On September 30, 2024, FASB issued an exposure draft clarifying the accounting treatment for share-based consideration payable to a customer for the sale of goods or services. The interaction of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, and ASC 718, Compensation – Stock Compensation, has led to diversity in practice in accounting for these transactions.
Background
Companies frequently offer customers incentives to purchase goods and services, usually in the form of cash or a credit to be applied against amounts owed to the company. Sometimes, this can be in the form of equity instruments (or other types of share-based consideration) such as warrants. For these awards, vesting often occurs when the grantee (customer) purchases a certain volume or dollar amount of goods or services from the grantor.
Guidance in ASC 606 requires that an entity account for consideration payable to a customer as a reduction of the transaction price unless the payment is in exchange for a distinct good or service.
However, Accounting Standards Update (ASU) 2019-08 requires that a grantor apply the guidance in ASC 718 to measure and classify share-based consideration payable to a customer. If the consideration included vesting conditions, the grantor also was required to determine if the vesting terms represent a service condition or a performance condition. For a performance condition, a company is required to estimate the probable outcome, i.e., is it expected to vest or be forfeited. For a service condition, a grantor can elect to account for forfeitures as they occur instead of estimating forfeitures. When the grantor elects to account for forfeitures as they occur, revenue recognition may be delayed for awards that are not probable of vesting.
Proposed Changes
The proposed amendments would update the performance condition definition to include conditions (including vesting conditions) based on the volume, monetary amount, or timing of a customer’s purchases of goods or services from the grantor. The revised definition also would incorporate performance targets based on the volume of purchases made by other parties that purchase the grantor’s goods or services from the grantor’s customers.
This change means most share-based customer awards would be considered a performance condition rather than a service condition.
For customer awards that meet the service condition definition, the amendments would eliminate the policy election to account for forfeiture as they occur. The grantor of a customer award with a service condition would be required to estimate the number of forfeitures expected to occur.
The proposal further clarifies that a grantor should not apply ASC 606 guidance on constraining estimates of variable consideration to share-based consideration payable to a customer. A grantor must assess the probability an award will vest only using ASC 718 guidance.
Separate policy elections for forfeitures would 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.
“Under the proposed amendments, revenue recognition would 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.”
Effective Date & Transition
FASB will determine an effective date and if early adoption will be permitted after a review of comment letters. If adopted, a grantor could apply the new guidance on a modified retrospective or retrospective basis.
Conclusion
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