New guidance for share-based compensation performance conditions

Scope

This Accounting Standards Update (ASU) applies to all entities that issue share-based consideration to customers that are within the scope of ASC 606.

Background

Many entities issue equity instruments, such as stock, options, or warrants, to customers as incentives to purchase a specified volume or dollar amount of goods or services. Under existing guidance, these arrangements are treated as consideration payable to a customer, and generally reduce revenue unless they represent payment for a distinct good or service. However, there was uncertainty on how to apply Topic 718, particularly vesting conditions and forfeiture policies.

Main provisions

1. Revised definition of a performance condition: 

The ASU expands the Topic 718 definition of a performance condition to explicitly include conditions based on a customer’s purchase volume or monetary amount. As a result, many customer‑purchase‑based vesting conditions will now be treated as performance conditions rather than service conditions.

2. Elimination of the forfeiture policy election:

For share‑based consideration granted to customers, entities may no longer elect to account for forfeitures as they occur. Instead, forfeitures must be estimated, aligning the recognition of revenue reductions more closely with expected outcomes and reducing delays in revenue recognition.

3. Clarification related to the variable consideration constraint:

The ASU clarifies that the variable consideration constraint in Topic 606 does not apply to share‑based consideration payable to a customer. Measurement and classification remain governed by Topic 718, with the resulting amount presented as a reduction of revenue under Topic 606.

Why it matters

By aligning the accounting more closely with the economics of customer incentive programs, ASU 2025‑04 is expected to improve comparability, reduce delayed revenue recognition, and simplify application of the guidance for entities using equity‑based customer incentives.

Effective dates

These amendments are effective for all fiscal years beginning after 15 December 2026. Early adoption is permitted. Entities will need to evaluate affected customer incentive arrangements and update estimates, policies, and disclosures accordingly.

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Jeffrey A. Ford is a Founding & Managing Partner at Grossman Yanak & Ford LLP. He has over 30 years of experience, focused in audit and assurance, M&A transactions, and technology consulting. Jeff has served on a variety of ownership groups including public and private companies, private equity groups and international investors.