FASB Clarifies Guidance on Share-Based Consideration Payable to a Customer
Overview
On May 15, 2025, the FASB issued ASU 2025-04,1 which clarifies 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 ASU is intended to reduce
diversity in practice and improve existing guidance, primarily by revising the
definition of a “performance condition” and eliminating a forfeiture policy
election for service conditions associated with share-based consideration
payable to a customer. In addition, the ASU clarifies that the guidance in ASC
606 on the variable consideration constraint does not apply to share-based
consideration payable to a customer “regardless of whether an award’s grant date
has occurred” (as determined under ASC 718).
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 (1) there is diversity in
practice associated with whether these types of vesting conditions are
performance conditions or service conditions and (2) this distinction affects
how an entity accounts for the associated award.
Connecting the Dots
An entity that has adopted the amendments in ASU 2019-084 must 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 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. This is 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.
Before the issuance of ASU 2025-04, the guidance in U.S. GAAP was unclear
about whether entities should 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 given that the definitions of those terms in the
ASC master glossary did 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.
Main Provisions of ASU 2025-04
Revision of the Term “Performance Condition”
ASU 2025-04 amends the definition of “performance condition” in the ASC
master glossary related to share-based consideration payable to a
customer.5 The revised definition (1) incorporates conditions (including vesting
conditions) that are based on a customer’s purchases of goods or services
from an entity and (2) includes 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).
Specifically, the ASU adds the following language to the definition of
performance condition:
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:
a. 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)
b. The grantee’s purchase (or potential purchase) of the
grantor’s goods or services from either the grantor or the
grantor’s customers
c. 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.
In accordance with the ASU, a performance condition
explicitly includes any condition related to achieving a specified
performance target that is defined by reference to a grantee’s purchase 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 ASU’s guidance, a vesting
condition that is based on a specified volume or a specified monetary amount
“of goods or services [purchased from the grantor] (including over a
specified period of time)” is a performance condition. This includes
“performance targets achieved upon the first purchase from the grantor (or
the grantor’s customers)” as well as targets based on purchases of an
entity’s goods or services by a customer’s customer. The amended definition
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,
which includes the following terms:
-
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 must be classified as equity under ASC 718.
Entity A determines that the terms of the MSA are
sufficient to establish a grant date for the share-
based consideration in accordance with the criteria
in ASC 718. Therefore, A measures the share- based
consideration issued to B on January 1, 20X1. 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 it becomes probable at any point during the
year 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
As a result of the revision to the definition of “performance condition,”
fewer awards issued to customers are expected to have service conditions.
However, ASU 2025-04 also amends the guidance in ASC 718-10-35-1D on service
conditions in share-based payment arrangements, which permits entities to
elect a policy of recognizing the effect of forfeitures when they occur. The
ASU eliminates that policy election for share-based consideration payable to
a customer that is not in exchange for distinct goods or services. Further,
the ASU amends ASC 718-10-35-1D to indicate, in part, that “[i]f 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).”
Thus, for service conditions associated with share-based consideration
payable to a customer, entities are required to estimate the number of
forfeitures expected to occur for the entire award.
Connecting the Dots
In the ASU’s Basis for Conclusions, the Board
explains that it considered an alternative approach under which it
would not have revised the definition of performance condition but
would have merely eliminated an entity’s ability to elect an
accounting policy of recognizing the effect of forfeitures as they
occur (and thereby required entities to estimate the number of
forfeitures expected to occur) for service conditions associated
with share-based consideration payable to a customer. 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 ASU
2025-04 (i.e., improving an entity’s estimate of the transaction
price in a contract with a customer) without having to amend the
definition of 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 ASU not only improves the guidance on estimating the transaction
price in a contract with a customer that includes share-based
consideration payable to a customer but also addresses diversity in
practice related to 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 FASB had initially requested feedback on whether
entities should be permitted, upon adopting the amendments, to make a
one-time change to their forfeiture policy for nonemployee awards if they
previously elected to estimate forfeitures for such awards. However, the
Board ultimately decided to not allow such change.
Variable Consideration Constraint Guidance
The ASU clarifies 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,
regardless of whether an award’s grant date has occurred.” This
clarification addresses the 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 such constraint
guidance) apply to share-based consideration payable to a customer.
Effective Date and Transition
Effective Date
ASU 2025-04 is effective for fiscal years beginning after
December 15, 2026, including interim periods within those fiscal years.
Early adoption is permitted.
Transition
Entities can use either a modified retrospective or a retrospective method to
adopt the ASU’s amendments. 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.
An entity that elects to apply the guidance retrospectively should use the
actual outcome, if known, of a performance condition or service condition as
of the beginning of the annual reporting period of adoption for all
prior-period estimates. If actual outcomes are unknown as of the beginning
of the annual reporting period of adoption, the entity should use its
estimate of the probability that it will meet a service condition or
performance condition as of the beginning of the annual reporting period of
adoption for all prior-period estimates.
Under either approach, an entity would apply the ASU’s guidance 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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Charlie Steward
Audit & Assurance
Partner
Deloitte &
Touche LLP
+1 404 220
1102
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Marissa Lee
Audit & Assurance
Senior Manager
Deloitte & Touche LLP
+1 415 783 7678
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Henry Wilson
Audit & Assurance
Senior Manager
Deloitte & Touche LLP
+1 312 802 4897
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Footnotes
1
FASB Accounting Standards Update (ASU) No. 2025-04,
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 ASU, share-based consideration payable to a
customer encompasses “the same instruments as share-based payment
arrangements” (as defined in the ASC master glossary), but the
grantee need not be a supplier of goods or services to the
grantor.
6
Paragraph BC24 of ASU 2025-04 states, “Although the
term purchases (including potential purchases) is not
defined in the amendments in this Update, the Board intends for that
term to be interpreted broadly. For example, performance targets
based on (a) payments by a grantee (including advance payments) 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 grantee, upon inception of a contract,
committing to purchase goods or services from the grantor in
exchange for consideration are performance conditions for the
purpose of applying the definition.”
7
This conclusion is based on
the revised definition of “performance condition”
in ASU 2025-04. Therefore, A would not necessarily
reach the same conclusion under U.S. GAAP before
its adoption of the ASU.