FASB clarifies share-based consideration accounting payable to a customer

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-04, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Clarifications to Share-Based Consideration Payable to a Customer.

The ASU amends share-based consideration accounting by:

• Revising the Accounting Standards Codification (ASC) Master Glossary definition of the term performance condition to include vesting conditions that are based on the volume or monetary amount of a customer’s purchases or potential purchases.
• Requiring entities to estimate the number of forfeitures expected to occur when measuring share-based consideration payable to a customer with a service condition.
• Clarifying that the guidance on constraining estimates of variable consideration in Topic 606, Revenue from Contracts with Customers, doesn’t apply to share-based consideration payable to a customer.

The amendments apply to all entities that issue share-based consideration to a customer that’s within the scope of Topic 606.

Key provisions

Entities may offer consideration to a customer to incentivize the customer to purchase goods and services.

Topic 606 requires entities to account for consideration payable to a customer as a reduction of the transaction price unless the payment to the customer is in exchange for a distinct good or service.

When consideration payable to a customer is in the form of a share-based payment award, such as warrants, the reduction to the transaction price is measured based on the grant-date fair value of the share-based payment award in accordance with Topic 718, Compensation — Stock Compensation.

Topic 718 requires entities to determine if the share-based consideration payable to a customer contains vesting conditions and if those conditions represent service conditions or performance conditions. There is diversity in practice in determining whether certain conditions, such as those based on customer purchases, are service conditions or performance conditions. This determination can affect the timing of revenue recognition, as follows.

• When the vesting condition is treated as a performance condition, the reduction to the transaction price and revenue is recognized if the performance condition is probable of being achieved.
• When the vesting condition is treated as a service condition and the entity elects to estimate forfeitures, the reduction to the transaction price and revenue is the grant-date fair value of the awards for which it’s probable the requisite service will be rendered.
• When the vesting condition is treated as a service condition and the entity elects the policy to account for forfeitures as they occur, the reduction to the transaction price and revenue is the grant-date fair value of all awards. The revenue recognized is subsequently adjusted in the period in which the award is forfeited. This may result in a delay in revenue recognition if the reduction to the transaction price includes share-based payment awards that the entity doesn’t expect to ultimately issue to the customer.

Performance conditions

The amendments revise the definition of the term performance condition for share-based consideration payable to a customer in the ASC Master Glossary.

The revised definition explicitly incorporates conditions that relate to achieving a specified performance target that’s defined by reference to a grantee’s purchases or potential purchases of goods or services from a grantor.

As amended, a performance condition includes vesting conditions based on the volume or monetary amount of a customer’s purchases of goods and services from the entity. The performance targets included in the definition of a performance condition for employee and nonemployee awards, including a change in control, are also considered a performance condition for share-based consideration payable to a customer.

The revised definition also incorporates performance targets based on purchases made by the customer’s customer.

Forfeitures

The amendments eliminate the policy election to account for forfeitures as they occur when measuring share-based consideration payable to a customer with a service condition.

The FASB believes the amendments to the definition of a performance condition, as discussed above, are expected to result in fewer share-based awards granted to customers with service conditions. However, if a share-based award is granted to a customer with a service condition, the entity is required to estimate the number of forfeitures expected to occur.

Entities may still elect to account for forfeitures as they occur for share-based payment awards with service conditions granted to employees and nonemployees in exchange for goods or services to be used or consumed in the entity’s own operations.

Probability

The amendments require entities to assess the probability of the share-based consideration vesting in accordance with the guidance in Topic 718 only.

The guidance on constraining estimates of variable consideration in Topic 606 doesn’t apply to share-based consideration payable to a customer.

Effective dates

The amendments are effective for all entities for annual reporting periods, including interim reporting periods within annual reporting periods, beginning after Dec. 15, 2026.

Early adoption is permitted for all entities.

Transition requirements

The amendments permit a grantor to apply the new guidance on either a modified retrospective or a retrospective basis.

When applying the amendments on a modified retrospective basis, a grantor should recognize a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption and shouldn’t recast any financial statement information before the period of adoption.

When applying the amendments on a retrospective basis, a grantor should 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.