14.6 Subsequent Measurement and Presentation
ASC 718-10
35-1D The total
amount of compensation cost recognized for share-based payment
awards to nonemployees shall be based on the number of
instruments for which a good has been delivered or a service has
been rendered. To determine the amount of compensation cost to
be recognized in each period, an entity shall make an
entity-wide accounting policy election for all nonemployee
share-based payment awards, including share-based payment awards
granted to customers, to do either of the following:
- Estimate the number of forfeitures expected to occur. The entity shall base initial accruals of compensation cost on the estimated number of nonemployee share-based payment awards for which a good is expected to be delivered or a service is expected to be rendered. The entity shall revise that estimate if subsequent information indicates that the actual number of instruments is likely to differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimates shall be recognized in compensation cost in the period of the change.
- Recognize the effect of forfeitures in compensation cost when they occur. Previously recognized compensation cost for a nonemployee share-based payment award shall be reversed in the period that the award is forfeited.
Pending Content (Transition
Guidance: ASC 606-10-65-2)
35-1D
The total amount of compensation cost recognized
for share-based payment awards to nonemployees
shall be based on the number of instruments for
which a good has been delivered or a service has
been rendered. To determine the amount of
compensation cost to be recognized in each period,
an entity shall make an entity-wide accounting
policy election for nonemployee share-based
payment awards, including share-based payment
awards granted to customers in exchange for a
distinct good or service, to do either of the
following:
- Estimate the number of forfeitures expected to occur. The entity shall base initial accruals of compensation cost on the estimated number of nonemployee share-based payment awards for which a good is expected to be delivered or a service is expected to be rendered. The entity shall revise that estimate if subsequent information indicates that the actual number of instruments is likely to differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimates shall be recognized in compensation cost in the period of the change.
- Recognize the effect of forfeitures in compensation cost when they occur. Previously recognized compensation cost for a nonemployee share-based payment award shall be reversed in the period that the award is forfeited.
For share-based consideration
payable to a customer that is not in exchange for
a distinct good or service (or that is in exchange
for a distinct good or service and can result in a
reduction of the transaction price in accordance
with paragraph 606-10-32-26), a grantor shall
estimate the number of forfeitures expected to
occur in accordance with paragraph
718-10-35-1D(a). 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 shall estimate the number of
forfeitures expected to occur for the entire award
(including the portion that is not accounted for
as a reduction of the transaction price).
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.
Share-based consideration payable to a customer is measured on the grant
date (for both equity-classified and liability-classified share-based payments) in
accordance with the guidance in ASC 718. In addition, under ASC 718, equity-classified
awards are not remeasured, whereas liability-classified awards are remeasured until
settlement.
Further, since both vesting and nonvesting conditions should be
evaluated under ASC 718, a change in the probable or actual outcome of a service or
performance condition that results in a change in the measurement of the award should be
reflected as a change in the transaction price.5 If an estimate is required, an entity should estimate the total fair-value-based
measure of the award (e.g., by determining the number of awards that it will be
obligated to issue) and update that amount until the award ultimately vests or is
forfeited. See Sections
3.4.1 and 3.4.2 for further discussion of service conditions and performance
conditions, respectively.
By contrast, any changes in measurement that are due to the form of
consideration are not reflected as changes to the transaction price but instead are
presented elsewhere in the grantor’s income statement. This includes changes to the
fair-value-based measure of liability-classified awards that are not related to service
or performance conditions.
Connecting the Dots
While ASC 606-10-32-25A states that subsequent changes in
measurement due to the form of the consideration should not be included in the
transaction price (i.e., should not be presented as an adjustment to revenue),
it does not specify where such changes should be reflected in the income
statement. Therefore, an entity must use judgment to determine the appropriate
presentation in such circumstances.
ASC 718 does not explicitly provide guidance on the accounting for a
modification of share-based consideration payable to a customer if the modification
occurs while the grantee remains a customer. We generally believe that in these
situations, it would be appropriate to apply the modification guidance in ASC 718 when
measuring the modification’s impact. (See Chapter 6 for a discussion of modification
accounting under ASC 718.)
