Accounting for Share-Based Payment From Customers
ASU 2025-07 improves consistency in financial reporting for increasingly common noncash consideration.
In under a minute
- On Sept. 29, 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-07, which amends Topic 606 (“Revenue From Contracts With Customers”), Topic 815 (“Derivatives and Hedging”), Topic 321 (“Investments – Equity Securities”), and Subtopic 610-20 (“Other Income – Gains and Losses From the Derecognition of Nonfinancial Assets”) to clarify the accounting for share-based noncash consideration received from customers.
- In addition to introducing a new scope exception to derivatives guidance in Topic 815, the ASU clarifies that share-based noncash consideration (such as shares, share options, warrants, or other equity instruments) received from customers as consideration for goods or services is subject to Topic 606 until an entity has an unconditional right to receive or retain the consideration, other than by the passage of time or by conditions unrelated to the entity’s performance obligations.
- The amendments are expected to reduce diversity in practice by clarifying which accounting framework applies first to these increasingly common arrangements.
- Entities may apply the guidance either prospectively to new contracts or on a modified retrospective basis to existing revenue contracts. The amendments are effective for annual reporting periods beginning after Dec. 15, 2026, with early adoption permitted.
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Breaking it down
Background
The FASB issued ASU 2025-07, “Derivatives and Hedging (Topic 815) and Revenue From Contracts With Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for Share-Based Noncash Consideration From a Customer in a Revenue Contract,” in response to growing diversity in interpretation regarding the accounting for share-based payments received from customers. In 2023, the FASB staff received a question about how entities should account for warrants granted by customers in revenue contracts when the warrants vest upon satisfaction of performance obligations. This issue subsequently was raised at the November 2023 public roundtable meeting on the FASB’s post-implementation review of Topic 606.
Stakeholders noted a lack of clarity about which guidance entities should apply first to recognize share-based payments (such as warrants or shares) received from customers as consideration for goods or services. This uncertainty led to inconsistent interpretations in practice, with some entities recognizing these payments at contract inception as derivative assets under Topic 815 or equity securities under Topic 321, while others waited to recognize the payments until the related performance obligations were satisfied under Topic 606.
Crowe observation: The diversity in interpretation likely stemmed from a view that share-based noncash consideration from customers meets the definition of a financial instrument, leading some to believe Topic 815 or Topic 321 should apply immediately.
Scope of the guidance
The amendments apply to all entities that receive share-based noncash consideration as consideration for the transfer of goods or services. This includes shares, share options, warrants, and other equity instruments.
The amendments explicitly clarify that Topic 606 applies first to a contract with share-based noncash consideration received from a customer. The ASU provides a similar clarification for share-based noncash consideration received in transactions within the scope of Subtopic 610-20.
Crowe observation: Entities should carefully evaluate whether the share-based noncash consideration truly represents consideration received in exchange for goods or services or the transfer of a nonfinancial asset or whether it was instead received under another type of arrangement (such as a financing or investment arrangement) that might be subject to different accounting guidance.
Recognition and measurement principles
ASU 2025-07 establishes clear principles for when and how to recognize share-based noncash consideration from customers.
When to recognize
The amendments specify that share-based noncash consideration received from a customer as consideration for the transfer of goods or services in a revenue contract is subject to Topic 606 until an entity has an unconditional right to receive or retain the share-based noncash consideration, other than by the passage of time or by conditions that are unrelated to the entity’s performance obligations (or a specific outcome of the entity’s performance) under Topic 606.
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Excerpt from FASB Accounting Standards Codification |
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606-10-15-3A. An entity shall apply the guidance in this Topic, including the guidance on noncash consideration in paragraphs 606-10-32-21 through 32-24, to a contract with share-based noncash consideration (for example, shares, share options, or other equity instruments) from a customer for the transfer of goods or services. The guidance in other Topics (including Topic 815 on derivatives and hedging and Topic 321 on equity securities) does not apply to share-based noncash consideration from a customer for the transfer of goods or services unless and until the entity’s right to receive or retain the share-based noncash consideration is unconditional under this Topic. To assess whether the right is unconditional under this Topic, only the contract terms that relate to the entity’s performance obligations (or a specific outcome of the entity’s performance) within the scope of this Topic are evaluated. The determination of whether the right is unconditional is consistent with the guidance in paragraph 606-10-45-4, which states that a right to consideration is unconditional if only the passage of time is required before payment of that consideration is due. |
Consequently, the timing of when an entity recognizes share-based noncash consideration:
- Is based on when the entity obtains an unconditional right to the consideration, not when the consideration is received or exercisable
- Is not affected by conditions related only to the passage of time or conditions unrelated to performance obligations or outcomes of the entity’s performance
- Was designed by the FASB to improve symmetry with the grantor’s accounting under Topic 718
Measurement requirements
Under the amendments, entities must:
- Apply the guidance in paragraphs 606-10-32-21 through 32-24 on noncash consideration
- Measure the share-based noncash consideration at estimated fair value at contract inception
- Exclude from the transaction price any changes in fair value after contract inception that are due to the form of the consideration (consistent with other noncash consideration)
Interaction with other topics
The ASU clarifies the interaction between Topic 606 and other accounting standards. The board decided to clarify that guidance in other topics should not be applied to share-based noncash consideration from a customer before Topic 606 is applied. Those other topics include but are not limited to Topic 815 and Topic 321.
