ACCA Strategic Business Reporting (SBR) Practice Exam

How often should the fair value of liability be updated for cash-settled instruments under IFRS 2?

1. Only at the grant date

2. Annually

3. At each transaction

4. At each year end

The correct answer is: At each year end

Under IFRS 2, the fair value of cash-settled share-based payment transactions, such as cash-settled instruments, must be remeasured at each reporting date until the liability is settled. This means that the fair value is updated at each year-end or reporting period, which ensures that the liability accurately reflects any changes in the fair value of the underlying equity instruments during the life of the cash-settled arrangement. This approach allows for more accurate financial reporting by accounting for fluctuations in market conditions and volatility in the share price that may affect the expense recognized in the financial statements. Thus, the choice to update the fair value at each year-end aligns with the requirement for continuous alignment between the recognized liability and its fair value in response to market movements. In contrast, other options, such as only updating at the grant date or annually, would not adequately reflect the current value of the liability as they would ignore changes that could significantly impact its fair value.