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Nepal Financial Reporting Standards · CA Final — Financial Reporting

NFRS 2 — Share-based Payment

The complete study post: why paying people in shares is still an expense, how to measure it at fair value, and how vesting, forfeitures, repricing and cash-settled plans change the answer. With worked journals, charts and exam traps — written for students in Nepal.

Equivalent to IFRS 2Issued by ASB Nepal · ICANCompanion file: NAS 2 — InventoriesReading time ~35 min

3Transaction types
1 ruleGoods / services received = expense or asset
Grant dateMeasurement date for equity-settled
51 parasNFRS 2 paras 1–51 + Appendices A & B


Chapter 1 · The idea

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:

The core principle (Para 2 & 7)When an entity receives goods or services in a share-based payment transaction, it recognises those goods/services — as an expense (unless they qualify as an asset) — with a corresponding increase in equity (equity-settled) or a liability (cash-settled), measured at fair value.

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.

Entity receives service→Pays in shares / options / share-linked cash→Recognise expense→Credit Equity or Liability

Chapter 2 · Paras 1–6

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

Transaction Why it is in NFRS 2
Equity-settled: entity receives goods/services for its own equity instruments (shares, options, warrants) Classic ESOP; shares to suppliers
Cash-settled: entity incurs a liability to transfer cash (or other assets) based on the price/value of its equity instruments Share Appreciation Rights (SARs), phantom shares
Choice: either the entity or the counterparty can choose equity or cash settlement Paras 34–43 — see Chapter 9
Transactions with employees and non-employees (suppliers, consultants) NFRS 2 is not an “employee-only” standard
Group transactions — parent grants its shares to subsidiary’s employees Paras 43A–43D — see Chapter 11

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

Excluded Dealt with instead by
Shares issued in a business combination (consideration transferred) — except shares granted to acquiree’s employees for future service NFRS 3 Business Combinations
Transactions within NFRS 9 scope — e.g. financial instruments, contracts to buy/sell non-financial items in NFRS 9’s scope NFRS 9 / NAS 32
Share-based payment settled by another group entity / shareholder on the entity’s behalf — not excluded; expressly included since the group amendments NFRS 2 group rules
Employee benefits that are not share-based (salaries, bonus in fixed cash, gratuity) NAS 19 Employee Benefits
Exam tip — the one scope trapShares given to employees of an acquired company that vest only if they stay after acquisition are not part of NFRS 3 consideration — the post-combination portion is NFRS 2 remuneration expense. Examiners love this split.

Chapter 3 · Appendix A

Key definitions — learn these word for word

Term Meaning in plain English
Share-based payment transaction Entity receives goods/services and pays with equity instruments, or incurs a liability based on equity prices.
Grant date Date entity and counterparty agree to the arrangement — both understand the terms. If approval (e.g. AGM / board) is required, grant date is when approval is obtained.
Vesting conditions Conditions that decide whether the counterparty becomes entitled: service and performance conditions only (Para 19, App A).
Vesting period Period over which all specified vesting conditions are to be satisfied.
Fair value Amount for which an asset could be exchanged / liability settled between knowledgeable, willing parties at arm’s length (NFRS 2’s own definition, aligned to NFRS 13 in practice).
Intrinsic value Share price − exercise price (if positive). Used only in the rare case fair value cannot be reliably estimated.
Reload feature / reload option Automatic grant of additional options whenever previously granted options are exercised using shares to pay the exercise price.
Market condition Performance condition tied to market price/value of equity — e.g. achieve share price of Rs. 800, or TSR vs index.
Non-vesting condition Any other condition that is neither service nor performance — e.g. employee must save monthly, or keep holding shares during vesting.

Chapter 4 · Concept map

The three types at a glance

1 · Equity-settled

Pays in shares / options.
Credit: Equity (SBP reserve).
Measured: once, at grant-date fair value. Never remeasured for share-price moves.

2 · Cash-settled

Pays cash based on share price (SARs).
Credit: Liability.
Remeasured to fair value at every reporting date and at settlement — changes go to P&L.

3 · Choice of settlement

Counterparty chooses → compound instrument (liability + equity components). Entity chooses → classify by whether a present obligation to pay cash exists.

Share-based payment? Settled in shares / options? YES → Equity-settledGrant-date FV · credit equity NO → Cash-settledRemeasure liability each period
Figure 1 — Classification flowchart. Ask “what will actually be delivered?” — shares means equity-settled; share-price-linked cash means cash-settled.