14.6.1 Equity-Classified Share-Based Payments
ASC 718 requires that entities measure equity-classified share-based
payment awards on the grant date and not remeasure them unless the awards are
modified. Entities should determine the grant-date fair-value-based measure of the
award on the basis of the probable or actual outcomes of any service or performance
conditions (whether vesting or nonvesting). The probable or actual outcomes are
reassessed in each reporting period, and the final measurement of the award
associated with the ultimate outcomes of those conditions will be reflected as a
reduction of the transaction price. Therefore, any change to the total measurement
of share-based consideration payable to a customer that is not attributable to the
form of consideration should be recognized as a change to the transaction price.
Example 14-3
Share-Based
Consideration Payable to a Customer That Includes Both
Service and Performance Conditions
On January 1, 20X1, Entity A sells 10,000
units of Product X to Customer B, a retailer, for $10 each
(resulting in a total sales value of $100,000). Assume that
A has adopted ASU 2025-04 and the arrangement is within the
scope of ASC 606.
As part of the arrangement, B promises to
display Product X in a favorable location within its store
to encourage sales of Product X to the end consumer. On
January 1, 20X1, in return for the favorable in-store
placement of Product X, A grants B 1,000 unvested
equity-classified warrants on A’s common stock. The warrants
have a term of five years and a grant-date fair-value-based
measure (as calculated under ASC 718) of $7 (resulting in a
total grant-date fair-value-based measure of $7,000). The
warrants vest if B displays Product X in the favorable
location for one year. In addition, to protect A’s existing
shareholders from dilution if A experiences poor financial
results, the warrants will vest only if A achieves a
specified EBITDA target during the one-year vesting
period.
Entity A determines the following:
- The grant date established for the warrants is January 1, 20X1.
- The requirement to provide favorable in-store placement of Product X for one year is a service condition, and the specified EBITDA target is a performance condition.
- As of the grant date of the warrants, A estimates that it is probable that the warrants will vest under the service and performance conditions.
- The benefit received from B (i.e., favorable in-store placement of Product X) in exchange for the warrants does not represent a distinct good or service.
On the basis of the above determinations, A
concludes that the warrants should be recognized as a
reduction of the transaction price for its sale of Product X
to B (i.e., the warrants represent share-based consideration
payable to a customer). To calculate the amount of that
reduction, A considers that it is probable that the service
and performance conditions will be met. Therefore, on
January 1, 20X1, A reduces the transaction price for its
sale of Product X to B by $7,000. If A determines that the
share-based consideration is associated with the revenue
from the sale of the 10,000 units of Product X, the net
revenue for those units will be $93,000 ($100,000 – $7,000).
The reduction in the transaction price would be reversed and
reflected as an increase in the transaction price in a
subsequent reporting period if the warrants do not vest or
it becomes probable that the warrants will not vest.
Example 14-4
Share-Based
Consideration Payable to a Customer That Includes a
Performance Condition That Affects the Quantity of
Awards (Nonvesting Condition)
Assume the same facts as in the example
above except that in this case, the performance condition
affects the quantity of the warrants earned instead of their
vesting, and minimum, target, and maximum awards can be
earned depending on the level of the EBITDA target achieved.
The table below shows the amount of warrants that can be
earned, as well as the resulting grant-date fair-value-based
measure of the warrants, depending on the relative
achievement of the performance.
Entity A determines the following:
- The grant date established for the warrants is January 1, 20X1.
- The requirement to provide favorable in-store placement of Product X for one year is a service condition, and the specified EBITDA target is a performance condition.
- As of the grant date of the warrants, A estimates that it is probable that the warrants will vest under the service condition and that 1,000 warrants will be issued (in accordance with the target level) on the basis of the probable outcome of the performance condition.
- The benefit received from Customer B (i.e., the favorable in-store placement of Product X) in exchange for the warrants does not represent a distinct good or service.
On the basis of the above determinations, A
concludes that the warrants should be recognized as a
reduction of the transaction price for its sale of Product X
to B (i.e., the warrants represent share-based consideration
payable to a customer). To calculate the amount of that
reduction, A considers that it is probable that the service
condition will be met and that the target performance
condition resulting in the issuance of 1,000 warrants will
be met. Therefore, on January 1, 20X1, A reduces the
transaction price for its sale of Product X to B by $7,000.
