FASB Proposes Clarifications to the Accounting for Share-Based Consideration Payable to a Customer
Overview
On September 30, 2024, the FASB issued a proposed ASU1 that would clarify the guidance in both ASC 6062 and ASC 7183 on the accounting for share-based payment awards that are granted by an
entity as consideration payable to its customer. The proposed ASU’s purpose is
to reduce diversity in practice and improve existing guidance, primarily by
revising the definition of a “performance condition” and eliminating a
forfeiture policy election specifically for service conditions associated with
share-based consideration payable to a customer. In addition, the proposed ASU
would clarify that the variable consideration constraint guidance in ASC 606
does not apply to share-based consideration payable to a customer regardless of
whether an award’s grant date has occurred. Comments on the proposal are due by
November 14, 2024.
Background
In November 2023, the FASB received an agenda request to clarify certain aspects of
the current guidance on an entity’s accounting for share-based payment awards issued
to a customer that are not in exchange for a distinct good or service. The agenda
request focused primarily on awards that vest on the basis of customer purchases (or
purchases by other parties that purchase the entity’s goods or services from its
customers) and noted that there is diversity in practice associated with whether
these types of vesting conditions are performance conditions or service conditions
and that this distinction affects how an entity accounts for the associated
award.
Connecting the Dots
The amendments in ASU 2019-084 require that an entity apply the guidance in ASC 718 to measure and
classify share-based consideration payable to a customer if such
consideration is not in exchange for a distinct good or service. The entity
then records the amount as a reduction of the transaction price in
accordance with the presentation guidance in ASC 606 on consideration
payable to a customer. ASU 2019-08 also requires an entity to determine
whether any vesting conditions represent service conditions or performance
conditions. As a result, this determination may affect when an entity
recognizes amounts related to such awards (and, therefore, the entity’s
timing of revenue recognition). Specifically, an entity recognizes amounts
related to an award that vests on the basis of a performance condition only
if it is probable that the performance condition will be met (and, thus, it
is probable that the award will vest). By contrast, an entity may initially
recognize amounts related to an award that vests on the basis of a service
condition even if it is not probable that the award will vest because the
entity may elect, as an accounting policy for awards issued to nonemployees
(including customers), to only account for the effects of forfeitures of
such awards as they occur.
Given the lack of clarity in the current guidance, views
have differed about whether to treat vesting conditions that are based on
customer purchases (or purchases by other parties that purchase the entity’s
goods or services from its customers) as service conditions or performance
conditions. The current definitions of “performance condition” and “service
condition” in the ASC master glossary do not explicitly acknowledge
share-based payment awards issued to customers or awards that vest on the
basis of the grantee’s purchases of goods or services from the grantor.
When these vesting conditions are treated as service conditions and an entity elects
to account for the effects of forfeitures as they occur, there can be a delay in
revenue recognition for transactions that include the grant of awards for which
vesting is not probable. Certain stakeholders have indicated that such a delay can
diminish the usefulness of an entity’s reported revenue information. For example, in
this scenario, an entity would (1) initially reduce revenue for amounts related to
an award that the entity does not expect will vest and (2) subsequently recognize
revenue when the unvested award ultimately expires, which could conceivably occur in
a reporting period after the entity has already satisfied the related performance
obligation.
In response to the agenda request, the FASB staff conducted research and outreach
with various stakeholders. At its June 12, 2024, meeting, the Board approved the
addition of a project on this topic to its technical agenda, made tentative
decisions about various proposals presented by the FASB staff, and instructed the
staff to draft the proposed ASU.
Main Provisions of the Proposed ASU
Revision of the Term “Performance Condition”
The proposed guidance would revise the ASC master glossary
definition of “performance condition.” Specifically, for share-based
consideration payable to a customer,5 the revised definition would specify conditions (including vesting
conditions) that are based on a customer’s purchases of goods or services from
an entity. The revised definition would also include performance targets based
on purchases made by other parties that purchase the entity’s goods or services
from its customers (i.e., purchases made by an entity’s customer’s
customer).
Under the proposed ASU, the ASC master glossary definition of “performance
condition” would be revised to add the following:
2. 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
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 of the grantor’s goods or services from either the grantor or the grantor’s customers
- A 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.
As indicated in the revised definition above, a performance
condition would explicitly include any condition related to achieving a
specified performance target that is defined by reference to a grantee’s
purchases of the grantor’s goods or services from the grantor or the grantor’s
customers or a purchase of the grantor’s goods or services from the grantee or
the grantee’s customers. Therefore, under the proposed ASU, a vesting condition
that is based on a specified volume or specified monetary amount “of goods or
services [purchased from the grantor] (including over a specified period of
time)” would be a performance condition. The revised definition would also
include such targets on the basis of purchases of an entity’s goods or services
by a customer’s customer and reflects the FASB’s decision that awards that vest
upon direct customer purchases and those that vest upon purchases made by a
customer’s customer are similar and therefore do not warrant different
accounting treatment.6
Example
Share-Based Sales Incentive Contingent on Cumulative
Purchases
On January 1, 20X1, Entity A executes a one-year master
supply agreement (MSA) to sell and deliver widgets to
Customer B. Customer B agrees to pay A $1,000 for each
widget purchased under the MSA. Entity A includes the
following terms in the MSA:
- Customer B will earn 1,000 shares of A’s common stock if or when B purchases five widgets within one year of the MSA’s execution.
- Customer A’s payment of shares to B is not in exchange for distinct goods or services.
- Customer A determines that this payment represents share-based consideration payable to a customer and that it is equity-classified in accordance with the guidance in ASC 718.
