New FASB proposal targets share-based payment inconsistencies
The FASB proposed on Sept. 30, 2024, to amend the accounting rules governing share-based payments to customers, seeking to bring clarity to a murky area of financial reporting.
The proposal, which was issued to solicit public comment, aims to tackle the confusion surrounding the accounting for share-based consideration payable to customers, such as warrants and other equity instruments. These instruments are often used as incentives for customers to purchase goods or services, but their accounting treatment has been a source of controversy.
Under current rules, companies have been allowed to interpret the accounting treatment of these instruments in different ways, leading to inconsistent financial reporting. The FASB's proposal seeks to put an end to this inconsistency, providing a clearer framework for companies to follow.
At the heart of the proposal is a revised definition of "performance condition," which would explicitly include conditions based on customer purchases. This change would bring the accounting treatment of these instruments more in line with the revenue recognition rules outlined in Topic 606, Revenue from Contracts with Customers.
The proposal also would change how companies account for "forfeitures," which happen when someone doesn't meet the conditions to receive a share-based payment. Currently, companies can choose to account for forfeitures as they happen, but the proposal would require them to estimate forfeitures instead. This change should help prevent delays in recognizing revenue and improve the accuracy of estimates for transaction prices.
Furthermore, the FASB's proposal would clear up confusion around "variable consideration," which refers to situations where the amount of money a company receives from a customer is uncertain or depends on a future event. The proposal makes it clear that special rules for handling this uncertainty in revenue recognition (outlined in Topic 606) don't apply to share-based payments made to customers. This clarification will help reduce confusion and provide more certainty in financial reporting.
If finalized, the proposed changes would be applicable on a modified retrospective or retrospective basis, with the effective date to be determined after considering stakeholder feedback.
The FASB released the Provisions under 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, seeking feedback on whether the proposed changes would enhance the clarity, effectiveness, and accuracy of financial reporting.
The public comment period is open until Nov. 14.
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