Chapter 14 — Accounting for Share-Based Payments Issued as Sales Incentives to Customers
Chapter 14 — Accounting for Share-Based Consideration Payable to a Customer
14.1 Background
The scope of ASC 718 does not include the recognition of share-based
payments issued to a customer that (1) are not in exchange for a distinct good or
service or (2) are in exchange for a distinct good or service but can result in a
reduction of the transaction price in accordance with ASC 606-10-32-26 (i.e.,
“share-based consideration payable to a customer”). Such recognition must be accounted
for under ASC 606 (i.e., as a reduction of revenue). However, the measurement (and
measurement date) of share-based consideration payable to a customer and its
classification are subject to the guidance in ASC 718.
See Chapter 6 of Deloitte’s Roadmap Revenue Recognition for additional guidance
on consideration payable to a customer.
14.2 Overview
The guidance in ASC 718 on measuring and classifying share-based
consideration payable to a customer requires entities to calculate such amounts on the
grant date by using a fair-value-based measure. The grant date is the date on which the
grantor (the entity) and the grantee (the customer) reach a mutual understanding of the
key terms and conditions of the share-based consideration. The result is reflected as a
reduction of the transaction price and, therefore, of revenue in accordance with the
guidance in ASC 606 on consideration payable to a customer. After initial recognition,
the measurement and classification of share-based consideration payable to a customer
continues to be subject to ASC 718 unless (1) the award of such consideration is
subsequently modified when vested and (2) the grantee is no longer a customer.
The pending content in this chapter is from 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. For more information about the ASU, see the Changing Lanes in Section 14.4.
14.3 Scope
ASC 718-10
Transactions
15-3 The guidance
in the Compensation — Stock Compensation Topic applies to all
share-based payment transactions in which a grantor acquires
goods or services to be used or consumed in the grantor’s own
operations or provides consideration payable to a customer by
issuing (or offering to issue) its shares, share options, or
other equity instruments or by incurring liabilities to an
employee or a nonemployee that meet either of the following
conditions:
- The amounts are based, at least in part, on the price of the entity’s shares or other equity instruments. (The phrase at least in part is used because an award of share-based compensation may be indexed to both the price of an entity’s shares and something else that is neither the price of the entity’s shares nor a market, performance, or service condition.)
- The awards require or may require settlement by issuing the entity’s equity shares or other equity instruments.
Pending Content (Transition Guidance: ASC
718-10-65-17)
15-3 The guidance in the Compensation —
Stock Compensation Topic applies to all
share-based payment transactions in which a
grantor acquires goods or services to be used or
consumed in the grantor’s own operations or
provides consideration payable to a customer by
either of the following:
- Issuing (or offering to issue) its shares, share options, or other equity instruments to an employee or a nonemployee
- Incurring liabilities to an employee or a
nonemployee that meet either of the following
conditions:
- The amounts are based, at least in part, on the price of the entity’s shares or other equity instruments. (The phrase at least in part is used because an award of share-based compensation may be indexed to both the price of an entity’s shares and something else that is neither the price of the entity’s shares nor a market, performance, or service condition.)
- The awards require or may require settlement by issuing the entity’s equity shares or other equity instruments.
15-5A Share-based
payment awards granted to a customer shall be measured and
classified in accordance with the guidance in this Topic (see
paragraph 606-10-32-25A) and reflected as a reduction of the
transaction price and, therefore, of revenue in accordance with
paragraph 606-10-32-25 unless the consideration is in exchange
for a distinct good or service. If share-based payment awards
are granted to a customer as payment for a distinct good or
service from the customer, then an entity shall apply the
guidance in paragraph 606-10-32-26.
Pending Content (Transition
Guidance: ASC 606-10-65-2)
15-5A
Share-based consideration granted to a customer
(or to other parties that purchase the grantor’s
goods or services from the customer) shall be
measured and classified in accordance with the
guidance in this Topic (see paragraph
606-10-32-25A) and reflected as a reduction of the
transaction price and, therefore, of revenue in
accordance with paragraph 606-10-32-25 unless the
consideration is in exchange for a distinct good
or service. If share-based payment awards are
granted to a customer as payment for a distinct
good or service from the customer, then the
grantor shall apply the guidance in paragraph
606-10-32-26. See also paragraph
606-10-55-88AB.
