14.4 Initial Measurement | DART – Deloitte Accounting Research Tool

ASC 718-10 — Glossary

Performance Condition

A condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that relates to both of the following:

Rendering service or delivering goods for a specified (either explicitly or implicitly) period of time
Achieving a specified performance target that is defined solely by reference to the grantor’s own operations (or activities) or by reference to the grantee’s performance related to the grantor’s own operations (or activities).

Attaining a specified growth rate in return on assets, obtaining regulatory approval to market a specified product, selling shares in an initial public offering or other financing event, and a change in control are examples of performance conditions. A performance target also may be defined by reference to the same performance measure of another entity or group of entities. For example, attaining a growth rate in earnings per share (EPS) that exceeds the average growth rate in EPS of other entities in the same industry is a performance condition. A performance target might pertain to the performance of the entity as a whole or to some part of the entity, such as a division, or to the performance of the grantee if such performance is in accordance with the terms of the award and solely relates to the grantor’s own operations (or activities).

Pending Content (Transition Guidance: ASC 606-10-65-2)

Performance Condition

1. For share-based payments in which a grantor acquires goods or services to be used or consumed in the grantor’s own operations, a condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that relates to both of the following:

Rendering service or delivering goods for a specified (either explicitly or implicitly) period of time
Achieving a specified performance target that is defined solely by reference to the grantor’s own operations (or activities) or by reference to the grantee’s performance related to the grantor’s own operations (or activities).

Attaining a specified growth rate in return on assets, obtaining regulatory approval to market a specified product, selling shares in an initial public offering or other financing event, and a change in control are examples of performance conditions. A performance target also may be defined by reference to the same performance measure of another entity or group of entities. For example, attaining a growth rate in earnings per share (EPS) that exceeds the average growth rate in EPS of other entities in the same industry is a performance condition. A performance target might pertain to the performance of the entity as a whole or to some part of the entity, such as a division, or to the performance of the grantee if such performance is in accordance with the terms of the award and solely relates to the grantor’s own operations (or activities).

2. For share-based consideration payable to a customer that can result in a reduction of the transaction price in accordance with Topic 606, a condition affecting the vesting, exercisability, exercise price, or other pertinent factors used in determining the fair value of an award that relates to any of the following:

Achieving a specified performance target that is defined solely by reference to the grantor’s own operations (or activities) or by reference to the grantee’s (the customer’s) performance related to the grantor’s own operations (or activities)
The grantee’s purchase (or potential purchase) of the grantor’s goods or services from either the grantor or the grantor’s customers
A purchase (or potential purchase) of the grantor’s goods or services from either the grantee or the grantee’s customers.

The performance targets listed in this definition for employee and nonemployee awards (for example, a change in control) are also examples of performance conditions for share-based consideration payable to a customer.

ASC 606-10

32-25A Equity instruments granted by an entity in conjunction with selling goods or services shall be measured and classified under Topic 718 on stock compensation. The equity instrument shall be measured at the grant date in accordance with Topic 718 (for both equity-classified and liability-classified share-based payment awards). Changes in the measurement of the equity instrument (through the application of Topic 718) after the grant date that are due to the form of the consideration shall not be included in the transaction price. Any changes due to the form of the consideration shall be reflected elsewhere in the grantor’s income statement. See paragraphs 606-10-55-88A through 55-88B for implementation guidance on equity instruments granted as consideration payable to a customer.

Pending Content (Transition Guidance: ASC 606-10-65-2)

32-25A Share-based consideration granted by an entity in conjunction with selling goods or services shall be measured and classified under Topic 718 on stock compensation. The share-based consideration shall be measured at the grant date in accordance with Topic 718 (for both equity-classified and liability-classified awards). Changes in the measurement of the share-based consideration (through the application of Topic 718) after the grant date that are due to the form of the consideration shall not be included in the transaction price. Any changes due to the form of the consideration shall be reflected elsewhere in the grantor’s income statement. See paragraphs 606-10-55-88A through 55-88C for implementation guidance on share-based consideration payable to a customer.

