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

14.2 Overview

14.3 Scope

14.4 Initial Measurement

14.5 Classification

14.6 Subsequent Measurement and Presentation

14.6.1Equity-Classified Share-Based Payments

14.6.2 Liability-Classified Share-Based Payments

14.6.3 Practical Expedients for Nonpublic Entities

14.7 Recognition

14.8 Disclosure

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)

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:
1. 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.)
2. 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

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).

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

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.

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

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

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

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

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.

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.

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

See paragraph BC18 of ASU 2019-08.