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 share-based
consideration 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. The grant-date
fair-value-based measure is $1 per share.
Entity A concludes that the share-based
consideration payable 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).7 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
payable 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.
Elimination of Forfeiture Policy Election
Under the proposed revision to the ASC master glossary definition of “performance
condition,” fewer awards issued to customers would be expected to have service
conditions. However, the proposed ASU would also amend the guidance in ASC
718-10-35-1D on service conditions in share-based payment arrangements that
permits entities to elect a policy of recognizing the effect of forfeitures when
they occur. The amendment would eliminate that policy election for share-based
consideration payable to a customer that is not in exchange for distinct goods
or services. Thus, for service conditions associated with share-based
consideration payable to a customer, entities would be required to estimate the
number of forfeitures expected to occur.
Connecting the Dots
In the proposed ASU’s Basis for Conclusions, the Board explains that it
considered an alternative approach to the proposed ASU in which it would
not amend the definition of performance condition but would merely
eliminate an entity’s ability to elect an accounting policy of
recognizing the effect of forfeitures as they occur (and thereby require
entities to estimate the number of forfeitures expected to occur) for
service conditions associated with share-based consideration payable to
a customer that is not in exchange for distinct goods or services. Under
this approach, entities would need to estimate the number of awards
expected to vest regardless of their conclusion about whether a vesting
condition is a service condition or a performance condition, which would
have achieved the same objective as the guidance in the proposed ASU
(i.e., improving an entity’s estimate of transaction price in a contract
with a customer) without an amendment to the current definition of
either service condition or performance condition.
However, the Board ultimately decided to amend the definition of
“performance condition” because of its concern about the consequences of
failing to address underlying issues associated with the definition’s
lack of clarity. The Board noted that one such consequence is related to
differences in how awards with service conditions and awards with
performance conditions are incorporated into the calculation of diluted
earnings per share (EPS). Accordingly, by amending the definition of
“performance condition,” the proposed ASU would not only improve an
entity’s estimate of transaction price in a contract with a customer
that includes share-based consideration payable to a customer but also
address diversity in practice in other areas of U.S. GAAP in which
entities need to distinguish between service conditions and performance
conditions for share-based consideration payable to a customer. For
further discussion of the impact of service conditions and performance
conditions in the calculation of EPS for share-based payment awards, see
Section
7.1 of Deloitte’s Roadmap Earnings per
Share.
The proposed ASU also includes a request for feedback on whether
entities should be permitted, upon transition to the new guidance, to make a
one-time change to their forfeiture policy for nonemployee awards if they
previously elected to estimate forfeitures for such awards.
Variable Consideration Constraint Guidance
The proposed ASU would also clarify that the guidance on
constraining estimates of variable consideration in ASC 606 “should not be
applied to share-based consideration payable to a customer that is measured and
classified under Topic 718.” The Board is aware of the current diversity in
practice that has resulted from an absence of guidance that clearly describes
the extent to which the variable consideration requirements in ASC 606 (which
includes the constraint) apply to share-based consideration payable to a
customer.
Effective Date and Transition
Effective Date
The Board will determine the effective date after considering stakeholder
feedback on the proposed ASU.
Transition
Entities would be able to apply the ASU’s amendments on either a modified
retrospective or retrospective basis. Under the modified retrospective approach,
an entity would recognize a cumulative-effect adjustment to the opening balance
of retained earnings as of the beginning of the fiscal year of adoption and
would not recast any comparative periods presented. Under the retrospective
approach, an entity would recast comparative periods and recognize a
cumulative-effect adjustment to the opening balance of retained earnings as of
the beginning of the earliest period presented. Under either approach, an entity
would apply the amendments in this proposed ASU as of the date of initial
application to all arrangements for share-based consideration payable to a
customer.
Contacts
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Aaron Shaw
Audit &
Assurance
Partner
Deloitte & Touche
LLP
+1 202 220 2122
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Sean May
Audit &
Assurance
Partner
Deloitte & Touche
LLP
+1 415 783 6930
|
|
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Charlie Steward
Audit & Assurance
Partner
Deloitte & Touche
LLP
+1 404 220 1102
|
|
Henry Wilson
Audit &
Assurance
Senior Manager
Deloitte & Touche
LLP
+1 312 802 4897
|
Footnotes
1
FASB Proposed Accounting Standards Update (ASU),
Clarifications to Share-Based Consideration Payable to a
Customer.
2
FASB Accounting Standards Codification (ASC) Topic 606,
Revenue From Contracts With Customers.
3
FASB Accounting Standards Codification Topic 718,
Compensation — Stock Compensation.
4
FASB Accounting Standards Update No. 2019-08,
Codification Improvements — Share-Based Consideration Payable
to a Customer.
5
As specified in the proposed ASU, share-based
consideration payable to a customer would encompass “the same
instruments as share-based payment arrangements” (as defined in the ASC
master glossary) but the grantee would not need to be a supplier of
goods or services to the grantor.
6
Paragraph BC14 of the proposed ASU states that
“[a]lthough not defined in the amendments in this proposed Update, the
Board expects that the term purchases would be interpreted
broadly. For example, performance targets based on (a) payments by a
grantee in connection with a grantee’s purchase of goods and services
from the grantor, (b) delivery of purchased goods or services by the
grantor to the grantee, or (c) the grantor, upon inception of a
contract, committing to provide goods or services to the grantee in
exchange for consideration would be considered performance conditions
for the purpose of applying the proposed definition.”
7
This conclusion is based on the
revised definition of “performance condition” in
the proposed ASU. Entity A, therefore, would not
necessarily reach the same conclusion under
current authoritative GAAP.