Share-based payments as shares or share options are common features of employee remuneration. Suppliers, who provide professional services, can also be paid by issuing shares or share options. Share-based payments become an important way of binding employees to a company, where the key asset is staff and aligning the employees’ interests with those of the shareholders. Those kinds of payments became a larger component of employee and executive compensation especially in biotechnology and information technology sectors. 

A share-based payment is the transaction, in which a company pays for goods or services either by transferring its own equity instruments to the counterparty, or by paying an amount of cash that is based on its own share price. IFRS 2 specifies how companies should account for goods or services received in exchange for share-based payments. In IFRS 2, three types of share-based payment transactions are identified.

• Equity settled shared-based payment transactions, in which the company pays for goods or services by issuing equity instruments such as shares or share options.
• Cash settled share-based payment transactions, in which the company pays for goods or services in cash, but the amount to be paid is based on the price of the company’s equity instruments (shares or share options).
• Share-based payment transactions with cash alternatives, in which the company receives goods or services and either the company or the supplier of the goods and services has a choice of the entity settling the transaction in cash or by issuing equity instruments.

In practice, companies have an interest in using equity settled share-based payments or cash settled share-based payments. This study focuses on the recognition and measurement of equity settled and cash settled share-based payment transactions and investigates their financial effects. How and when the company measures the transactions or whether the company must remeasure the transaction, all depend on whether the transaction is equity settled or cash settled. Equity settled share-based payment transactions require a measurement that reflects the price of the shares or share options at the grant date. The measurement of equity settled share-based payment transactions cannot be updated after the grant date in order to reflect the changes in share price. However, for vesting conditions a company should update the measurement to reflect the changes in its employee number estimates. No adjustments can be made based on market conditions. Share-based payment cost is recognized over the vesting period, with a corresponding entry in equity. This cost can be recognized as an expense or capitalized as an asset if the general asset-recognition criteria are met. Cash settled share-based payment transactions are measured at the fair value of the liability and recognized as an expense or capitalized as an asset if the general assetrecognition criteria are met. The liability to pay cash is measured on a basis that reflects the price of the share or share option. In order to reflect the changes in the price of share or share option, the subsequent measurement should be updated at each reporting period. Changes in the measurement of the liability are reported in profit or loss and remeasurements during the vesting period are only recognized to the extent that services have been received.

The choice of share based payments transactions is relevant for economic decisions of the companies and for the assessment of stewardship by management. In this study, recognition and measurement of equity settled and cash settled share-based payment transactions were analyzed and the financial effects of the application of both the equity settled and cash settled share-based payment transactions were examined through two case studies. Five financial ratios were calculated in order to investigate the financial effects of the different share-based payment transactions. The classification of share-based payment transactions (equity settled or cash settled share-based payment) changes the magnitude of the key liquidity and profitability ratios of the companies. Equity settled share-based payment transactions are more suitable for immature companies with low liquidity, which prefer debt financing, whereas cash settled share-based payment transactions are more favorable for the companies which prefer equity financing and cannot benefit from the leverage effect.