Chapter 5 · Paras 7–13A

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.
The vesting-period logicIf there is no vesting period (options vest immediately), presume services are already received → expense the full grant-date fair value on day one. If vesting is 3 years, spread over 3 years, adjusting for expected forfeitures (Chapter 7).

Chapter 6 · Paras 10–29 · The heart of NFRS 2

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.

Total expense = No. of instruments expected to vest × Grant-date fair value per instrument
Recognised each year = Total × (expired vesting period ÷ total vesting period) − already recognised

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.

Chapter 7 · Paras 18–21A · Most examined area

Vesting conditions — where most marks are won and lost

Condition type In grant-date fair value? Effect on number expected to vest?
Service condition
Stay 3 years
No Yes — estimate leavers; revise each year; true-up at vesting date so total = instruments that actually vested × grant FV.
Non-market performance
Profit +20%, EPS target, sales target
No Yes — revise estimate of outcome each year (e.g. graded vesting tranches).
Market performance
Share price Rs. 800; TSR ranking
Yes — built into option-pricing model (e.g. Monte Carlo) No — never revise. If service is completed, expense is recognised in full even if the share-price target is missed.
Non-vesting condition
Save monthly; hold shares
Yes — reflected in fair value No — but if the entity/counterparty can choose and fails it, treat as cancellation (accelerate).
The golden rule — say it in every answerMarket conditions are priced in and never trued-up. Non-market vesting conditions are never priced in and always trued-up. Mixing these two up is the single most common NFRS 2 error in CA exams.

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.

Chapter 8 · Paras 16–18, Appendix B

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:

Effect of an increase in each input on option fair value Share price ↑FV ↑↑ Volatility ↑FV ↑ Option life ↑FV ↑ Exercise price ↑FV ↓ Expected dividends ↑FV ↓ Risk-free rate ↑FV ↑ (small)
Figure 2 — Direction of the six Black–Scholes inputs (share price, exercise price, expected volatility, option life, expected dividends, risk-free rate). Early-exercise behaviour and vesting restrictions that affect the holder are also considered; post-vesting transfer restrictions are not (except via marketability where App B permits).
  • 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.

Chapter 9 · Paras 30–43

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.

Liability Rs. lakh GrantYear 1 · FV 30Year 2 · FV 25 ↓ credit P&LSettled · cash paid ▲ expense▼ gain on remeasurement
Figure 3 — Cash-settled SARs: the liability follows fair value up and down. A falling share price creates a P&L credit — impossible under equity-settled accounting.

Choice of settlement (Paras 34–43)

Who chooses? Treatment
Counterparty (e.g. employee can take cash or shares) Compound instrument: measure liability component first (fair value of cash alternative), equity component = residual (total FV − liability FV). Liability remeasured; equity fixed at grant date.
Entity If a present obligation to settle in cash exists (past practice, stated policy, cash is the only realistic option) → cash-settled. Otherwise → equity-settled. If the entity then chooses cash anyway, the payment is treated as a repurchase of equity (debit equity).
Net-share / tax withholding Withholding shares to pay the employee’s tax does not make the award cash-settled — whole award stays equity-settled if it would be equity-settled without the net-settlement clause (2016 amendment, Paras 33E–33H).

Chapter 10 · Paras 26–29

Modifications, cancellations and settlements

Event Accounting — never reduce the original charge
Modification that increases FV (repricing options down, adding shares, shortening vesting) Recognise the incremental fair value (FV after − FV before, both at modification date) over the remaining vesting period (or immediately if already vested) — in addition to the original grant-date charge.
Modification that decreases FV / is not beneficial Ignore it for expense purposes — keep recognising the original grant-date fair value as if the change never happened. No “saving” is ever booked.
Change in non-market vesting outcome via modification Apply the vesting-condition rules: account for the modified (more favourable) condition.
Cancellation / settlement during vesting (by entity or counterparty, incl. failure of a non-vesting condition either side can choose) Accelerate: recognise immediately the amount that would have been recognised over the rest of vesting. Any payment on cancellation up to the FV of the instruments is an equity repurchase (debit equity); any excess is an expense.
Failure of a service / non-market condition (employee leaves) Not a cancellation — it is a forfeiture: reverse via the true-up so cumulative expense for that person becomes zero.
Replacement award identified as a replacement for a cancelled award Treat as a modification: incremental FV = FV of replacement − net FV of cancelled award at replacement date.
One-line memory hookUnder NFRS 2 the expense can only stay the same or go up after grant (for equity-settled). It never goes down because the deal got worse for the employee — only forfeiture for failed service / non-market conditions reduces it.

