disappear because the employee later chooses not to exercise an option.
The transaction represents remuneration for services already received by the employer.
Consequently, an amount previously recognised within the share option reserve may ultimately be transferred within equity, such as to retained earnings. It is not simply reversed through profit or loss because the vested option expires unexercised.
This is an important distinction between accounting for the employee's service and accounting for the employee's later decision about an option.
6. Modifications and cancellations need separate attention
Share schemes do not always run exactly as originally designed.
An employer may modify an award, particularly where existing options have become unattractive to employees.
Where a modification increases the value of an equity-settled award to the employee, the incremental benefit needs to be considered in the accounting.
A cancellation during the vesting period creates a different issue. Under the treatment discussed in the webinar, cancellation can accelerate the recognition that would otherwise have occurred over the remaining vesting period.
Practitioners should therefore review amendments to scheme terms rather than assuming the original accounting can continue unchanged.
What changed under the Periodic Review 2024?
The major FRS 102 changes attracting attention in 2026 concern areas such as leases and revenue recognition. Section 26 has not undergone a comparable overhaul.
There are, however, incremental improvements and clarifications relevant to share-based payments.
The revised standard includes further requirements concerning group share-based payment arrangements and cash-settled transactions. It also addresses areas including share-based payment transactions involving cash alternatives and certain net-settlement features.
The FRC confirms that most Periodic Review 2024 amendments apply for accounting periods beginning on or after 1 January 2026.
One point requiring care is fair value. The revised FRS 102 introduces Section 2A, Fair Value Measurement, as part of the wider Periodic Review changes, but practitioners should follow the specific measurement requirements and scope provisions applying to share-based payments rather than assuming every new general fair-value requirement applies unchanged to Section 26.
What disclosures are required for share-based payments?
Section 26 requires information that allows users to understand the nature and financial effect of share-based payment arrangements.
Depending on the arrangement, disclosures can include:
- a description of the share-based payment arrangements;
- relevant vesting requirements and the maximum term of options;
- movements in the number of options during the reporting period;
- weighted average exercise prices;
- how fair value was determined;
- information about modifications; and
- the expense recognised and, where relevant, liabilities arising from the arrangements.
Similar arrangements may be aggregated where appropriate.
The disclosure exercise should therefore begin well before the financial statements are finalised, particularly where valuations or information about employee awards must be obtained from elsewhere in the business.
Frequently asked questions
What is a share-based payment under FRS 102?
A share-based payment is a transaction in which an entity receives goods or services in exchange for equity instruments or amounts based on the value of equity instruments. Employee share options are a common example. Section 26 of FRS 102 sets out the recognition and measurement requirements, including the distinction between equity-settled and cash-settled transactions.
Where does an equity-settled share-based payment go in the accounts?
For an employee award, the cost of the services received is generally recognised as an expense over the relevant service or vesting period. The corresponding credit is recognised in equity. Where an award vests immediately because no further service is required, the services received are generally recognised immediately rather than spread over a future service period.
Are cash-settled share-based payments remeasured?
Yes. For cash-settled transactions, FRS 102 requires the liability to be remeasured at fair value at each reporting date and at settlement. Changes in fair value are recognised in profit or loss. This differs from the grant-date measurement approach that is central to employee equity-settled awards.
What happens when employees leave before their options vest?
Where continued employment is a vesting condition, the entity estimates how many awards are expected to vest. That estimate is revised as new information becomes available. Ultimately, the cumulative accounting for a service or other non-market vesting condition reflects the instruments that actually vest.
What happens if vested options are never exercised?
For an equity-settled award, the employee's later decision not to exercise a vested option does not mean the employer never received the employee services. The recognised remuneration expense is therefore not simply reversed through profit or loss. Any subsequent movement relating to the share option reserve is an equity movement.
Are the 2024 FRS 102 amendments already effective?
For most changes, yes, for accounting periods beginning on or after 1 January 2026. Early application was also permitted, subject to the conditions specified by FRS 102. The FRC's current FRS 102 material confirms 1 January 2026 as the principal effective date for the Periodic Review 2024 amendments.
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.