ASC 606-10

55-88A Paragraph 606-10-32-25A requires that equity instruments granted in conjunction with an entity selling goods or services be measured and classified under Topic 718 on stock compensation. If the number of equity instruments promised in a contract is variable due to a service condition or a performance condition that affects the vesting of an award, an entity should estimate the number of equity instruments that it will be obligated to issue to its customer and update the estimate of the number of equity instruments until the award ultimately vests in accordance with Topic 718. When measuring each instrument, the entity should include, in accordance with Topic 718, the effect of any market conditions and service or performance conditions that affect factors other than vesting. Examples of factors other than vesting are included in paragraph 718-10-30-15. Changes in the grant-date fair value of an award due to revisions in the expected outcome of a service condition or a performance condition (both those that affect vesting and those that affect factors other than vesting) are not deemed to be changes due to the form of the consideration (as described in paragraph 606-10-32-23) and, therefore, should be reflected in the transaction price.

Pending Content (Transition Guidance: ASC 606-10-65-2)

55-88A Paragraph 606-10-32-25A requires that share-based consideration granted in conjunction with an entity selling goods or services be measured and classified under Topic 718 on stock compensation. If the number of awards promised in a contract is variable due to a service condition or a performance condition that affects vesting, the grantor should estimate the number of awards that it will be obligated to issue to the grantee and reduce the transaction price by the grant-date fair value of the number of awards that are expected to vest (for awards with service conditions in accordance with paragraph 718-10-35-1D(a)) or for which vesting is probable (for awards with performance conditions in accordance with paragraph 718-10-25-20). A grantor should update the estimate of the number of awards until the awards ultimately vest or are forfeited in accordance with Topic 718. When measuring each award, the grantor should include, in accordance with Topic 718, the effect of any market conditions and service or performance conditions that affect factors other than vesting. Examples of factors other than vesting are included in paragraph 718-10-30-15. Changes in the expected outcome of a service condition or a performance condition (both those that affect vesting and those that affect factors other than vesting) are not deemed to be changes due to the form of the consideration (as described in paragraph 606-10-32-23) and, therefore, should be reflected in the transaction price.

55-88AA Examples of performance conditions in share-based consideration payable to a customer that can result in a reduction of the transaction price in accordance with this Topic include those with performance targets based on the grantee (or other parties that purchase the grantor’s goods or services from the grantee) purchasing (or potentially purchasing) any of the following from the grantor (or the grantor’s customers):

A specified volume of goods or services (including over a specified period of time). This includes performance targets achieved upon the first purchase from the grantor (or the grantor’s customers).
A specified monetary amount of goods or services (including over a specified period of time).

55-88AB If share-based consideration payable to a customer is a payment for a distinct good or service from the customer and the grantor accounts for any portion of the share-based consideration as a reduction of the transaction price in accordance with paragraph 606-10-32-26, the grantor should apply the definition of performance condition that is specific to share-based consideration payable to a customer that can result in a reduction of the transaction price in accordance with this Topic to the entire award (including the portion that is not accounted for as a reduction of the transaction price). If share-based consideration payable to a customer is a payment for a distinct good or service from the customer and the grantor accounts for any portion of the share-based consideration as a reduction of the transaction price in accordance with paragraph 606-10-32-26, the grantor should apply the definition of performance condition that is specific to share-based consideration payable to a customer that can result in a reduction of the transaction price in accordance with this Topic to the entire award (including the portion that is not accounted for as a reduction of the transaction price).

55-88B Paragraph 606-10-32-25A requires that share-based consideration granted by an entity in conjunction with selling goods or services be measured and classified under Topic 718 at the grant date of the instrument. When an estimate of the fair value of share-based consideration is required before the grant date in accordance with the guidance on variable consideration in paragraph 606-10-32-7, the estimate should be based on the fair value (measured in accordance with Topic 718) of the award at the reporting dates that occur before the grant date. The grantor should change the transaction price for the cumulative effect of measuring the fair value at each reporting period after the initial estimate until the grant date occurs. In the period in which the grant date occurs, the grantor should change the transaction price for the cumulative effect of measuring the fair value at the grant date rather than the fair value previously used at any prior reporting date.

