Core Summary

  • The Financial Accounting Standards Board (FASB) issued a news release on Thursday announcing it has finalized an update to Generally Accepted Accounting Principles (GAAP) that clarifies when companies should recognize revenue related to certain warrants or equity instruments issued to customers. The new rules apply to annual reporting periods after December 15, 2026.
  • Such share-based financial instruments are typically granted by mid-sized or smaller companies, rather than large public companies, to incentivize customers to purchase their goods or services. These instruments are similar to rebates or payments that may be received at a later date.
  • The amendments address issues in existing guidance (Topic 606, "Revenue from Contracts with Customers," and Topic 718, "Compensation—Stock Compensation") and "clarify the recognition requirements for share-based consideration payable to a customer when the customer purchases a specified quantity or amount of goods or services from the entity," the news release said.

In-Depth Analysis

At the heart of the issue is how companies should evaluate the transaction price related to warrant vesting. Under the amendments, if a company grants a customer an instrument with conditions attached (i.e., the customer must meet certain conditions to receive the award), the company must estimate the likelihood that the award will ultimately vest.

"Under the amendments in this update, revenue recognition will no longer be deferred when an entity grants an award that is not expected to vest," the newly issued guidance states.

"This is expected to result in estimates of transaction price that better reflect the amount of consideration to which the entity expects to be entitled in exchange for transferring promised goods or services to customers, thereby resulting in more decision-useful financial reporting," the guidance states.

As part of the amendments, the new rules also refine the definition of "performance conditions" that trigger awards. Such conditions are typically related to monetary thresholds paid by customers or the timing of their purchases, Big Four accounting firm PwC said in a briefing issued Thursday.

"The expanded definition of performance conditions is expected to result in more vesting conditions being considered performance conditions for customer awards," PwC said in its report.

The change stems from concerns over stakeholders using a variety of different methods in accounting for warrants, as noted in the proposal.

"Stakeholders indicated that this deferral of revenue recognition could diminish the decision usefulness of revenue information for the grantor," the accounting standards update states.

"For example, revenue may be recognized when warrants that are not expected to vest are forfeited," the update states. "Thus, revenue may be recognized several reporting periods after the grantor has satisfied the related performance obligation, even if the likelihood of vesting has not changed during that period."