Chapter 14 — Accounting for Share-Based Payments Issued as Sales Incentives to Customers
Chapter 14 — Accounting for Share-Based Payments Issued as Sales Incentives to Customers
14.1 Background
Recognition of share-based payments issued to a customer that are not in
exchange for a distinct good or service (i.e., share-based sales incentives) is outside
the scope of ASC 718 and must be accounted for under ASC 606. While ASC 606 addresses
the recognition of share-based sales incentives (i.e., as a reduction of revenue), it
does not provide guidance on the measurement (or measurement date) of such incentives.
Measurement and classification of share-based sales incentives is subject to the
guidance in ASC 718.
14.2 Overview
The guidance in ASC 718 on measuring and classifying share-based sales
incentives requires entities to use a fair-value-based measure to calculate such
incentives on the grant date. 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
revenue in accordance with the guidance in ASC 606 on consideration payable to a
customer. After initial recognition, the measurement and classification of the
share-based sales incentives continue to be subject to ASC 718 unless (1) the award is
subsequently modified when vested and (2) the grantee is no longer a customer.
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.
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.
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.
ASC 718 applies to share-based payments granted in conjunction with the
sale of goods and services to a customer that are not in exchange for a distinct good or
service. However, entities apply ASC 718 only to measure and classify share-based sales
incentives, and they reflect the measurement of such incentives as a reduction of the
transaction price and recognize it in accordance with the guidance in ASC 606 on
consideration payable to a customer. Entities that receive distinct goods or services
from a customer in exchange for share-based payments should account for such payments in
the same manner as they account for other purchases from suppliers (i.e., by applying
the guidance in ASC 718). Any excess of the fair-value-based measure of the share-based
payment award over the fair value of the distinct goods or services received should be
reflected as a reduction to the transaction price and recognized in accordance with the
guidance in ASC 606 on consideration payable to a customer.
See Chapter
6 of Deloitte’s Roadmap Revenue Recognition for additional guidance on consideration
payable to a customer.
Connecting the Dots
ASC 718 applies to share-based sales incentives issued to
customers under ASC 606 but does not directly address similar equity-based
incentives issued by a lessor to a lessee under ASC 840 or ASC 842.1
Footnotes
1
See paragraph BC17 of ASU 2019-08.
14.4 Initial Measurement
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.
Share-based sales incentives are reflected as a reduction in the
transaction price on the basis of the grant-date fair-value-based measure in accordance
with ASC 718 (for both equity- and liability-classified awards). In addition,
share-based sales incentives may contain vesting conditions (i.e., service or
performance conditions that must be satisfied for the customer to vest in an 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 a share-based sales incentive would (1)
reflect the actual outcome of any vesting condition and (2) incorporate in its
measurement any nonvesting conditions.
Connecting the Dots
An entity is required to use judgment when determining whether a
vesting condition related to a share-based sales incentive is a service
condition or a performance condition.
The recognition of a share-based sales incentive with a service
condition that affects vesting will depend on the entity’s accounting policy for
forfeitures of nonemployee share-based payment awards. For example, if the
entity elects to estimate forfeitures, it bases its estimate of the share-based
sales incentive on the probable outcome for both service and performance
conditions. However, if the entity elects to recognize forfeitures when they
occur, it reflects the entire share-based sales incentive with a service
condition that affects vesting in the transaction price unless the award is
forfeited.
Many share-based sales incentives include conditions that are tied to customer
purchase levels (or to a customer’s remaining purchases for a specified period).
We believe that such conditions are akin to service conditions.
Example 14-1
Share-Based Sales Incentive Issued for Each Purchase
On January 1, 20X1, Entity A executes a one-year master supply
agreement (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 share-based 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 sales
incentive is not in exchange for distinct goods or services.
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 sales
incentive in accordance with the guidance in ASC 718. Entity A
measures the share-based sales incentive issued to B on January
1, 20X1, because a grant date exists for the share-based sales
incentive 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 sales
incentive 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 sales incentive in
accordance with the guidance in ASC 718. Likewise, A will
continue to apply ASC 718 to classify and measure the
share-based sales incentive 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 Sales Incentive 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 concludes that the share-based
sales incentive includes a service condition and applies its
policy election under ASC 718-10-35-1D for nonemployee
share-based payment awards to recognize forfeitures as they
occur. Entity A calculates the reduction in transaction price as
$1,000 (1,000 shares × $1 grant-date fair-value-based measure),
which A will recognize with the related revenue. If at the end
of 20X1 B has purchased five or more widgets, there is no effect
on the total reduction in transaction price. By contrast, if at
the end of 20X1 B has purchased fewer than five widgets and
therefore forfeits the share-based sales incentive, A will
reverse the portion of the $1,000 that it previously recorded as
a reduction of revenue.