Chapter 11 · Paras 43A–43D

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).

Chapter 12 · Numbers — practise these until automatic

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.

Year Calculation (cumulative) Cumulative Rs. Charge for year Rs.
Year 1 50 × 90% × 1,000 × Rs. 60 × 1/3 9,00,000 9,00,000
Year 2 50 × 88% × 1,000 × Rs. 60 × 2/3 17,60,000 8,60,000
Year 3 (actual) 44 × 1,000 × Rs. 60 26,40,000 8,80,000
Rs. 9.0 LRs. 8.6 LRs. 8.8 L Year 1Year 2Year 3
Figure 4 — Example A annual charges. Note Year 2 dips because the forfeiture estimate rose from 10% to 12% — the true-up mechanism at work. Total = Rs. 26.40 lakh.
Each year:
Employee benefits expense (P&L) Dr. 9,00,000 / 8,60,000 / 8,80,000
To Share-based payment reserve (Equity) 9,00,000 / 8,60,000 / 8,80,000

On exercise (say all 44,000 options exercised at Rs. 200):
Bank (44,000 × 200) Dr. 88,00,000
SBP reserve Dr. 26,40,000
To Share capital (44,000 × Rs. 100 par) 44,00,000
To Share premium (balancing figure) 70,40,000

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.

Year Liability (cumulative) P&L charge Rs.
Year 1 10,000 × 45 × 1/2 = Rs. 2,25,000 2,25,000
Year 2 10,000 × 52 = Rs. 5,20,000 2,95,000
Year 1: Expense Dr. 2,25,000 → SAR liability Cr. 2,25,000
Year 2: Expense Dr. 2,95,000 → SAR liability Cr. 2,95,000
Payment: SAR liability Dr. 5,20,000 → Bank Cr. 5,20,000
Total P&L cost = Rs. 5,20,000 = cash paid. Always true for cash-settled.

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.

Chapter 13 · Paras 44–52

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)).

Chapter 14 · Nepal lens

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.
NFRS 2 vs old practice Before NFRS Under NFRS 2
Options granted Often no entry at all Expense over vesting at grant-date FV
SARs Expense only when paid Liability accrued & remeasured each year
Repricing Ignored Incremental FV expensed additionally
Disclosure Minimal Full roll-forward + model inputs (Paras 44–52)

Chapter 15 · Revise in 10 minutes

10 exam traps + one-page checklist

# Trap Correct treatment
1 Remeasuring equity-settled options when share price changes Never. Grant-date FV is locked.
2 Adjusting expense when a market condition is missed No adjustment if service completed — expense stands.
3 Building a non-market target (EPS) into fair value No — adjust the expected number vesting instead.
4 Reversing expense when vested options expire unexercised Prohibited — transfer within equity only.
5 Booking a “saving” when a modification reduces FV Ignore decreases; original charge continues.
6 Treating an employee leaving as a cancellation It is forfeiture — cumulative expense → zero via true-up. Cancellation accelerates instead.
7 Straight-lining graded vesting Each tranche = separate award (front-loaded).
8 Using direct FV of services for employee awards Employees = indirect (equity FV). Direct FV is for suppliers (rebuttable presumption).
9 Forgetting SAR liability remeasurement gains Cash-settled: falls in FV are P&L credits.
10 Putting acquisition-date employee shares wholly in NFRS 3 consideration Split: pre-combination service → consideration; post-combination service → NFRS 2 expense.

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

Is an ESOP expense a real expense if no cash is paid?

Yes. The company consumed employee services and paid with equity value instead of cash. NFRS 2 measures that consumption at grant-date fair value — exactly as a cash salary would be expensed.

What if the share price doubles after grant — does the expense double?

For equity-settled: no, it stays at grant-date fair value. For cash-settled SARs: yes — the liability is remeasured, so the total expense follows the price until cash is paid.

Can NFRS 2 apply to a private company with no share price?

Yes. Fair value is estimated using valuation techniques (recent transactions, multiples, DCF of the shares). “No market price” is not an exemption — intrinsic value is only a last resort when FV truly cannot be estimated reliably.

Where does the credit go before shares are actually issued?

To a separate component of equity — commonly called the share-based payment reserve — which moves to share capital/premium on exercise, or within equity on expiry.

Check yourself

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).

NFRS 2 — Share-based Payment · Study notes for CA students in Nepal · Figures in examples are illustrative (Rs.).