Key insights
- ASU 2025-04 reduces inconsistency and tackles the confusion around how to account for share-based payments to customers by giving clear guidance on when to use performance or service conditions.
- ASC 606 now includes a clear definition of performance conditions, making it easier to tell them apart from service conditions and standardizing the metrics used for awards to customers and non-employees.
- Previously, companies could choose how to recognize forfeitures, leading to different practices. The ASU now provides clearer guidance to reduce differences in revenue recognition timing.
Keep your financial reporting compliant with new standards.
ASU 2025-04 is all about making the rules for share-based payments to customers clearer and more consistent.
It helps your company figure out when to apply performance or service conditions under ASC 606 and ASC 718, which should make financial reporting more comparable and useful.
Why ASU 2025-04 matters for share-based payments to customers
- Brings clarity and consistency — The update aims to reduce confusion and variation in how companies account for share-based payments to customers under ASC 606 and ASC 718.
- Aligns with revenue guidance — Under ASC 606, payments to customers are generally treated as a reduction of revenue — unless they’re for a distinct good or service.
- Reduces inconsistent reporting — Previously, companies differed in how they classified vesting conditions (service vs. performance), leading to inconsistent revenue patterns.
- Clarifies vesting conditions — ASC 718 now provides clearer guidance on how to determine and account for service-based (time) vs. performance-based (metrics) vesting conditions, which directly impacts when revenue is recognized.
- Improves comparability — By standardizing how forfeitures and vesting expectations are handled, the update helps enable more consistent reporting of key metrics like revenue, margins, and earnings per share across companies.
This update helps reduce the wide range of accounting practices companies were using. By providing clearer rules, it makes financial reporting more consistent, comparable, and easier to apply when share-based payments are part of a sale.
Accounting treatments before and after ASU 2025-04
Comparability across reporting entities
Before the update, there was diversity in practice among issuers with respect to electing the option to recognize forfeiture of awards.
ASU 2025-04 introduces clearer guidance, helping companies apply the rules more consistently — making financial statements easier to compare across the board.
Performance conditions
Performance conditions under ASC 606 were not defined. This resulted in the deferral of reduced revenues as reporting entities were using service conditions as a metric to estimate the revenue reduction. Service conditions typically apply to employment arrangements.
The new ASU amends the glossary for ASC 606 to include a definition of the term performance condition — which applies to almost all situations where share-based consideration is awarded to a customer.
This updated definition provides clear guidance on metrics used for awards issued in connection with awards issued to customers and other non-employees, helping reduce guesswork and improve timing of revenue recognition.
Forfeitures
Issuers of stock-based awards to customers had the option to recognize them as estimated over the life of the award or recognize them as incurred.
Companies now have more structured options for handling forfeitures under service-based conditions (e.g., a customer staying under contract for a year). This flexibility helps reduce delays and inconsistencies in revenue reporting.
How CLA can help with share-based consideration
Our accounting professionals can help you understand the nuances of ASU 2025-04, including contract analysis and transitional accounting, to support effective compliance with the new guidance.