If A determines that the share-based consideration is
associated with the revenue from the sale of the 10,000
units of Product X, the net revenue for those units will be
$93,000 ($100,000 – $7,000). The reduction in the
transaction price would be reversed and reflected as an
increase in the transaction price in a subsequent reporting
period if the warrants do not vest or it becomes probable
that the warrants will not vest under the service
condition.
In addition, A would reflect as an
adjustment to the transaction price a subsequent change in
the measurement of the warrants on the basis of the expected
outcome or actual outcome of the performance condition. For
example, if A determines in a subsequent reporting period
that the probable outcome is that 150 percent of the EBITDA
target will be achieved, which would result in the issuance
of 1,500 warrants will be met. Therefore, in this subsequent
reporting period, A would adjust the transaction price to
reflect the revised grant-date fair-value-based measure of
the warrants (i.e., from $7,000 to $10,500) and record net
revenue of $89,500 for Product X. The final reduction in the
transaction price would be based on the grant-date
fair-value-based-measure of the ultimate outcome achieved
for both the service and performance conditions.
14.6.2 Liability-Classified Share-Based Payments
Under ASC 718, liability-classified share-based payment awards must
be remeasured at the end of each reporting period until settlement. However, ASC
606-10-32-25A requires that entities reflect only the grant-date fair-value-based
measure of liability-classified share-based consideration as a reduction of revenue.
Any changes to the measurement of the share-based sales consideration after the
grant date that are attributable to the form of the consideration (i.e., not due to
the probable or actual outcome of any service or performance conditions) would be
reflected elsewhere in the income statement. Therefore, although entities would be
required to remeasure liability-classified share-based consideration payable to a
customer at the end of each reporting period until settlement, they would not
reflect as an adjustment to revenue subsequent changes to the fair-value-based
measure because such changes are attributable to the form of the consideration.
Example 14-5
Liability-Classified
Share-Based Consideration Payable to a Customer
Assume the same facts as in Example
14-3 except that instead of equity-classified
warrants, Entity A grants Customer B 1,000 cash-settled SARs
that are liability classified. The grant-date
fair-value-based measure is $7 (resulting in a total
grant-date fair-value-based measure of $7,000). On December
31, 20X1, the fair-value-based measure is $9 (resulting in a
total fair-value-based measure of $9,000). Entity A
concludes that it is probable that the SARs will vest, and
the SARs actually do vest, on December 31, 20X1.
On January 1, 20X1, A initially measures and
reduces its transaction price for its sale of Product X to B
by $7,000 (for net revenue of $93,000). On December 31,
20X1, the subsequent measurement of the award is $9,000.
This represents a change in the measurement of the award
after the grant date that is attributable to the form of
consideration (changes in the fair-value-based measure of a
liability-classified share-based payment award that are
unrelated to a change in service or performance conditions).
Therefore, A does not revise its estimate of the transaction
price; rather, A reflects the change of $2,000 elsewhere in
the income statement.
14.6.3 Practical Expedients for Nonpublic Entities
Except for the practical expedient related to the intrinsic value
method, ASC 718 permits nonpublic entities to use the same practical expedients that
they use for employee and nonemployee awards to account for share-based
consideration payable to a customer.
A nonpublic entity may use a practical expedient to measure all
liability-classified share-based payment awards for goods and services at intrinsic
value instead of a fair-value-based measure as of the end of each reporting period
until the award is settled. While this practical expedient must be applied
consistently to both employee and nonemployee awards, it cannot be applied to
share-based consideration payable to a customer that is classified as a liability.
In accordance with ASC 718-30-30-2, a nonpublic entity’s initial and subsequent
measurement of its liability-classified share-based consideration payable to a
customer should be calculated at the fair-value-based measure even when the entity
makes the intrinsic value measurement election for other liability-classified awards
within the scope of ASC 718.
For more information about measurement-related practical expedients available to
nonpublic entities, see Section 4.13.
Footnotes
5
Before the adoption of ASU 2025-04, if an entity has elected as
an accounting policy to recognize the effects of forfeitures for nonemployee
share-based payment awards when they occur, it would not assess the probable
outcome of a service condition that affects the awards’ vesting. It would
instead include the entire share-based consideration payable to a customer in
the transaction price unless the incentive is forfeited. After the adoption of
ASU 2025-04, the entity must assess the probable outcome of a service
condition.