14.7 Recognition
ASC 718-10
25-2C This guidance
does not address the period(s) or the manner (that is,
capitalize versus expense) in which an entity granting the
share-based payment award (the purchaser or grantor) to a
nonemployee shall recognize the cost of the share-based payment
award that will be issued, other than to require that an asset
or expense be recognized (or previous recognition reversed) in
the same period(s) and in the same manner as if the grantor had
paid cash for the goods or services instead of paying with or
using the share-based payment award. A share-based payment award
granted to a customer shall be reflected as a reduction of the
transaction price and, therefore, of revenue as described in
paragraph 606-10-32-25 unless the payment to the customer is in
exchange for a distinct good or service, in which case the
guidance in paragraph 606-10-32-26 shall apply.
An entity applies ASC 718 only to the measurement and classification of
share-based consideration payable to a customer. To recognize and present such
consideration, the entity should apply the guidance in ASC 606 on consideration payable
to a customer.
For example, under ASC 606-10-32-27, an entity would recognize the
grant-date fair-value-based measure of share-based consideration payable to a customer
as a reduction of revenue when (or as) the later of either of the following events
occurs:
- The entity recognizes revenue for the transfer of the related goods or services to the customer.
- The entity pays or promises to pay the consideration (even if the payment is conditional on a future event). That promise might be implied by the entity’s customary business practices.
In accordance with the above guidance, an entity will typically
recognize share-based consideration payable to a customer as a reduction of revenue
when, or as, the “entity recognizes revenue for the transfer of the related goods or
services to the customer.”6 In such circumstances, because the vesting of share-based consideration payable to
a customer may not align with the recognition of revenue for the transfer of the related
goods or services to the customer, an entity will need to use judgment to determine what
the “related” goods and services are. Because the vesting of share-based sales
incentives may not align with the recognition of revenue for the transfer of the related
goods or services to the customer, an entity will need to use judgment in those
circumstances to determine what the “related” goods and services are.
See Chapter
8 of Deloitte’s Roadmap Revenue Recognition for additional guidance on determining
when to recognize revenue.7
Example 14-6
Recognition of Fully Vested
Share-Based Consideration Payable to a Customer
On January 1, 20X1, Entity A executes a one-year
MSA to sell Product X to Customer B, a retailer, for $10 per
unit. The MSA includes general terms and conditions and also
contains a minimum purchase requirement of 12,000 units (which
establishes legally enforceable rights and obligations
associated with the revenue contract), resulting in a total
minimum commitment of $120,000. The arrangement is within the
scope of ASC 606.
As incentive for B to agree to a minimum
purchase commitment, A grants B 1,000 fully vested
equity-classified shares of A’s common stock. The shares have a
grant-date fair-value-based measure of $10 (resulting in a total
grant-date fair-value-based measure of $10,000). The terms of
the contract are sufficient to establish a grant date of January
1, 20X1, for the shares.
Entity A concludes that it does not receive a
distinct good or service in exchange for the shares and
therefore determines that it should account for the shares as a
reduction of the transaction price for its sale of Product X
(i.e., the shares represent share-based consideration payable to a customer). In addition, A determines that the up-front grant of a fully vested award with a grant-date fair-value-based measure of $10,000 meets the definition of an asset as defined in Chapter 4 of FASB Concepts Statement 8.8 Entity A also determines that the share-based
consideration is solely related to the 12,000 units of Product X
in the initial contract on the basis of its best estimate of the
probable amount of units that B is expected to purchase.
Entity A measures and classifies the shares in
accordance with ASC 718 and recognizes revenue, adjusted for the
share-based consideration payable to B, in accordance with ASC
606. Because it determined that the up-front fully vested
share-based consideration payable to B meets the definition of
an asset, A recognizes an asset and corresponding credit to
equity on the basis of the grant-date fair-value-based measure
of $10,000. The net transaction price is $110,000 ($120,000 –
$10,000), and A subsequently derecognizes the asset as a
reduction of revenue as control of the related goods is
transferred to the customer (i.e., as control of the 12,000
units of Product X transfers to the customer, with net revenue
of approximately $9 per unit).
