NFRS 2 — Share-based Payment

Why NFRS 2 exists — “no cash paid” does not mean “no cost”

Companies pay directors, employees and suppliers not only in cash but in shares, share options and cash linked to the share price — ESOPs for bank staff, sweat-equity shares for founders, shares issued to a consultant instead of a fee. Before NFRS 2 many entities recorded nothing when they granted options: no cash left the bank, so no expense appeared, profit was overstated, and two identical companies — one paying salary in cash, one in options — looked completely different.

NFRS 2 fixes that with one sentence you should memorise:

Everyday Nepali examples: a commercial bank granting share options to its CEO under an ESOP approved by NRB and the AGM; a hydropower company issuing shares to a contractor for construction services; a startup issuing shares to its software team; a listed company paying its non-executive directors partly in shares. All fall inside NFRS 2.

Objective and scope

Objective (Para 1): to specify the financial reporting by an entity when it undertakes a share-based payment transaction — so the effects are reflected in profit or loss and the statement of financial position, including expenses for transactions in which share options are granted to employees.

Inside scope

Outside scope — the 4 exclusions (Paras 3–6)

Key definitions — learn these word for word

The three types at a glance

Recognition — when, and as what?

• When: when the entity obtains the goods or services are rendered. For employees, services are normally received over the vesting period, so the expense is spread over that period — not all on grant date.
• As what: an expense, unless the goods qualify for recognition as an asset (e.g. shares issued for machinery → debit asset; services that build inventory / a qualifying asset under NAS 23 may be capitalised).
• If options expire unexercised after vesting: no reversal. The services were received; the amount in equity may be transferred within equity (e.g. to retained earnings) but never through P&L.
• If goods/services do not qualify as an asset: expense immediately — e.g. shares issued for advertising: full fair value expensed on receipt.

Measurement — equity-settled transactions

With employees (Paras 10–13)

Employee services are hard to price directly, so NFRS 2 uses an indirect measure: measure the equity instruments granted at their fair value at grant date. That number is then locked in — later share-price rises or falls are ignored.

With non-employees / suppliers (Paras 13)

There is a rebuttable presumption that the fair value of goods/services received can be measured reliably — so measure directly, at the fair value of the goods/services on the date received. Only if that presumption is rebutted (rare) do you use the fair value of the equity given.

The rare exception — intrinsic value (Paras 24–25)

If fair value genuinely cannot be estimated reliably (extremely rare; e.g. unlisted start-up options with no observable inputs), use intrinsic value, remeasured at each reporting date until settlement. Disclose why. Examiners ask this as a one-mark MCQ — remember it exists, but it is almost never the main answer.

Vesting conditions — where most marks are won and lost

Graded vesting

If options vest in tranches (e.g. ⅓ each year for 3 years), NFRS 2 treats each tranche as a separate grant with its own vesting period — producing a front-loaded expense pattern (highest charge in Year 1). US GAAP allows straight-line; NFRS does not.

Measuring fair value of options — the pricing model

Share price is observable for listed shares. Options are not traded, so fair value comes from an option-pricing model — Black–Scholes–Merton or a binomial model (Monte Carlo for market conditions). NFRS 2 (App B) lists the minimum inputs:

• Expected volatility: use historical volatility over a period matching the option life; for newly listed entities, use comparable listed companies.
• Expected life: not the contractual maximum — reflect early exercise (employees often exercise early once vested).
• Unlisted companies (common in Nepal): no market price — fair value must be estimated (e.g. net-asset / earnings multiples, recent transactions, independent valuation). State the method and assumptions in disclosure.

Cash-settled plans and choice of settlement

Cash-settled (Paras 30–33): recognise the services and a liability at fair value, then remeasure the liability at every reporting date and at settlement, with all fair-value changes in profit or loss. Unlike equity-settled, the total cost is not fixed — it ends up equal to the cash actually paid.

Choice of settlement (Paras 34–43)

Modifications, cancellations and settlements

Group transactions and treasury shares

• Parent grants its own shares to subsidiary’s employees: Subsidiary (receiving services, no obligation to settle) → equity-settled in its own books: Dr Expense, Cr Equity (capital contribution from parent). Parent → equity-settled in consolidated and separate books (increase in investment in subsidiary).
• Subsidiary grants its own shares / parent must pay cash: classify in each entity by who settles and in what: the entity with the obligation follows its settlement (cash → cash-settled); the receiving entity without obligation → equity-settled.
• Consolidated accounts: always follow the substance of the group arrangement — normally equity-settled if settled in equity instruments of any group entity.
• Treasury shares: if the entity buys its own shares to settle awards, the consideration paid for treasury shares is deducted from equity (NAS 32); no gain/loss in P&L on their later delivery.
• Shareholder settles directly: if a major shareholder grants shares to the entity’s employees, the entity still recognises the NFRS 2 expense with a credit to equity (contribution).