15-5B
A grantor shall not apply by analogy the aspects
of the definition of performance condition that
are specific to share-based consideration payable
to a customer described in paragraph
606-10-55-88AA to awards granted to employees or
nonemployees in which the grantor acquires goods
or services to be used or consumed in the
grantor’s own operations that are solely within
the scope of the guidance in this Topic. See also
paragraphs 606-10-55-88AB through 55-88AC.
ASC 606-10
32-25 Consideration payable to a
customer includes:
- Cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase the entity’s goods or services from the customer)
- Credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the entity (or to other parties that purchase the entity’s goods or services from the customer)
- Equity instruments (liability or equity classified) granted in conjunction with selling goods or services (for example, shares, share options, or other equity instruments).
An entity shall account for consideration payable to a customer
as a reduction of the transaction price and, therefore, of
revenue unless the payment to the customer is in exchange for a
distinct good or service (as described in paragraphs
606-10-25-18 through 25-22) that the customer transfers to the
entity. If the consideration payable to a customer includes a
variable amount, an entity shall estimate the transaction price
(including assessing whether the estimate of variable
consideration is constrained) in accordance with paragraphs
606-10-32-5 through 32-13.
Pending Content (Transition
Guidance: ASC 606-10-65-2)
32-25
Consideration payable to a customer includes:
- Cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase the entity’s goods or services from the customer)
- Credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the entity (or to other parties that purchase the entity’s goods or services from the customer)
- Share-based consideration (liability or equity classified) granted to the customer (or to other parties that purchase the grantor’s goods or services from the customer) in conjunction with selling goods or services. Share-based consideration encompasses the same instruments as share-based payment arrangements (for example, shares, cash-settled stock appreciation rights, share options and warrants, or other equity instruments), but the grantee (as a customer) need not be a supplier of goods or services to the grantor.
An entity shall account for
consideration payable to a customer as a reduction
of the transaction price and, therefore, of
revenue unless the payment to the customer is in
exchange for a distinct good or service (as
described in paragraphs 606-10-25-18 through
25-22) that the customer transfers to the entity.
If the consideration payable to a customer (other
than share-based consideration) includes a
variable amount, an entity shall estimate the
transaction price (including assessing whether the
estimate of variable consideration is constrained)
in accordance with paragraphs 606-10-32-5 through
32-13. See paragraph 606-10-32-25A for guidance
applicable to share-based consideration payable to
a customer.
Share-based consideration payable to a customer is treated as
consideration payable to a customer under ASC 606. Accordingly, it is recognized as a
reduction of the transaction price and, therefore, of revenue unless it represents a
fair value payment for a distinct good or service. While share-based consideration
payable to a customer is accounted for as a reduction of revenue, the share-based
payment is measured and classified (e.g., equity or liability) in accordance with ASC
718.
Connecting the Dots
ASC 718 applies to share-based consideration payable to a
customer under ASC 606 but does not directly address similar equity-based
incentives issued by a lessor to a lessee under ASC 842.1
Footnotes
1
See paragraph BC17 of ASU 2019-08.
14.4 Initial Measurement
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.
Footnotes
2
This conclusion is based on the revised
definition in ASU 2025-04 of “performance condition” for
share-based consideration payable to a customer.
Accordingly, before adopting the ASU, A would not
necessarily reach the same conclusion.
3
See Section
3.6.4.
14.5 Classification
As discussed above, the classification of share-based consideration
payable to a customer is subject to the guidance in ASC 718. Therefore, an entity
applies ASC 718-10-25-6 through 25-19A to determine whether an award is classified as
equity or a liability. As in the case of other nonemployee awards, if (1) the award is
subsequently modified when vested and (2) the grantee is no longer a customer, the award
becomes subject to other U.S. GAAP (e.g., ASC 480, ASC 815) unless the modification is
made in conjunction with an equity restructuring that meets certain conditions.4
See Chapter 5 for more information about
determining whether an award is classified as equity or a liability.
Footnotes
4
See Section
5.8.
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.
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.
14.8 Disclosure
There are no specific disclosure requirements for share-based
consideration payable to a customer because ASC 606 and ASC 718 already provide guidance
on disclosures related to revenue transactions and share-based payment arrangements.
Accordingly, an entity should evaluate the disclosure requirements in both ASC 606 and
ASC 718 when it grants share-based consideration payable to customers.9
Footnotes
9
See paragraph BC18 of ASU 2019-08.