Coming accounting rule on share-based payments to customers, could boost revenue for tech firms

The FASB is poised to unveil new accounting rules that could boost revenue for technology companies, including those in the Software as a Service (SaaS) sector, by streamlining the treatment of share-based payments to customers

The changes, expected to be issued in the second quarter of this year, could have a positive earnings impact on companies that issue warrants to customers, according to March 6, 2025, discussions by the Private Company Council (PCC), a group of board advisers to the private sector.

The new rules will make it easier for companies to recognize revenue and will likely lead to increased revenue for tech firms, said Michael Cheng, a national professional practice partner at Frazier & Deeter LLC. "I think this would be very helpful. It makes it a lot easier. I think they'll have more revenue too, which will make them happier, at least the CFOs that I talked to," he said.

There could be a strategic rationale behind granting share-based consideration, the discussions revealed.

"Presumably, the reason you would do this is you want your customer to buy from you and be an owner in your company," said Jere Shawver, Chair of the PCC and CEO at Baker Tilly US, LLP. "And so the fact that you would actually sell something to them and get no revenue doesn't seem to make any sense in creating value."

Similarly, Holly Nelson, CEO at Key Advisory Services, noted that while estimating for returns and tracking them adds complexity, the amendments would ultimately aid in revenue recognition.

Proposal received broad support

The FASB released Proposed Accounting Standards Update(ASU) No. 2024-ED300, Compensation-Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Clarifications to Share-Based Consideration Payable to a Customer, last year for public comment to clarify how companies should handle rewards given to customers in the form of stock or other equity-based incentives as part of a sale.

Currently, accountants struggle to define and classify these rewards, which can include shares, warrants, and other stock-based payments. The proposal was developed address this issue, to provide clear guidelines on how to handle these types of transactions.

The new rules will clarify that rewards tied to customer purchases are considered performance-based incentives. This means that companies will need to estimate the likelihood that customers will actually receive the rewards, rather than assuming they will definitely get them. This change will help companies provide a more accurate picture of their financial situation and make it easier for investors and regulators to understand their business dealings.

The proposal received broad support, with the FASB affirming the key proposals and planning for the amendments to apply to all entities for annual reporting periods beginning after Dec. 15, 2026. This timeline allows companies ample time to adopt the changes, particularly benefiting private companies that typically grant these awards.

More judgement required?

Douglas Uhl, director of corporate accounting policy at Chick-fil-A, Inc., who observed that current practices can be inconsistent, noted that the new standard would tie revenue recognition to the underlying transaction economics, but require companies to estimate the likelihood of employees meeting award conditions.

"So that will increase some level of effort from the grantor to make those judgments and estimations," Uhl said, asking if his understanding was correct and whether private companies saw the added effort as overly burdensome.

The FASB staff confirmed that the proposed change would require companies to estimate the likelihood of employees meeting award conditions, which could involve more complex judgments. However, they said some entities already make such estimates and did not express significant cost concerns during outreach.

The cost impact should be limited, as these transactions are typically one-off and not widespread, staff added.

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