14.6 Subsequent Measurement and Presentation

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 Entity A has elected to estimate forfeitures of nonemployee share-based payment awards. 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 a share-based sales incentive). 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 sales incentive 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.

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 a share-based sales incentive). 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 sales incentive 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.

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.