Share-based payments are commonly used in large businesses, particularly in the tech industry. Just recently Tesla shareholders approved a $1trn pay package for Elon Musk.
The accounting for share-based payments hasn’t changed in several years (see my video for AB on the subject). The basic principles are that when a company issues equity-settled share-based payments, they are included at fair value at the grant date to reflect the value of the service received.
For a company issuing cash-settled share-based payments (cash linked to share price performance), this is revalued to the fair value at each period end to represent the most likely payment to be made.
The value recorded in the accounts reflects the values when granted many years earlier
If this is with a third party, then the fair value is deemed to be the value of the service provided. The most famous example of this is the graffiti artist David Choe who provided graffiti to the offices of Facebook in their days as a start-up. Instead of charging them his normal fee of US$60,000, he instead accepted share options. These were recorded in the accounts of Facebook at the US$60,000 figure, but at the date of the Facebook IPO, these options were valued at US$200m.
If the transaction is with an employee, then the fair value is recorded as the fair value of the option at the grant date. This means that the value recorded in the accounts reflects the values when granted many years earlier, even if the value of these options is much greater when exercised.
This can lead to a large discrepancy between the figures reported as the value given, and what is recorded in the accounts. This has been particularly prevalent in the case of Elon Musk, and we have previously broken down the accounting for it in my recent AB video and article.
Thematic review
In the UK, the Financial Reporting Council (FRC) produces a regular thematic review of issues in the financial reporting environment. These reviews identify examples of good practice, areas of improvement and a review of consistency across a sample of firms applying the standard.
In October 2025, the FRC produced a thematic review on share-based payments. It noted that transactions with suppliers are less frequent, so the review focused on the transactions with employees. Its findings might well be of note to other jurisdictions. Here are the highlights.
Some entities are criticised for giving a misleading picture when producing APMs
A lot of the review was focused on the disclosures made by companies in relation to their share-based payment schemes. With the vast discrepancy between reported figures and the figures in the accounts, this can mean that these disclosures become increasingly important for users of financial statements. The report looked at some of the key disclosures made in relation to share-based payments.
In terms of measurement and recognition, these disclosures are central to the understanding of the schemes for users, covering the valuation methods used, the impact of vesting conditions and the discussion of the time the options will be vested over. The review findings of these disclosures were generally positive, highlighting their clarity and the useful information provided.
Classification issues
As for classification, companies need to disclose the details of whether schemes are equity-settled, cash-settled or both. The FRC did find some issues here. It was noted that when the detail was examined it could appear contradictory. Some companies stated in one place that they only had equity-settled schemes, but other disclosures or the figures in the statement of cashflows suggested that there was an element of cash-settled.
On alternative performance measures (APMs), entities were found to often exclude IFRS 2 expenses from APMs using ‘adjusted’ or ‘underlying’ profit metrics. If the share-based payment expenses are a regular part of the compensation package, this is not a helpful thing to do, but it can be acceptable in the case of large, one-off schemes.
The FRC found that some companies in the sample did not provide clear explanations for excluding IFRS 2 charges from their APMs, despite these charges appearing to be an established part of their employee compensation. This further emphasises a common criticism about the misleading picture some entities give when producing APMs.
Omitting information and simply linking to another note can increase the boilerplate nature
The final negative findings identified that there was a common lack of conciseness across the disclosures. It found that the same information was often repeated in several places in the annual report and accounts (for example, in the directors’ remuneration report, the share-based payment note, the related parties note and staff costs note).
The fear of omitting information was further displayed through the inclusion of non-specific and irrelevant policies, such as a policy for accounting for cash-settled awards when all awards are equity-settled.
This final conclusion can show the problem with excessive disclosure. While it is bold to omit information and simply link to another note, it can increase the boilerplate nature of the narrative and reduce its usefulness. Disclosures, sometimes consulted more than the numbers themselves in financial statements, clearly have room for improvement to better serve users.
Watch and learn
See the latest video in Adam Deller’s series, looking at Apple’s current focus on services