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, an entity should apply ASC 606-10-32-7 and estimate the
fair-value-based measure of an equity instrument before the grant date when a grant date
has not been established but (1) the customer has a valid expectation that a share-based
sales incentive will be issued (e.g., because of an entity’s history of issuing
share-based sales incentives or its ongoing negotiations related to the issuance of a
share-based sales incentive for which the terms of the equity instruments have not yet
been finalized) or (2) other facts and circumstances indicate that the entity intends to
issue a share-based sales incentive. 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.2 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 sales incentive 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.
Footnotes
2
See Section
3.6.4.
14.5 Classification
As discussed above, the classification of share-based sales incentives
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.3
See Chapter 5 for more information about
determining whether an award is classified as equity or a liability.
Footnotes
3
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.
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.
Share-based sales incentives are 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.4 If an estimate is required, an entity should estimate the total fair-value-based
measure of the sales incentive (e.g., by determining the number of equity instruments
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 a
share-based payment issued as a sales incentive to a customer when 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 a share-based sales incentive that is not attributable to the form of
consideration should be recognized as a change to the transaction price.
Example 14-3
Share-Based Sales Incentives That Include 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
Entity A has elected to estimate forfeitures of nonemployee
share-based payment awards. The arrangement is within the
scope of ASC 606.
As part of the arrangement, B promises to
display Product X in a favorable location within its store
to encourage sales of Product X to the end consumer. In
return for the favorable in-store placement of Product X, A
grants B 1,000 unvested equity-classified warrants on A’s
common stock. The warrants have a term of five years and a
grant-date fair-value-based measure (as calculated under ASC
718) of $7 (resulting in a total grant-date fair-value-based
measure of $7,000). The warrants vest if B displays Product
X in the favorable location for one year. In addition, to
protect A’s existing shareholders from dilution if A
experiences poor financial results, the warrants will vest
only if A achieves a specified EBITDA target during the
one-year vesting period.
Entity A determines the following:
- The grant date established for the warrants is January 1, 20X1.
- The requirement to provide favorable in-store placement of Product X for one year is a service condition, and the specified EBITDA target is a performance condition.
- As of the grant date of the warrants, A estimates that it is probable that the warrants will vest under the service and performance conditions.
- The benefit received from B (i.e., favorable in-store placement of Product X) in exchange for the warrants does not represent a distinct good or service.
On the basis of the above determinations, A concludes that
the warrants should be recognized as a reduction of the
transaction price for its sale of Product X to B (i.e., the
warrants represent a share-based sales incentive). To
calculate the amount of that reduction, A considers that it
is probable that the service and performance conditions will
be met. Therefore, on January 1, 20X1, A reduces the
transaction price for its sale of Product X to B by $7,000.
If A determines that the share-based sales incentive is
associated with the revenue from the sale of the 10,000
units of Product X, the net revenue for those units will be
$93,000 ($100,000 – $7,000). The reduction in the
transaction price would be reversed and reflected as an
increase in the transaction price in a subsequent reporting
period if the warrants do not vest or it becomes probable
that the warrants will not vest.
Example 14-4
Share-Based Sales Incentive 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., favorable in-store placement of Product X) in exchange for the warrants does not represent a distinct good or service.
On the basis of the above determinations, A concludes that
the warrants should be recognized as a reduction of the
transaction price for its sale of Product X to B (i.e., the
warrants represent a share-based sales incentive). To
calculate the amount of that reduction, A considers that it
is probable that the service condition will be met and that
the target performance condition resulting in the issuance
of 1,000 warrants will be met. Therefore, on January 1,
20X1, A reduces the transaction price for its sale of
Product X to B by $7,000. If A determines that the
share-based sales incentive is associated with the revenue
from the sale of the 10,000 units of Product X, the net
revenue for those units will be $93,000 ($100,000 – $7,000).
The reduction in the transaction price would be reversed and
reflected as an increase in the transaction price in a
subsequent reporting period if the warrants do not vest or
it becomes probable that the warrants will not vest under
the service condition.
In addition, A would reflect as an adjustment to the
transaction price a subsequent change in the measurement of
the warrants on the basis of the expected outcome or actual
outcome of the performance condition. For example, if A
determines in a subsequent reporting period that the
probable outcome is that 150 percent of the EBITDA target
will be achieved, which would result in a total grant-date
fair-value-based-measurement of $10,500, 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 a liability-classified share-based sales incentive as a reduction of
revenue. Any changes to the measurement of the share-based sales incentive 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 sales incentives 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 Sales Incentive
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 as noted below, under ASC 718 nonpublic entities may apply the same practical
expedients to share-based sales incentives as they apply to employee and nonemployee
awards.
A nonpublic entity is permitted to 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. This practical expedient must be
applied consistently to both employee and nonemployee awards. However, in accordance
with ASC 718-30-30-2, a nonpublic entity’s initial and subsequent measurement of its
liability-classified share-based sales incentives 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
4
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
sales incentive in the transaction price unless the incentive is forfeited.
