Should employee share options be expensed in an entity’s financial statements?

This paper investigates the debate as to whether employee share options (ESOs) should be expensed in an entity’s financial statements as required by the IASB’s IFRS 2 – Share‐based payment (2004). The paper presents arguments for and against expensing ESOs, demonstrating that compensation of employees via ESOs is a bona fide expense in terms of the recognition and measurement criteria of the IASB Framework. It concludes that, the substance of an ESO transaction is that the entity pays an employee for his services, albeit with a different financial instrument. Consequently, the accounting treatment of such compensation should be the same as for any other payment of services of an employee.