Chapter 14 — Accounting for Share-Based Payments Issued as Sales Incentives to Customers

14.7 Recognition

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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 sales incentives. To recognize and present such incentives, 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 sales incentives 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 a share-based sales incentive as a reduction of revenue when, or as, the “entity recognizes revenue for the transfer of the related goods or services to the customer.”5 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.6

Example 14-6

Recognition of Fully Vested Share-Based Sales Incentives

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 a share-based sales incentive). In addition, A determines that the up-front grant of a fully vested share-based sales incentive 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 8.7 Entity A also determines that the share-based sales incentive 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 (and the reduction of revenue) for the share-based sales incentive payable in accordance with ASC 606. Because it determined that the up-front fully vested share-based sales incentive 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 the related goods or services are provided 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).

Footnotes

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 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 before the grant date.

See Chapter 6 of Deloitte’s Roadmap Revenue Recognition for additional guidance on the measurement and recognition of consideration payable to a customer.

See Chapter 6 of Deloitte’s Roadmap Revenue Recognition for guidance on the recognition of up-front payments to customers.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.