Example 14-7
Recognition of Share-Based Consideration Payable to a Customer
Before the Grant Date
On January 1, 20X1, Entity A enters into an MSA to sell and
deliver widgets to Entity 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 are only met each time B issues a purchase order
under the MSA. As part of the MSA, B agrees to pay A $500,000
for each widget purchased under the MSA.
Assume that A has adopted ASU 2025-04, the
arrangement is within the scope of ASC 606, and B is a customer
of A.
As part of the arrangement, A agrees to issue 5,000 warrants on
A’s common stock to B as a share-based payment award, subject to
certain vesting conditions. Vesting of these warrants is subject
to B’s achievement of a certain level of purchases (i.e., once
specific volume thresholds have been met). The contractual term
of the warrants is 10 years beginning on January 1, 20X1.
Entity B will earn 5,000 warrants when it
purchases five widgets within five years of entering into the
MSA. The exercise price for the warrants will be established on
the vesting date at the then-current market price of A’s common
stock (the date on which B issues a purchase order for the fifth
widget).
Entity A concludes the following:
-
The vesting condition represents a performance condition as defined in ASC 718, and it is probable that B will purchase five widgets within five years of the MSA’s execution.
-
The benefit received by A from B in exchange for the warrants does not represent a distinct good or service.
-
The warrants are equity-classified awards in accordance with ASC 718.
-
It will not establish a grant date until or unless the warrants vest upon B’s purchase of the fifth widget within five years of the MSA’s execution.
-
A service inception date precedes the grant date in accordance with ASC 718.
On the basis of the above conclusions, A determines that the
warrants should be recognized as a reduction of the transaction
price for its sale of widgets to B under the MSA (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 B will purchase five widgets
within five years of the MSA’s execution.
ASC 606-10-55-88C (as added by ASU 2025-04)
states that the constraint guidance on variable consideration
does not apply to share-based consideration payable to a
customer either before or after the grant date occurs.
Therefore, until a grant date is established, A reduces the
transaction price by the current fair-value-based measure of the
warrants under ASC 718 in accordance with the number of warrants
it expects to issue (i.e., 5,000), without regard to the
constraint guidance in ASC 606-10-32-11 and 32-12.
On April 1, 20X1, a few months after the MSA is signed, B submits
its first purchase order to acquire one widget from A for
$500,000. As of April 1, 20X1, the fair-value-based measure of
the warrants is $7.
Accordingly, on April 1, 20X1, A reduces the transaction price
for its sale of a widget to B by $7,000 ($7 fair-value-based
measure × 5,000 warrants expected to be issued × 1/5 of the
total widgets purchased to date), resulting in a net transaction
price of $493,000 for the sale of the first widget. This
reduction in the transaction price must be remeasured in each
reporting period on the basis of the fair-value-based measure of
the warrants in accordance with ASC 718 until the grant date
occurs. Entity A will take this approach for each subsequent
sale of widgets until the fifth widget purchase is made,
assuming that A continues to conclude that it is probable that
the performance condition (which needs to be reassessed in each
reporting period) will be met within five years.
Subsequently, after continued purchases of
widgets, B submits its fifth purchase order on December 31,
20X4, to acquire a widget from A for $500,000. This establishes
a grant date on December 31, 20X4, because the exercise price is
set when B submits the purchase order for the purchase of the
fifth widget before the end of five years. As of December 31,
20X4, the fair-value-based measure of the warrants is $10.
Entity A would revise its determination of the transaction price
for the sale of all five widgets, resulting in a total reduction
to the transaction price of $50,000 ($10 fair-value-based
measure × 5,000 warrants).
Footnotes
6
As discussed in Section 14.4, there may be circumstances
in which a grant date has not been established but the customer has a valid
expectation that share-based consideration payable to a customer will be issued.
In such circumstances, the entity should apply the variable consideration
guidance in ASC 606-10-32-7 and estimate the fair-value-based measure of the
equity instrument in accordance with ASC 718 before the grant date.
7
See Chapter
6 of Deloitte’s Roadmap Revenue Recognition for additional
guidance on the measurement and recognition of consideration payable to a
customer.
8
See Chapter 6 of
Deloitte’s Roadmap Revenue
Recognition for guidance on the
recognition of up-front payments to customers.