The FASB has issued an Exposure Draft for public comment that is intended to reduce diversity in practice related to share-based consideration payable to a customer in conjunction with selling goods or services.

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 who adopt the election to account for forfeitures as they occur could result in a delay in revenue recognition after the performance obligation had 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 consideration represents service conditions or performance conditions, particularly when the conditions are contingent upon customer purchases.

The Exposure Draft would revise 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, the Exposure Draft would eliminate 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. 

The effective date of the amendments in the Exposure Draft and whether early adoption will be permitted has not yet been determined. The Exposure Draft is proposed to be adopted on either a modified retrospective or retrospective basis. Under the modified retrospective basis, an entity would recognize a cumulative-effect adjustment to the opening balance of equity as of the beginning of the period of adoption and would account for all new grants issued to customer under the revised guidance. Under the retrospective method, a cumulative-effect adjustment would be recorded to equity as of the earliest period presented. 

The full text of the Exposure Draft can be found here.

Readers should not act upon information presented without individual professional consultation.