ASU 2025-04: Share-Based Consideration Payable to Customers (effective 2027)

Some companies grant shares, warrants, or other equity instruments to customers – often to secure long-term purchase commitments or strategic partnerships. Under ASC 606, such awards are consideration payable to a customer and generally reduce the transaction price. In practice, the interaction between ASC 606 and the stock compensation guidance in ASC 718 has led to inconsistent application.

With ASU 2025-04, issued in May 2025, the Financial Accounting Standards Board (FASB) has clarified the rules.

What ASU 2025-04 Changes

1. Revenue reduction only when vesting is probable (ASC 606)

A company that grants a share-based award to a customer reduces the transaction price – and therefore revenue – only when the award is probable of vesting. This aligns the accounting with the core principle of ASC 606: revenue reflects the consideration the company expects to be entitled to.

2. Customer purchases as performance conditions (ASC 718)

The definition of a "performance condition" in ASC 718 now explicitly includes vesting conditions that are based on the customer's purchases – for example, an award that vests when the customer reaches a certain purchase volume.

3. No policy election for forfeitures

For share-based awards to customers with service conditions, the grantor can no longer account for forfeitures as they occur. Expected forfeitures must be estimated. The policy election remains available for awards to employees and to non-employees providing goods or services used in the grantor's own operations.

Why This Matters

Awards to customers are often tied to purchase targets. Before the clarification, companies took different views on whether these conditions were performance or service conditions, and on when to reduce revenue. This led to differences in the timing and amount of revenue reductions.

The new guidance creates a consistent approach: the probability of vesting drives whether and when revenue is reduced.

Effective Date and Transition

• Effective for all entities for annual periods beginning after December 15, 2026, including interim periods within those years. For calendar-year companies, this means January 1, 2027.

• Early adoption is permitted.

• Transition: Companies can choose between

• a modified retrospective approach, with a cumulative-effect adjustment to opening retained earnings at the beginning of the period of adoption, or

• a retrospective approach, recasting comparative periods with a cumulative-effect adjustment at the beginning of the earliest period presented. Where actual vesting outcomes are known, they are used for prior-period estimates.

Who Is Affected

The ASU is relevant for companies that:

• grant warrants or shares to customers in connection with supply or purchase agreements,

• use equity incentives in strategic customer partnerships,

• operate in industries where such arrangements are common, such as technology, life sciences, or energy.

What This Means for Revenue Accounting and Systems

Consideration payable to a customer is part of the transaction price and affects the allocation across performance obligations. For companies using SAP Revenue Accounting and Reporting, this means:

• the expected revenue reduction must be reflected in the transaction price, based on the probability of vesting,

• changes in the vesting assessment lead to changes in the transaction price and potentially to reallocation,

• the data – award terms, vesting conditions, probability assessments – often sits outside the SAP sales process and must be integrated.

Outlook: Further FASB Proposal on Consideration Payable to a Customer

On October 22, 2026, the FASB issued a proposed ASU that would clarify when payments made on behalf of a customer, or to a customer’s customer, fall under the guidance on consideration payable to a customer. The proposal also includes conforming amendments to ASC 718 for share-based consideration granted on a customer’s behalf. Comments are due by November 23, 2026; the effective date will be determined after the FASB has considered the feedback.

What Companies Should Do

• Identify all existing and planned share-based awards to customers.

• Assess vesting conditions, forfeiture estimates and the probability of vesting under the new guidance.

• Evaluate the impact on the timing of revenue reductions.

• Choose the transition approach and decide whether early adoption makes sense.

• Define how the information is captured and reflected in revenue accounting.

• Monitor the October 2026 proposal on payments made on behalf of customers.

Related Articles

• ASU 2025-05: Simplified Credit Loss Estimates for Receivables and Contract Assets

• The 5-Step Model of IFRS 15 / ASC 606 Explained for SAP Teams

• IFRS 15 vs. ASC 606: Where the Standards Still Differ

The Bottom Line

ASU 2025-04 brings clarity to a niche but material topic. Companies that grant equity to customers should assess the impact well before the effective date in 2027 – both on their accounting policy and on how the data flows into revenue accounting.

Questions about consideration payable to customers in SAP RAR? Talk to our experts.