14.7 Recognition
ASC 718-10
25-2C This guidance
does not address the period(s) or the manner (that is,
capitalize versus expense) in which an entity granting the
share-based payment award (the purchaser or grantor) to a
nonemployee shall recognize the cost of the share-based payment
award that will be issued, other than to require that an asset
or expense be recognized (or previous recognition reversed) in
the same period(s) and in the same manner as if the grantor had
paid cash for the goods or services instead of paying with or
using the share-based payment award. A share-based payment award
granted to a customer shall be reflected as a reduction of the
transaction price and, therefore, of revenue as described in
paragraph 606-10-32-25 unless the payment to the customer is in
exchange for a distinct good or service, in which case the
guidance in paragraph 606-10-32-26 shall apply.
An entity applies ASC 718 only to the measurement and classification of share-based sales
incentives. To recognize and present such incentives, the entity should apply the
guidance in ASC 606 on consideration payable to a customer.
For example, under ASC 606-10-32-27, an entity would recognize the grant-date
fair-value-based measure of share-based sales incentives as a reduction of revenue when
(or as) the later of either of the following events occurs:
- The entity recognizes revenue for the transfer of the related goods or services to the customer.
- The entity pays or promises to pay the consideration (even if the payment is conditional on a future event). That promise might be implied by the entity’s customary business practices.
In accordance with the above guidance, an entity will typically
recognize a share-based sales incentive as a reduction of revenue when, or as, the
entity recognizes revenue for the transfer of the related goods or services to the
customer.5 Because the vesting of share-based sales incentives may not align with the
recognition of revenue for the transfer of the related goods or services to the
customer, an entity will need to use judgment in those circumstances to determine what
the “related” goods and services are.
See Chapter
8 of Deloitte’s Roadmap Revenue Recognition for additional guidance on determining
when to recognize revenue.6
Example 14-6
Recognition of Fully Vested Share-Based Sales
Incentives
On January 1, 20X1, Entity A executes a one-year
MSA to sell Product X to Customer B, a retailer, for $10 per
unit. The MSA includes general terms and conditions and also
contains a minimum purchase requirement of 12,000 units (which
establishes legally enforceable rights and obligations
associated with the revenue contract), resulting in a total
minimum commitment of $120,000. The arrangement is within the
scope of ASC 606.
As incentive for B to agree to a minimum purchase commitment, A
grants B 1,000 fully vested equity-classified shares of A’s
common stock. The shares have a grant-date fair-value-based
measure of $10 (resulting in a total grant-date fair-value-based
measure of $10,000). The terms of the contract are sufficient to
establish a grant date of January 1, 20X1, for the shares.
Entity A concludes that it does not receive a
distinct good or service in exchange for the shares and
therefore determines that it should account for the shares as a
reduction of the transaction price for its sale of Product X
(i.e., the shares represent a share-based sales incentive). In
addition, A determines that the up-front grant of a fully vested
share-based sales incentive with a grant-date fair-value-based
measure of $10,000 meets the definition of an asset as defined
in Chapter 4 of FASB Concepts Statement 8.7 Entity A also determines that the share-based sales
incentive is solely related to the 12,000 units of Product X in
the initial contract on the basis of its best estimate of the
probable amount of units that B is expected to purchase.
Entity A measures and classifies the shares in
accordance with ASC 718 and recognizes revenue (and the
reduction of revenue) for the share-based sales incentive
payable in accordance with ASC 606. Because it determined that
the up-front fully vested share-based sales incentive meets the
definition of an asset, A recognizes an asset and corresponding
credit to equity on the basis of the grant-date fair-value-based
measure of $10,000. The net transaction price is $110,000
($120,000 – $10,000), and A subsequently derecognizes the asset
as a reduction of revenue as the related goods or services are
provided to the customer (i.e., as control of the 12,000 units
of Product X transfers to the customer, with net revenue of
approximately $9 per unit).
Footnotes
5
As discussed in Section 14.4, there may be circumstances
in which a grant date has not been established but the customer has a valid
expectation that share-based consideration will be issued. In such
circumstances, the entity should apply the variable consideration guidance in
ASC 606-10-32-7 and estimate the fair-value-based measure of the equity
instrument before the grant date.
6
See Chapter
6 of Deloitte’s Roadmap Revenue Recognition for additional
guidance on the measurement and recognition of consideration payable to a
customer.
7
See Chapter 6 of
Deloitte’s Roadmap Revenue
Recognition for guidance on the
recognition of up-front payments to customers.
14.8 Disclosure
The FASB decided not to establish specific disclosure requirements for
share-based sales incentives 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 sales incentives to customers.8
Footnotes
8
See paragraph BC18 of ASU 2019-08.