Under ASC 606, Revenue from Contracts with Customers, entities are required to account for consideration payable to a customer as a reduction of the total transaction price, resulting in a reduction of revenue, unless the payment is in exchange for a distinct good or service. When entities issue equity instruments to a customer as consideration payable to a customer, rather than cash or credits, the entity is required to apply the guidance in ASC 718, Compensation—Stock Compensation, to measure and classify the share-based consideration payable. Under ASC 718, if the share-based payments include vesting conditions, entities are required to determine if the vesting conditions are service- or performance-based conditions. For performance-based vesting, an entity is required to estimate the probable outcome of the performance condition. For service-based vesting, an entity can elect to account for forfeitures as they occur.
Stakeholders noted that entities that adopt the election to account for forfeitures as they occur could result in a delay in revenue recognition after the performance obligation has been satisfied. This treatment is inconsistent with other forms of consideration payable to customers, including cash and credits issued to customers. In addition, stakeholders noted that there is diversity in practice about whether certain considerations represent service conditions or performance conditions, particularly when the conditions are contingent upon customer purchases.
ASU 2025-04 revises the definition of a performance condition for share-based consideration payable to a customer to include conditions based on volume, monetary amount, or timing of a customer’s purchases from the entity. Furthermore, ASU 2025-04 eliminates the election to account for forfeitures as they occur for share-based consideration payable to a customer when the consideration is based on a service condition. Therefore, the entity would be required to estimate forfeitures that are expected to occur for share-based consideration payable to a customer. ASU 2025-04 improves the decision usefulness of the financial statements and no longer delays the revenue recognition when an entity grants awards that are not expected to vest.
ASU 2025-04 is effective for annual reporting periods beginning after December 15, 2026, and early adoption is permitted. The amendment can be applied either on a modified retrospective or retrospective basis. If a modified retrospective method is adopted, the cumulative-effect adjustments related to all share-based consideration payable to a customer are recognized in the opening balance of retained earnings as of the beginning of the period of adoption. If a retrospective basis is adopted, the entity should recast comparative periods and recognize a cumulative-effect adjustment to the opening balance of retained earnings as of the earliest period presented.
The full text of the ASU 2025-04 can be found here.
Published: 06/03/2025
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