Article

US Companies Face New Accounting Standards for Customer Incentives

Jun 11, 2025

U.S. companies now have new accounting rules for share-based customer incentives under a standard issued by the FASB, aimed at curbing inconsistencies and boosting transparency in financial reporting.

The new standard, Accounting Standards Update (ASU) No. 2025-04, Compensation-Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Clarifications to Share-Based Consideration Payable to a Customer, was issued on May 15, 2025, to provide clearer guidelines on how companies should account for shares or stock they give to customers as an incentive to buy their products or services.

The changes, which take effect for annual financial reports starting after December 15, 2026, impact revenue recognition and investor comparisons. Companies can choose to adopt the standard early, can apply it to all their past financial records, or just to the current and future records, the rules state.

The FASB "did a great job of listening to suggestions from comment letter writers, ultimately crafting an operable set of guidelines that are straightforward to apply and provide better, more meaningful information to financial statement users," said Scott Ehrlich, President of Mind the GAAP, LLC, on May 15.

Prior to the change, rules that govern how companies account for payments made to customers in the form of shares have been unclear, leading to inconsistent accounting practices. Specifically, the definitions of "performance condition" and "service condition" did not provide clear guidance on how to handle certain types of payments, such as those made to customers or parties that buy goods or services from a company's customers.

This lack of clarity has resulted in the seller recognizing little to no "or sometimes even negative revenue" during the initial sales of goods and services to the customer, Ehrlich explained. "Worse yet, if the purchase target was not ultimately achieved by the end of the incentive period, the seller would suddenly recognize a windfall of revenue from reversing its prior assumption that the share-based incentives would be issued in full," he said.

Payments Made in the Form of Shares

Under the changes, the definition of "performance condition" was revised to include conditions based on the volume or monetary amount of a customer's purchases, as well as performance targets based on purchases made by other parties that buy goods or services from the company's customers. This change is aimed at helping companies better determine whether a payment to a customer is subject to a performance condition or a service condition.

Additionally, the amendments eliminate the option for companies to delay accounting for forfeitures, which occur when a customer does not meet the conditions to receive a payment. Instead, companies are required to estimate the number of forfeitures expected to occur, providing a more accurate picture of their financial obligations.

The changes also clarify that share-based consideration payable to a customer is subject to the same accounting rules as share-based payment arrangements, but with some key differences. For example, the customer does not need to be a supplier of goods or services to the company. Furthermore, the new amendments make it clear that companies should not apply certain revenue recognition rules to share-based consideration payable to a customer. This means that companies are required to assess the probability of an award vesting using specific guidance, rather than relying on more general revenue recognition rules.

Improving Accuracy in Financial Reports

The FASB said the overall goal of these changes is to improve the accuracy and usefulness of a company's financial statements, reduce inconsistencies in accounting practices, and provide more decision-useful information to investors and other stakeholders.

By requiring companies to estimate forfeitures and recognize revenue in a more timely manner, the changes will help to ensure that financial statements better reflect the true value of share-based payments made to customers, according to the rules' text. This, in turn, will provide investors and analysts with a clearer understanding of a company's financial performance, enabling them to make more informed decisions.

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