The Financial Accounting Standards Board issued an Accounting Standards Update (ASU) on May 15 that clarifies accounting guidance for share-based consideration payable to a customer in conjunction with selling goods or services.
According to the FASB, the changes improve financial reporting results by addressing the intersection of the requirements of FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, and Topic 718, Compensation—Stock Compensation.
- Related article: FASB Looks to Update Rules on Share-Based Payments
The amendments affect the timing of revenue recognition for entities that offer to pay share-based consideration (such as equity instruments) to a customer (or to other parties that purchase the entity’s goods or services from the customer) to incentivize the customer (or its customers) to purchase its goods and services.
Specifically, the amendments clarify the requirements for share-based consideration payable to a customer that vests upon the customer purchasing a specified volume or monetary amount of goods and services from the entity.
In the ASU, here’s how the FASB answers the questions of “What are the main provisions?”, “How do the main provisions differ from current GAAP?”, and “Why are they an improvement?”
Under current GAAP, the definitions of performance condition and service condition do not explicitly discuss purchases made by a customer or parties that purchase a grantor’s goods or services from the grantor’s customers. For share based consideration payable to a customer (including share-based consideration payable to other parties that purchase the grantor’s goods or services from the grantor’s customers) with a service condition, current GAAP permits the grantor to elect to account for the effect of forfeitures as they occur, which may result in a delay in revenue recognition for awards that are not probable of vesting.
In addition, current GAAP also does not explicitly state whether the guidance in Topic 606 on constraining estimates of variable consideration applies to share-based consideration payable to a customer that is measured and classified under the Topic 718 approach.
The amendments in this Update revise the Master Glossary definition of the term performance condition for share-based consideration payable to a customer. The revised definition incorporates conditions (such as vesting conditions) that are based on the volume or monetary amount of a customer’s purchases (or potential purchases) of goods or services from the grantor (including over a specified period of time). The revised definition also incorporates performance targets based on purchases made by other parties that purchase the grantor’s goods or services from the grantor’s customers. The revised definition of the term performance condition cannot be applied by analogy to awards granted to employees and nonemployees in exchange for goods or services to be used or consumed in the grantor’s own operations.
Although it is expected that entities will conclude that fewer awards contain service conditions, for those that are determined to have service conditions, the amendments in this Update eliminate the policy election permitting a grantor to account for forfeitures as they occur. Therefore, when measuring share-based consideration payable to a customer that has a service condition, the grantor is required to estimate the number of forfeitures expected to occur.
Separate policy elections for forfeitures remain available 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 grantor’s own operations.
The amendments in this Update clarify that share-based consideration encompasses the same instruments as share-based payment arrangements but the grantee does not need to be a supplier of goods or services to the grantor.
Finally, the amendments in this Update clarify that a grantor should not apply the guidance in Topic 606 on constraining estimates of variable consideration to share-based consideration payable to a customer. Therefore, a grantor is required to assess the probability that an award will vest using only the guidance in Topic 718.
Collectively, these changes improve the decision usefulness of a grantor’s financial statements, improve the operability of the guidance, and reduce diversity in practice for accounting for share-based consideration payable to a customer. Under the amendments in this Update, revenue recognition will no longer be delayed when an entity grants awards that are not expected to vest. This is expected to result in estimates of the transaction price that better reflect the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer and, therefore, more decision-useful financial reporting.
The amendments in the ASU 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.
The amendments permit a grantor to apply the new guidance on either a modified retrospective or a retrospective basis.
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