55-88C Regardless of whether an award’s grant date has occurred, the guidance on constraining estimates of variable consideration in paragraphs 606-10-32-11 through 32-12 should not be applied to share-based consideration payable to a customer that is measured and classified under Topic 718.

Share-based consideration payable to a customer is reflected as a reduction of the transaction price on the basis of the grant-date fair-value-based measure in accordance with ASC 718 (for both equity-classified and liability-classified awards). In addition, awards of such consideration may contain vesting conditions (i.e., service or performance conditions that must be satisfied for the customer to vest in the award) or conditions that affect factors other than the vesting of an award (i.e., market conditions, service or performance conditions that affect factors other than vesting or exercisability, or “other” conditions that do not meet the definition of a service, performance, or market condition). Both vesting and nonvesting conditions should be evaluated in accordance with ASC 718, which specifies that vesting conditions, unlike nonvesting conditions, are not directly factored into the fair-value-based measure of the award. Therefore, the amount recognized as share-based consideration payable to a customer would (1) reflect the actual outcome of any vesting condition and (2) incorporate in its measurement any nonvesting conditions.

Changing Lanes

In May 2025, the FASB issued ASU 2025-04 to clarify the accounting for share-based consideration payable to a customer and address the diversity in practice that has developed related to whether conditions based on customer purchases are performance conditions, service conditions, or other conditions. The ASU revises the definition of a performance condition to include conditions that are based on customer purchases of the entity’s goods or services. Under the revised definition, (1) performance targets can be based on purchases made by another party that purchases the entity’s goods or services from its customers (i.e., purchases made by an entity’s customer’s customer) and (2) vesting conditions can be based on a customer’s potential purchases of such goods or services. For example, a vesting condition would meet the definition of a performance condition if it is based on whether the customer signs a master service agreement (MSA) or a similar agreement facilitating future potential purchases to be made by the customer (or the customer’s customer).

The ASU also eliminates the forfeiture policy election specifically for share-based consideration payable to a customer with only service conditions, thereby requiring entities to estimate the number of awards expected to vest regardless of whether there are service conditions or performance conditions. Before the ASU’s adoption, entities recognize share-based consideration payable to a customer with a service condition that affects vesting in accordance with their accounting policy for forfeitures of nonemployee share-based payment awards, under which entities may elect to recognize forfeitures when they occur.

In addition, the ASU clarifies that the variable consideration constraint guidance in ASC 606 does not apply to share-based consideration payable to a customer either before or after a grant date has occurred.

See Deloitte’s May 16, 2025, Heads Up for more information about ASU 2025-04, which is effective for fiscal years beginning after December 15, 2026, including interim periods within those fiscal years. Early adoption is permitted.

Example 14-1

Share-Based Consideration Payable to a Customer Issued for Each Purchase

On January 1, 20X1, Entity A executes a one-year MSA to sell and deliver widgets to Customer B. The MSA includes general terms and conditions but does not contain any minimum purchase requirements. Accordingly, legally enforceable rights and obligations associated with a revenue contract between A and B do not exist until B issues a purchase order for a specific number of widgets. In other words, the criteria in ASC 606-10-25-1 that must all be met for an entity to conclude that a contract with a customer exists are only met each time B issues a subsequent purchase order under the MSA.

Customer B agrees to pay A $1,000 for each widget purchased under the MSA. As a sales incentive, A includes terms in the MSA that grant B 500 fully vested shares of A’s common stock for each widget that B purchases. The share-based consideration payable to B is not in exchange for distinct goods or services and is equity-classified in accordance with the guidance in ASC 718. Entity B issues three separate purchase orders, each for one widget, on January 31, March 1, and December 31, 20X1. On the same day on which A receives each purchase order, it transfers control of each widget to B and also issues to B 500 shares of A’s common stock in fulfillment of the terms of the MSA.

