AASB 2: Accounting for Share-Based Payments and Performance Rights

Key takeaway: Options and performance rights are an expense, even when no cash changes hands. Under AASB 2, equity-settled awards are measured at fair value on the grant date and expensed over the vesting period. How the vesting conditions are written decides how that expense behaves, so finance should be involved before an award is designed, not after it is granted.

Background

Listed and growing companies use options, performance rights and share plans to attract and retain people while conserving cash. AASB 2 Share-based Payment, which mirrors IFRS 2, requires the cost of those awards to be recognised in profit or loss. The expense often surprises boards because it is driven by valuation inputs rather than by the company's own share price movements after grant.

How the standard works

Equity-settled awards are measured at the fair value of the instruments on the grant date. That value is spread over the vesting period and credited to equity. It is not remeasured for later share price movements.

Vesting conditions are treated differently depending on their type:

• Service conditions, such as remaining employed for three years, and non-market performance conditions, such as EPS or revenue targets, affect how many awards are expected to vest. The estimate is revised each period, and the cumulative expense is trued up to the number that actually vests.

• Market conditions, such as total shareholder return hurdles, are built into the grant-date fair value. If the service condition is met, the expense is not reversed even when the market hurdle is missed.

• Non-vesting conditions are also reflected in the grant-date fair value.

Cash-settled awards, such as phantom shares or share appreciation rights paid in cash, are liabilities. They are remeasured at fair value at each reporting date until settlement.

Modifications and cancellations have their own rules. A modification that increases fair value adds the increase as an expense. A cancellation generally accelerates the expense not yet recognised.

Valuation

The grant-date fair value comes from an option pricing model. Black-Scholes suits simple awards. Binomial models and Monte Carlo simulation are used where there are market hurdles, early exercise features or relative TSR conditions. Key inputs are the share price, exercise price, expected life, volatility, dividend yield and risk-free rate. Each should be documented and defensible to the auditor.

Who is affected

• ASX-listed companies granting options or performance rights to directors, executives and employees.

• Unlisted companies and start-ups with employee share schemes.

• Australian subsidiaries whose staff receive awards over a foreign parent's shares. The subsidiary records the expense, with a matching contribution from the parent in equity.

Commercial implications

The accounting expense affects reported profit, earnings per share and, where relevant, covenant calculations. Plan design choices have consequences: an EPS hurdle can produce a reversal if it is missed, while a TSR hurdle cannot.

Other rules apply alongside the accounting. Employee share scheme tax rules decide when employees are taxed. State payroll tax can apply to share and option grants. Listed companies need shareholder approval under the ASX Listing Rules before issuing securities to directors under a plan.

Recommended considerations

1. Involve finance and your valuer when drafting plan rules and vesting conditions.

2. Fix the grant date carefully: it is generally when the parties share an understanding of the terms, which may follow shareholder approval.

3. Obtain an independent valuation at grant, with documented inputs.

4. Maintain a register of awards, vesting conditions and expected vesting, updated each reporting period.

5. Check employee share scheme tax, payroll tax and disclosure obligations before each grant.

6. Explain the expense to the board in advance so the reported result is not a surprise.

Sources

• AASB, Australian Accounting Standards (search for AASB 2)

• ATO, Employee share schemes: employers

• ASX Listing Rules, guidance notes and waivers

Speak with Reset Group. We value options and performance rights and prepare AASB 2 calculations and disclosures for listed and unlisted companies. Call +61 2 8208 3314 or email info@resetgroup.com.au.

General information only, current at 30 October 2026. It does not take your circumstances into account and is not advice. Liability limited by a scheme approved under Professional Standards Legislation.