FASB seeks to clarify share-based consideration payable to a customer

ARTICLE | June 06, 2025

Authored by RSM US LLP

The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2025-04, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Clarifications to Share-Based Consideration Payable to a Customer, to clarify the accounting for share-based consideration payable to a customer in conjunction with selling goods or services.

Background

An entity may issue consideration to a customer to provide an incentive for the customer to purchase the entity’s goods and services. The consideration can take the form of cash, credit or share-based consideration (such as warrants). When share-based consideration is granted to a customer, it often requires the purchase of a specified volume or monetary amount of goods or services before it vests. Under current generally accepted accounting principles (GAAP), a grantor applies the guidance in Topic 718 to measure and classify share-based consideration payable to a customer, and the guidance in Topic 606, Revenue from Contracts with Customers, for recognition. Topic 606 requires that an entity account for consideration payable to a customer as a reduction of the transaction price (i.e., a reduction of revenue) unless the payment to the customer is in exchange for a distinct good or service. Under Topic 718, if share-based consideration payable to a customer requires meeting certain vesting conditions, the grantor must determine if those vesting conditions represent service or performance conditions. The vesting conditions determine when the grantor recognizes revenue. For performance conditions, the grantor is required to estimate the probable outcome of a performance condition and whether the share-based consideration is expected to vest or be forfeited. When the award contains service conditions, a grantor can elect to estimate forfeitures or account for them as they occur. When forfeitures are accounted for as they occur, revenue recognition may be delayed for awards that are not probable of vesting. For example, in this case, the entity would reduce revenue for an award not expected to vest and that revenue would only be recognized upon the forfeiture of the award.

Under current GAAP, the definitions of performance condition and service condition do not explicitly address vesting conditions such as purchases made by a customer or parties that purchase a grantor’s goods or services from the grantor’s customers. Additionally, current GAAP is unclear as to whether Topic 606 guidance on constraining estimates of variable consideration applies to share-based consideration payable to a customer.

Main provisions

ASU 2025-04 revises the Master Glossary definition of the term performance condition for share-based consideration payable to a customer. The revised definition includes vesting conditions that are based on the volume, monetary amount or timing of a customer’s purchases of goods or services from the grantor. The updated definition also includes discussion of performance targets based on volume purchases made by other parties that acquire the grantor’s goods or services from the grantor’s customers (i.e., the grantor’s customers’ customers).

Although the revised performance condition definition is expected to result in significantly fewer customer awards with service conditions, for those customer awards that are deemed to have service conditions, ASU 2025-04 eliminates the policy election permitting a grantor to account for forfeitures as they occur. As a result, the grantor is required to estimate the number of forfeitures expected to occur when measuring the share-based consideration payable to a customer. However, the current policy election for share-based payment awards with service conditions granted to employees and nonemployees in exchange for goods or services to be used or consumed in the grantor’s own operations is still available.

ASU 2025-04 clarifies that the guidance in Topic 606 on constraining estimates of variable consideration does not apply to share-based consideration payable to a customer. As such, the guidance in Topic 718 is the only guidance applied to determine the probability that the award will vest.

ASU 2025-04 clarifies that as used in Topic 606, the term “share-based consideration” encompasses the same types of instruments as those in share-based payment arrangements; however, the grantee does not need to be a supplier of goods or services to the grantor. Additionally, the ASU clarifies that the term fair value in paragraph 606-10-55-88B is intended to align with how that term is used in Topic 718. In Topic 718, the term fair value refers to a fair-value-based method under which the effects of service and performance conditions are reflected based on the outcomes of those conditions.

Effective date and transition

The amendments in ASU 2025-04 are effective for all entities for annual reporting periods beginning after December 15, 2026, including interim periods within those annual reporting periods. Early adoption is permitted as of the beginning of the annual reporting period for which the financial statements have not yet been issued or made available for issuance.

ASU 2025-04 permits an entity (i.e., the grantor) to apply the new guidance on either a modified retrospective or a retrospective basis as follows:

• Modified retrospective basis: A grantor recognizes a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption and is not required to recast any financial statement information before the period of adoption.
• Retrospective basis: A grantor recasts comparative periods and recognizes a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the earliest period presented. Under the retrospective approach, the actual outcome of the vesting conditions, if known, should be used for any prior period estimates.

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