Explain the effect of share-based compensation on the financial statements

Share-based pay is an expense even though no cash leaves. It is measured at fair value on the grant date, using an option pricing model for options, and spread over the vesting period: annual expense equals grant-date fair value times awards expected to vest, divided by the service years (US GAAP also allows forfeitures to be booked as they occur). For equity-settled awards the credit goes to equity, so total equity is unchanged; for cash-settled awards such as share appreciation rights a liability is recognised and remeasured to fair value each period, so expense moves with the share price. Option value rises with volatility and expected life and falls with expected dividends. The trap is re-measuring an equity-settled grant when the share price later changes: its grant-date value is locked in.