Dive Brief:

• The Financial Accounting Standards Board issued a finalized guidance update to generally accepted accounting principles clarifying the timing of revenue recognition related to certain warrants or equity instruments issued by companies to customers, according to a Thursday press release from the U.S. standard setter. The new rules will be effective for annual reporting periods after Dec. 15, 2026. 
• The share-based financial instruments are sometimes granted by businesses — typically midsize or small-cap firms rather than large public companies — in order to incentivize their customers to buy goods and services. The instruments act like a rebate or payment to be received at a later date.
• The changes address issues stemming from existing guidance in Topic 606, Revenue from Contracts with Customers, and Topic 718, Compensation — Stock Compensation and “clarify the requirements for share-based consideration payable to a customer that vests upon the customer purchasing a specified volume or monetary amount of goods and services from the entity,” the release states. 

Dive Insight:

At the heart of the issue is the question of how a company should be valuing the transaction’s price as related to warrants vesting. With the amendments, if a company grants instruments to a customer with strings attached to what must happen in order for the customer to get the award, the company has to estimate how likely it is to get the award. 

“Under the amendments in this update, revenue recognition will no longer be delayed when an entity grants awards that are not expected to vest,” the newly published guidance states.

“This is expected to result in estimates of the transaction price that better reflect the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer and, therefore, more decision-useful financial reporting,” according to the guidance. 

As part of the changes, the amendments refine the definition of a “performance condition” that would trigger the award, which are typically related to a monetary threshold paid by the customer or the timing of their purchases, according to a Thursday brief on the changes from the Big Four accounting firm PwC.

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

The need for the change grew out of concern that stakeholders were taking a range of approaches to account for the warrants, according to the proposal. 

“Stakeholders indicated that this delay in revenue recognition can diminish the decision usefulness of a grantor’s revenue information,” according to the accounting standards update.

“For example, revenue may be recognized upon the forfeiture of warrants that were not expected to vest,” according to the update. “Therefore, revenue may be recognized several reporting periods after the grantor has satisfied the related performance obligation(s), even if during that time there has been no change in the likelihood that the award will vest.”