FASB ASU on share-based consideration to a customer

The guidance for share-based consideration payable to a customer requires revenue in the contract with the customer to be reduced by the grant-date fair value of such consideration, unless the consideration is a fair-value payment for a distinct good or service. The share-based consideration is measured and classified under ASC 718 and then recognized as a reduction of revenue in the same manner as if the payment was made in cash. When the share-based consideration includes vesting conditions, the type of condition (service versus performance) can significantly affect the timing and amounts of revenue recognized depending on an entity’s forfeiture policy. However, there is diversity in how entities interpret whether such an award contains a performance condition or a service condition. 

The ASU makes three important changes that affect share-based consideration granted to a customer:

• Revises the definition of performance condition: The ASU broadens the master glossary definition to explicitly include conditions based on a volume or monetary amount of purchases. 
• Eliminates the forfeitures policy election for awards granted to customers: The ASU eliminates the policy election to recognize forfeitures as incurred (instead of estimating forfeitures) for share-based consideration granted to customers.
• Clarifies the applicability of the variable consideration constraint: The ASU clarifies that the variable consideration constraint in ASC 606 should not be applied to share-based consideration payable to a customer.