FASB ASU Addresses Share-Based Payments to Customers
ASU 2025-04 amends the definition of a performance condition in Topic 718 and addresses the accounting for share-based consideration payable to customers.
In under a minute
- The Financial Accounting Standards Board (FASB) recently 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,” which addresses how to account for share-based consideration payable to a customer.
- Specifically, ASU 2025-04 amends the definition of a performance condition in Topic 718 to include conditions that are contingent on the purchase of goods or services by a customer (or a customer’s customer). The ASU also requires entities to estimate expected forfeitures for all share-based consideration payable to a customer with a service condition.
- ASU 2025-04 is effective for all entities for annual reporting periods (including interim periods therein) beginning after Dec. 15, 2026. Early adoption is also permitted.
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Introduction
When a revenue contract involves share-based consideration, reporting entities often face challenges navigating different topics of the FASB Accounting Standards Codification (ASC) to determine the appropriate accounting treatment. A recent FASB ASU clarifies the accounting for share-based consideration payable to a customer.
Background
Share-based consideration awarded to a customer often is offered as an incentive to drive additional purchases – for example, the award might include as a vesting condition the purchase of a specified amount (volume or monetary) of goods or services by the customer or the customer’s customers. Prior to the issuance of the final ASU, it was unclear whether such a condition should be classified as a performance condition or a service condition under Topic 718. This determination can significantly affect when an entity recognizes the impact of the award on its revenue contract.
Under Topic 718, if an award granted to a customer is subject to a performance condition, the grantor must recognize a reduction to the revenue contract’s transaction price equal to the grant date fair value of the award when it is probable that the performance condition will be met. In some cases, a grantor’s expectations of a performance condition being met might change, in which case the timing of any reduction to the transaction price would depend on when the performance condition becomes probable of being met.
In contrast, prior to the new guidance, if a customer award was subject to a service condition, the grantor had the following two options:
- The grantor could make an accounting policy election to estimate forfeitures expected to occur (an ongoing estimate, like the probability assessment for an award subject to a performance condition, as previously described).
- The grantor could elect to record actual forfeitures as they occur. That is, the grantor would immediately recognize a reduction in the revenue contract’s transaction price for the full amount of the grant. A grantor making this policy election would reverse the reduction if the grantee forfeited the award (that is, failed to satisfy the service condition).
The following example illustrates the potential differences in accounting for a customer award subject to a service condition under legacy guidance:
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Illustrative example: Accounting for share-based consideration payable to a customer |
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A large beverage company (BevCorp) offers a share-based sales incentive program to attract new retail customers. Through this program, BevCorp grants 50 shares of its own stock to any first-time customer that places an advance order of at least 1,000 cases. The shares vest after one calendar year, contingent on a customer of the customer placing at least five orders of any quantity of cases throughout the calendar year. A first-time customer places an order of 1,000 cases on Jan. 1, 20X1, and BevCorp grants the customer the requisite awards. The fair value of the shares is $30 per share on the grant date. BevCorp estimates based on historical experience that 20% of all awards granted through the incentive program will be forfeited. Under current practice, the vesting condition (the purchases by the customer’s customer) is considered a service condition, as it is based on the achievement of a performance target that is not defined solely by reference to BevCorp’s (the grantor’s) operations or activities. Therefore, recognition of award forfeitures could differ, depending on BevCorp’s accounting policy. Estimating forfeitures If BevCorp follows a policy of estimating forfeitures, it records a reduction to the contract’s transaction price of $1,200, reflecting 80% of the 50 shares granted. The value of the award is based on the $30 per share fair value as of the grant date. By Dec. 31, 20X1, none of the customer’s customers have met the five-order threshold. Thus, the customer forfeits the award. Upon the forfeiture, BevCorp recognizes $1,200 in revenue, reversing the previously recorded reduction. The subsequent reversal represents only the amount initially expected to vest. Recording forfeitures as they occur If BevCorp follows a policy of recording forfeitures only as they occur, BevCorp initially records $1,500 as a reduction to the contract’s transaction price, reflecting 100% of the value of the award. By Dec. 31, 20X1, the vesting condition has not been met, and the customer forfeits the award. As a result, BevCorp recognizes revenue of $1,500 (reversing the previously recorded reduction in the transaction price). |
Summary of significant changes
Definition of a performance condition
ASU 2025-04 broadens the definition of a performance condition within Topic 718 by explicitly including conditions related to achieving performance targets that are based on purchases or potential purchases of the grantor’s goods or services by the grantee (the customer) or by parties that purchase the grantor’s goods or services from the grantee (the customer’s customers).
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Excerpt from FASB Accounting Standards Codification |
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Master Glossary – 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:
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. |
Accounting for forfeitures
The final ASU also eliminates the policy election option to record forfeitures as they occur for awards granted to customers that are subject to a service condition. While the FASB expects fewer awards to contain service conditions under the amended guidance, the effect of this change is that an entity is required to estimate expected forfeitures for all customer awards – whether subject to a service condition or a performance condition.
Crowe observation: While the ASU prohibits grantors from accounting for forfeitures as they occur for share-based consideration payable to customers, this policy election remains for share-based awards granted to employees and nonemployees that are not customers.
Variable consideration constraint
The final ASU affirms that entities should refer to Topic 718 when evaluating conditions that could affect the vesting and fair value of customer awards. It also explicitly states that entities would not apply the guidance on variable consideration in Topic 606. Consequently, a grantor assesses the probability that an award will vest using only the guidance in Topic 718.
Effective date and transition
ASU 2025-04 is effective for all entities for fiscal years beginning after Dec. 15, 2026, including interim periods within those fiscal years. Early adoption is also permitted.
Entities may adopt ASU 2025-04 on either a modified retrospective or fully retrospective basis. Under the modified retrospective basis, an entity would adopt the ASU as of the beginning of the period of adoption and would not recast prior year financial information. Under the fully retrospective basis, an entity would adopt the ASU as of the beginning of the first period presented. Additionally, entities that elect to apply the guidance retrospectively are required to 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 not known as of the beginning of the annual reporting period of adoption, entities should use an estimate of achieving a service condition or performance condition as of that date.
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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