By Enoch AKUFFU-DJOBI (PhD)
In today’s corporate world, employee compensation has evolved beyond just salaries and bonuses. Share-based payments—such as stock options and performance shares—have become popular tools for rewarding employees, especially in listed companies.
But while these schemes boost motivation and align employees with company performance, they come with complex accounting demands, governed by IFRS 2: Share-Based Payment.
Many accountants still struggle with properly recognizing, measuring, and reporting these transactions. It’s time for the accounting profession—particularly in emerging markets like Africa—to stop treating IFRS 2 as optional complexity and start seeing it as an essential tool for transparent financial reporting.
IFRS 2: Share-Based Payment– What is it?
IFRS 2 pertains to creation of rights or options in shares of a given company to employees or others. Grant of shares or share options to employees and directors is a common feature with most companies. Besides, companies may sometimes issue share options to creditors as well.
Transactions where there is granting of shares or share options, may generically be referred to as “share-based payment transactions”.
These transactions mostly involve the company receiving employment services, directorial services, or other goods or services, and the company in turn settling the supply of goods or services in form of shares or share warrants.
The shares are mostly equities of the company (note that the meaning of “equity” under accounting standards is not the same as legal meaning of equity).
Types of Share Payment
Share-based payment transactions are of 3 types – equity-settled, cash-settled, and optionally-settled.
- A transaction is equity-settled where the entity receives goods/services that are settled by issuing equity instruments (that is, shares or share options).
- A transaction is cash-settled where the entity receives goods/services, at a value which is based on the price of the entity’s equity instruments. That is to say, it is almost as if the entity was to issue equity instruments for cash, but instead of getting cash in lieu, it gets goods/services. It may not be difficult to understand that as the value of goods/services obtained is equal to the fair value of equity instruments, the issue of equity instruments is only a mode of payment. Hence, under the cash-settled option, the issue of equity instruments is only a way of settling a financial obligation.
- The transaction is said to be optionally equity or cash settled, if either the entity or the counterparty has the option of settling it either in equity, or cash.
The Case for Rigorous Share-Based Payment Accounting
IFRS 2 requires companies to recognize the cost of share-based payments in the income statement, spreading it over the period that services are received. While the principle seems simple, the standard introduces challenges in areas such as fair value measurement, vesting conditions, and modifications to awards.
Yet, failure to properly account for these can lead to misstated profits, misleading financial statements, and a loss of investor confidence.
Practical Evidence: The Global and African Landscape
Globally, the consequences of weak share-based payment accounting have been evident. In the early 2000s, companies like Enron and WorldCom used stock options extensively while hiding the true cost, eventually contributing to massive accounting scandals. The introduction of IFRS 2 (and its US counterpart, FAS 123R) aimed to stop this.
In Africa, the issue is no less critical. A 2022 report by the Pan-African Federation of Accountants (PAFA) highlighted that over 60% of listed African companies with share-based schemes lacked full compliance with IFRS 2, especially in Ghana, Kenya, and Nigeria. Some firms failed to recognize share-based expenses altogether, while others improperly classified equity-settled awards as liabilities.
Why Some Accountants Still Get It Wrong
Complexity of Fair Value Estimation:
Estimating the fair value of options at grant date often requires models like Black-Scholes or Monte Carlo simulations. Many accounting teams, especially in SMEs or in markets with limited technical expertise, lack the tools or training to use them.
Misunderstanding Vesting Conditions:
Accountants sometimes incorrectly treat market-based conditions (like share price targets) the same as service conditions, affecting how and when expenses are recorded.
Poor Coordination Between HR and Finance:
Share-based payments often originate from HR departments, but in most cases accounting teams are left to guess terms and timelines, leading to errors.
Inconsistent Application Across Firms:
Without proper oversight from regulators and auditors, companies apply IFRS 2 differently, undermining comparability in financial reporting.
Why it Matters: Transparency and Investor Trust
Share-based payments can significantly impact a company’s reported profits and equity. Understating these costs overstates earnings, misleading investors and regulators. In highly competitive financial markets, especially as African stock exchanges look to attract foreign capital, transparency is non-negotiable.
For example, MTN Ghana, listed on the Ghana Stock Exchange, fully complies with IFRS 2. In its annual reports, the company clearly discloses the nature of share-based awards, fair value assumptions, vesting periods, and the expense recognized each year. This transparency boosts investor trust and sets a standard for others to follow.
The Call to Action: Professional Rethinking Needed
Accountants must take IFRS 2 seriously—not just to avoid audit issues, but to uphold financial integrity. Here’s what needs to change:
- Professional bodies and other tertiary institutions (accounting departments) should strengthen training and teachings on share-based payment accounting, especially in developing economies.
- Firms must ensure effective collaboration between finance and HR departments to capture accurate award data.
- Regulators and auditors must enforce stricter compliance and penalize misstatements.
- Accountants themselves must invest in understanding the valuation models and disclosure requirements that IFRS 2 demands.
Conclusion: No Room for Guesswork
Share-based payments are not just about rewarding employees—they’re about showing investors the true cost of doing so. With IFRS 2, there is no room for shortcuts or guesswork. For accountants, mastering share-based payment accounting is no longer optional—it’s a professional responsibility and a pillar of financial transparency.
Enoch is a Chartered Accountant / Certified Banker with a deep passion for accounting, banking, and governance. His expertise spans both education and practice reflecting a commitment to research and knowledge sharing. He can be reached via [email protected]). Contact: +233244201383.