The fair value of A’s common stock is $1.00 per share on January 1, 20X1, and appreciates during 20X1 as follows:

Entity A concludes that the terms of the MSA are sufficient to establish a grant date for the share-based consideration in accordance with the guidance in ASC 718. Entity A measures the award issued to B on January 1, 20X1, because a grant date exists for the share-based consideration in accordance with the criteria in ASC 718. For each separately sold widget, A will thus recognize revenue reduced by the grant-date fair-value-based measure of the share-based consideration of $500 (500 shares × $1.00), measured as of January 1, 20X1. Accordingly, A will recognize the following revenue during 20X1:

Entity A will classify the share-based consideration in accordance with the guidance in ASC 718. Likewise, A will continue to apply ASC 718 to classify and measure the share-based consideration unless it is subsequently modified when it vests and B is no longer a customer. Although there are changes to the fair-value-based measure of the common stock after the grant date, if the award remains within the scope of ASC 718 and is not modified, there is no accounting effect for those changes because the measurement date for an equity-classified award is the grant date.

Example 14-2

Share-Based Consideration Payable to a Customer Contingent on Cumulative Purchases

Assume the same facts as in the example above except that Customer B will earn 1,000 shares of Entity A’s common stock when it purchases five widgets within one year of the MSA’s execution. Entity A measures the share-based consideration payable to B on January 1, 20X1, because a grant date exists for the share-based consideration in accordance with the criteria in ASC 718. The grant-date fair-value-based measure is $1 per share.

Entity A concludes that the share-based consideration issued to B includes a performance condition because the shares issuable to B vest on the basis of a condition related to B’s (i.e., the grantee’s) purchase of goods from A (the grantor).2 Accordingly, A estimates the probable outcome of the performance condition and concludes that it is not probable that B will purchase five widgets within one year of the MSA’s execution. As a result, A (1) does not recognize any reduction in transaction price because it is not probable that the share-based consideration issued to B will vest and (2) does not apply the guidance on constraining estimates of variable consideration under ASC 606.

Throughout 20X1, A must continually assess the probability that the performance condition will be met. If at any point during the year it becomes probable that the shares issuable to B will vest on the basis of B’s expected purchases, A would (1) reduce the transaction price by $1,000 (1,000 shares expected to vest × $1 grant-date fair-value-based measure) and (2) recognize this reduction in transaction price in conjunction with its recognition of the related revenue, which may potentially include an immediate reversal of some amount of revenue already recognized under the MSA during the period in which A did not think it was probable that the shares would vest.

While vesting and nonvesting conditions are not subject to the variable consideration guidance in ASC 606, such guidance could still be applicable in certain circumstances. For example, as stated in ASC 606-10-55-88B, an entity should apply ASC 606-10-32-7 and estimate the fair-value-based measure of an award before the grant date when a grant date has not been established but (1) the customer has a valid expectation that share-based consideration will be issued (e.g., because of an entity’s history of issuing share-based consideration or its ongoing negotiations related to the issuance of share-based consideration for which the terms of the arrangement have not yet been finalized) or (2) other facts and circumstances indicate that the entity intends to issue share-based consideration to the customer.

In the period in which a grant date is established, the entity adjusts the transaction price for the cumulative effect of calculating the fair-value-based measure on the grant date. This treatment is similar to the accounting applied when the service inception date precedes the grant date for employee awards.3 For example, an entity could enter into a revenue contract with a customer for the purchase of goods or services while negotiating a share-based consideration arrangement with that customer. If a grant date has not been established for that award because the terms are still being negotiated, the entity would be required to estimate the fair-value-based measure of the award and reflect that estimate (or a portion of the estimate) as a reduction of the transaction price. That estimate will be adjusted in each reporting period until a grant date has been established. As stated in ASC 606-10-55-88C (added by ASU 2025-04), an entity should not apply the variable consideration constraint guidance in ASC 606 when measuring the estimate of share-based consideration payable to a customer either before or after a grant date has been established.