ASU 2025-04 introduces targeted clarifications to improve consistency in accounting for share-based consideration payable to customers. This update addresses key areas such as performance condition definitions, forfeiture accounting, and the treatment of variable consideration under ASC 718.
ASU 2025-04 – Compensation – Stock Compensation (Topic 718) and Revenue from Contracts With Customers (Topic 606): Clarifications to Share-Based Consideration Payable to a Customer, becomes effective for all entities with fiscal years (including interim reporting periods within annual reporting periods) beginning on or after December 15, 2026 and early adoption is permitted. The ASU will be applied using either a modified retrospective approach or a full retrospective approach.
ASU 2025-04 adds specific language to the FASB Codification to revise the definition of a performance condition to clearly state that a performance condition may specifically include customer purchases, potential customer purchases, or purchases from a customer that flow through to the customer’s customer. This language, which is currently absent in the guidance, aims to reduce variability in practice by explicitly including these types of transactions within the definition of a performance condition.
Next, the ASU eliminates the existing policy election by which an entity may choose to recognize share award forfeitures as they are incurred. By eliminating this election, an entity must now estimate all future forfeitures upfront. This simplification of the guidance is intended to reduce variability in practice especially in scenarios where share awards may not ever expect to vest.
ASU 2025-04 also intends to simply real-world application of the existing accounting guidance by clearly stating that variable consideration constraints do not apply to share-based consideration payable to customers. Therefore, an entity may only apply the guidance under ASC Topic 718 to these types of transactions when estimating the amount of share-based consideration to be recognized.
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