The UK’s Financial Reporting Council recently issued its thematic review of IFRS Share-based Payment.

The report was based on a “desktop review of 20 listed companies with significant share-based payment expenses (covering) annual reports and accounts with year-ends falling between September 2024 and February 2025 (and) companies from a variety of sectors and of various sizes.

You’ll recall that IFRS 2 is built on the assumption that since no one gets something for nothing, an entity issuing share-based payments must have received some form of economic resources in return for them, to be measured at their fair value. It follows, in broad terms, that certain kinds of conditions (so-called vesting conditions) will (at least in theory) affect the economic resources to be received, for example by incentivizing the recipients to work harder or better. Other kinds of conditions though (non-vesting conditions) won’t affect the resources received: the conditions are beyond the control of the recipients, so they’ll put in the same amount and quality of work either way. In the first case, then, the outcome of the condition may result in revising the expense in the light of experience; in the second case it doesn’t. A broad-based market condition, such as a target return on a share index, always falls into the second category, because it reflects the performance not only of an entity itself but that of other entities outside the group as well, and so is inherently beyond the control of any employee.

It’s possible to agree with all that in theory, and yet to have some reservations regarding both the immense amount of technical detail required to set out its workings and the broader value of what results from it: that is, more than for other aspects of the statements, stakeholders’ interest in stock-based compensation spills beyond what can be accommodated by the above model (in particular, in knowing what executives and others actually received from the instruments on exercise). The FRC’s report touches on the relationship between what’s disclosed in the financial statements and elsewhere:

• For some UK companies, there are overlaps between what is required to be disclosed to comply with IFRS 2 and what is required to comply with other regulations such as the Directors’ Remuneration Report, which can lead to duplication of information about arrangements. Companies should consider the extent to which they can use cross-referencing and signposting.
• Companies should also ensure that the disclosures within the annual report and accounts are consistent. (For example) we saw some companies state that all of their schemes were equity-settled but the detailed descriptions of some schemes suggested cash-settlement.

Some other points on disclosure:

• We observed that many companies chose to include all disclosures for all of their schemes, regardless of their relative significance. There are opportunities to cut clutter from the annual report and accounts whilst still providing the information necessary for users to understand the effect of share-based payments on the financial statements.
• Where companies did provide disclosures for all their schemes, the better examples brought together the common disclosures for each scheme and considered how to avoid duplication.

More than for most aspects of the statements, it seems to me that the number assigned to stock-based compensation is relatively unimportant in itself, likely to be taken as a broad representation of activity in this area rather than a particularly meaningful measure of it; of course, it’s often added back in alternative performance measures. The FRC makes an unsurprising point in that regard:

• In line with findings from our routine monitoring work, some companies in our 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.

The report sets out a finding relating to situations where entities estimate the future tax deduction to be received for share-based payments based on the share price at the end of the reporting period. It notes that when the estimated tax deduction differs from the cumulative remuneration expense recognized in the financial statements, it indicates that the tax deduction relates not only to remuneration expense but also to an equity item, so that the excess of the associated current or deferred tax should be recognized directly in equity. The report finds: “Three companies included an IFRS 2 expense adjustment in their total tax charge reconciliation with no tax deduction recognized in equity. This may suggest that an element of excess tax deduction has been incorrectly included in profit.”

More broadly though, given the opaque nature of share-based payment measurement mechanics, it’s not too surprising that the report has little to say in that area. Its so-called “key observation” is that “All companies in our sample used share-based payments to reward directors and employees, with the expense measured by reference to the fair value of the equity instruments.” As keys go, not much being unlocked there…!

The opinions expressed are solely those of the author.