Worked examples with journals

Example A — Equity-settled ESOP with changing forfeiture estimates

On 1 Shrawan 2081, Himal Traders Ltd grants 1,000 options to each of 50 employees (50,000 options). Exercise price Rs. 200. Options vest after 3 years’ service. Grant-date fair value = Rs. 60 per option. Estimates: Year 1 — 10% will leave over 3 years; Year 2 — revised to 12% total; Actual — 6 employees left in total, so 44 employees vest.

Par value Rs. 100 assumed for illustration. If options had expired unexercised, the Rs. 26.40 lakh reserve would move within equity only — never back through profit or loss.

Example B — Cash-settled Share Appreciation Rights (SARs)

On 1 Shrawan 2081 the company grants 10,000 SARs vesting after 2 years. Fair value per SAR: end of Year 1 = Rs. 45, end of Year 2 (vesting/settlement) = Rs. 52. All SARs vest and are paid in cash.

Example C — Repricing (modification that increases fair value)

Options were granted with FV Rs. 60. After a share-price fall, the exercise price is cut mid-vesting; FV immediately before modification = Rs. 35, immediately after = Rs. 48. Incremental FV = 48 − 35 = Rs. 13 per option. The company continues the original Rs. 60 charge over the original vesting period plus Rs. 13 over the remaining vesting period. Total recognised if the employee stays = Rs. 73 per option. Had FV fallen instead, the Rs. 60 charge would continue unchanged — decreases are ignored.

Presentation and disclosure

NFRS 2 has no special line-item rule (expense sits in employee benefits / relevant cost line; reserve within equity; SAR obligation as a liability) — the weight is in disclosure. An entity must disclose:

• Nature and extent of arrangements in the period: description of each plan, vesting requirements, maximum term, settlement method (Paras 44–45).
• Options roll-forward: number and weighted-average exercise price (WAEP) for options outstanding at start, granted, forfeited, exercised, expired, outstanding at end, and exercisable at end (Para 45(b)).
• For options exercised: weighted-average share price at exercise date. For options outstanding: range of exercise prices and weighted-average remaining contractual life (Para 45(c)–(d)).
• Fair-value measurement: weighted-average grant-date FV of options granted, the model used and all inputs (share price, exercise price, volatility and how it was determined, option life, dividends, risk-free rate), and how expected early exercise was incorporated (Para 47).
• Effect on performance and position (Paras 50–52): total expense for the period (split equity- vs cash-settled), total carrying amount of share-based payment liabilities, and total intrinsic value of vested liabilities.
• Modifications: explanation, incremental FV granted, and how it was measured (Para 47(c)).

NFRS 2 in Nepal — adoption and practice

• NFRS 2 is Nepal’s converged equivalent of IFRS 2, pronounced by the Accounting Standards Board (ASB) Nepal and adopted by ICAN as part of the NFRS framework — applicable to listed companies, banks and financial institutions, SOEs and other entities in the phased NFRS rollout (SMEs apply NFRS for SMEs Section 26, which mirrors the same principles in simplified form).
• Companies Act, 2063 and sector regulators govern whether shares/options may be issued (AGM approval, SEBON rules for listed companies, NRB directives for BFIs) — NFRS 2 governs only the accounting once they are. Accounting recognition never legalises an issue the law prohibits.
• Most Nepali application today: ESOPs in banks, insurers and listed companies; sweat equity and share-based pay in startups and hydropower/IT companies; shares issued to consultants and contractors. Unlisted issuers must document their share-valuation method carefully — there is no NEPSE price to point to.
• Tax note (handle with care in exams): accounting expense recognition under NFRS 2 does not by itself decide deductibility under the Income Tax Act, 2058 — tax follows its own rules and timing (often at exercise/settlement). Unless the question gives tax facts, do not invent a deferred-tax answer; if it does, a deductible temporary difference on the SBP reserve/liability is the usual NFRS 12 point.

10 exam traps + one-page checklist

Revision checklist

• Classify first: equity-settled, cash-settled, or choice — who chooses?
• Equity-settled: fix grant-date FV; adjust only for service + non-market outcomes.
• Cash-settled: remeasure liability to FV at every reporting date and settlement.
• Market condition? Priced in, never trued-up. Non-vesting failure either side can control = cancellation.
• Modification: add incremental FV if beneficial; ignore if not. Cancellation = accelerate.
• Group: receiving entity without obligation = equity-settled (capital contribution).
• Disclose: plan terms, options roll-forward with WAEP, model + inputs, expense split, liability carrying amount.

FAQs

Quiz — 5 questions

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Sources & further reading

NFRS 2 Share-based Payment (ASB Nepal / ICAN, converged with IFRS 2), especially Paras 1–52 and Appendices A–B; NFRS 3 for the business-combination scope split; NAS 19 for non-share-based employee benefits; NFRS for SMEs Section 26 for the SME version. This is a study summary — always confirm exam answers against the current standard text and ICAN’s latest pronouncements.

Companion notes in this set: NFRS 1 — First-time Adoption and NAS 2 — Inventories (separate file, as requested).