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Understanding ASU 2025-04: New Guidance for Share-Based Consideration Payable to a Customer

Has your organization evaluated the implications of the new FASB guidance for share-based consideration payable to a customer?

In May 2025, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU 2025-04”) with the goal of reducing diversity in practice with regard to accounting treatment for share-based consideration payable to a customer when entered into in connection with the sale of goods or services.  To incentivize a customer to purchase goods or services from a company, the company may issue consideration to the customer, which may be in the form of a discount or other cash consideration.  However, companies may issue non-cash consideration, such as stock options or warrants. Accounting for the sale of goods or services is accounted for under ASC 606 – Revenue Recognition, while accounting for share-based consideration is accounted for under ASC 718 – Share-based Compensation.  ASU 2025-04 aims to enhance the decision usefulness of financial reporting and improve the consistent application of guidance for transactions involving share-based consideration.

Current Guidance

When a share-based compensation arrangement is entered into in conjunction with a revenue-generating contract, ASU 2019-08, Compensation  – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606), the guidance states that a company must use ASC 718 – Stock Compensation to measure and classify the share-based consideration payable to a customer. Under ASC 606, the value of this consideration payable to a customer is recorded as a reduction of the transaction price, or an adjustment to revenue. However, if the consideration payable to the customer is for a distinct good or service, the company would adjust the transaction price and account for the consideration payable as an expense. 

Share-based consideration payable to a customer may include vesting conditions, such as a requirement for a customer to purchase a specified volume of goods or services. In such cases, a company must determine whether this vesting condition is a service or performance-based award, as this classification can significantly impact the timing of revenue recognition, upon which, in some cases, revenue recognition would be delayed. Under current guidance, purchases made by a customer or by a third party purchasing the company’s goods or services are not defined as a service or performance condition. 

Stakeholders have expressed concern that delayed revenue recognition may diminish the decision usefulness of the company’s revenue information, as revenue would be recognized in periods after the performance obligations have been completed. Therefore, differences in conclusions regarding the treatment of share-based consideration payable to a customer included within a revenue-generating contract and accounting treatment for forfeitures have resulted in diversity in practice.    

The Amendments

• Enhanced Definition of Performance Conditions: ASU 2025-04 updates the master glossary definition of performance condition for share-based consideration payable to a customer. The revised definition now includes conditions based on the volume or monetary value of a customer’s purchases—or potential purchases—of goods or services. It also encompasses performance targets tied to purchases made by third parties. Importantly, this definition is not to be applied by analogy to awards granted to employees or non-employees in exchange for goods or services under ASC 718. This clarification is expected to lead to more consistent conclusions that such awards represent performance conditions, thereby improving consistency in the treatment of forfeitures and the timing of revenue recognition.
• Removed Forfeitures Policy Election: ASU 2025-04 notes for companies that conclude the share-based consideration payable to a customer vests upon a service condition. ASU 2025-04 also eliminated the policy election to account for forfeitures when they occur. Therefore, companies will be required to estimate forfeitures expected to occur and recognize revenue accordingly. 
• Clarification on Revenue Recognition: ASU 2025-05 clarifies that a company should not apply ASC 606 to constraining estimates of variable consideration on share-based consideration payable to a customer, which is measured at the grant-date fair value.  Rather, a company is required to assess the probability that the award will vest under ASC 718.

Adoption Options

All companies are required to adopt the amendments in ASU 2025-04 with annual reporting periods beginning after December 15, 2026, and the interim periods within those annual reporting periods.  Companies can elect to adopt ASU 2025-04 either on a modified retrospective or a retrospective basis. Early adoption is permitted.

• If a company elects to adopt ASU 2025-04 on a modified retrospective basis, the company will recognize the cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the year of adoption. 
• If applied on a retrospective basis, prior periods will be recast and the company will recognize a cumulative-effect adjustment to the opening balance of retained earnings at the earliest period presented. 

How Centri Can Help

At Centri, our team of technical accounting and valuation experts is well-equipped to guide your business through the complexities of ASU 2025-04. We offer comprehensive support throughout the transaction lifecycle, including:

• Serving as the central point of contact for the working group, ensuring that responsibilities are clearly defined.

• Assisting with the preparation of technical accounting memorandum(s) to support the adoption of ASU 2025-04.
• Assist with the preparation of footnote disclosure and disclosure tables.

Whether you’re evaluating the impact on prior transactions or contemplating changes to future contracts that include non-cash consideration payable to a customer, Centri is here to help you apply the new guidance with confidence. ﷟Contact us to learn how we can help your business succeed.

Blake Roberts

Partner | Technical Accounting Practice Leader | CPA

Blake is a Partner at Centri Business Consulting and the leader of the firm’s Technical Accounting Practice. He has more than 18 years of public accounting experience. View Blake Roberts's Full Bio

Michael Kirchner

Managing Director | CPA, MBA

Mike is a Managing Director at Centri Business Consulting. He has more than 19 years of accounting, advisory, and audit experience. View Michael Kirchner's Full Bio