- Topic 815, “Derivatives”: “An entity shall not apply the guidance in this Topic to share-based noncash consideration from a customer for the transfer of goods or services unless and until the entity’s right to receive or retain the share-based noncash consideration is unconditional under Topic 606. …”
- Topic 321, “Equity Securities”: “An entity shall not apply the guidance in this Topic to share-based noncash consideration from a customer for the transfer of goods or services unless and until the entity’s right to receive or retain the share-based noncash consideration is unconditional under Topic 606. …”
Crowe observation: The new ASU underscores the importance of proper sequencing; entities must first recognize the share-based noncash consideration under Topic 606 before applying any subsequent measurement or presentation requirements from other topics.
Contract asset and receivable considerations
The amendments include an example demonstrating a situation where performance and consideration timing don’t align. When an entity performs by transferring goods or services before or after obtaining an unconditional right to the share-based noncash consideration, it should apply the guidance in Section 606-10-45 regarding contract assets and receivables.
Crowe observation: Entities will need to carefully track the timing of performance obligation satisfaction versus when rights to share-based noncash consideration become unconditional, as this could result in contract asset or contract liability recognition, depending on the sequencing.
Example: Customer-granted warrants
ASU 2025-07 includes the following example to illustrate application of the new guidance.
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Excerpt from FASB Accounting Standards Codification |
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606-10-55-250B. On January 1, 20X7, an entity enters into a contract with a customer to sell 5,000 units of Product A. The customer will pay $100 for each unit upon delivery. If the entity delivers all 5,000 units within 2 years from contract inception, the customer promises a performance bonus of 100 warrants for the customer’s common stock. The estimated fair value of the 100 warrants at contract inception is $100,000. At contract inception, the entity concludes that each unit is a performance obligation that is satisfied at a point in time. Based on its experience, the entity expects that all 5,000 units will be delivered to the customer before the end of 20X8. Accordingly, it concludes that the variable consideration related to the 100 warrants is not constrained and the transaction price is $600,000 ([5,000 units × $100] + $100,000 estimated fair value of 100 warrants at contract inception). Accordingly, the transaction price allocated to each unit is $120 ($600,000/5,000 units). 606-10-55-250C. During 20X7, the entity delivers 3,000 units to the customer. At the end of 20X7, the entity continues to expect that the remaining 2,000 units will be delivered to the customer before the end of 20X8. Therefore, the transaction price determined at contract inception is unchanged. For 20X7, the entity recognizes revenue of $360,000 (3,000 units × $120), cash of $300,000, and a contract asset of $60,000 ($100,000 estimated fair value of 100 warrants at contract inception × [3,000 delivered units/5,000 units]). The entity does not reflect any changes in the fair value of the 100 warrants in the transaction price. However, the entity assesses the related contract asset for impairment. 606-10-55-250D. During 20X8, the entity delivers the remaining 2,000 units to the customer. For 20X8, the entity recognizes revenue of $240,000 (2,000 units × $120), cash of $200,000, and a contract asset of $40,000 ($100,000 estimated fair value of 100 warrants at contract inception × [2,000 delivered units/5,000 units]). The entity does not reflect any changes in the fair value of the 100 warrants in the transaction price. However, the entity assesses the related contract asset for impairment. When all 5,000 units have been delivered, the entity concludes that its right to receive or retain the 100 warrants is unconditional under this Topic. At that point, the entity derecognizes the contract asset and applies the guidance in other Topics to account for the 100 warrants. |
20X7 journal entries:
| Dr. cash | $300,000 |
| Dr. contract asset | $60,000 |
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Cr. revenue |
$360,000 |
To record the transfer of 3,000 units in 20X7.
20X8 journal entries:
| Dr. cash | $200,000 |
| Dr. contract asset | $40,000 |
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Cr. revenue |
$240,000 |
To record the transfer of the remaining 2,000 units in 20X8.
| Dr. warrants | $xxx,xxx |
| Dr./Cr. loss/gain on warrants | $yyy,yyy |
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Cr. contract asset |
$100,000 |
To recognize the warrants in accordance with Topic 815 or Topic 321 once the company’s right to receive or retain the 100 warrants is unconditional.
Crowe observation: This example demonstrates the “asset-based approach” the board elected to use. As explained in the basis for conclusions, under this approach, “share-based noncash consideration from a customer in a revenue contract is expected to be accounted for in the same periods and in a similar manner to cash consideration and other forms of noncash consideration.”
Effective date and transition
The amendments are effective for annual reporting periods (including interim reporting periods within annual reporting periods) beginning after Dec. 15, 2026, for all entities. Early adoption is permitted for both interim and annual financial statements that have not yet been issued (or made available for issuance), and if an entity adopts the amendments in an interim period, the entity is required to adopt them as of the beginning of the annual reporting period that includes that interim period.
Entities may elect to apply the amendments in either of the following ways:
- Prospectively to new contracts entered into on or after the effective date
- Using a modified retrospective approach to existing revenue contracts as of the beginning of the fiscal year of adoption through a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity)
In both the interim period (if applicable) and the annual period of adoption, entities must disclose:
- The nature of and reason for the change in accounting principle
- If applying modified retrospective transition, the cumulative effect of the change on retained earnings or other components of equity as of the beginning of the fiscal year of adoption
FASB materials reprinted with permission. Copyright 2025 by Financial Accounting Foundation, Norwalk, Connecticut. Copyright 1974-1980 by American Institute of Certified Public Accountants.
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