IMA FRC comment letter response to proposed ASU on stock compensation

November 20, 2024

IMA’s Financial Reporting Committee (FRC or Committee) issued a comment letter to the Financial Accounting Standards Board’s (FASB) in response to the Proposed Accounting Standards Update (ASU), Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Clarifications to Share-Based Consideration Payable to a Customer (Proposed Update).

The Committee supports the Proposed Update, believing it will resolve the existing practice issues and produce more decision-useful information. The Committee provided responses to specific questions and suggestions.  Here is a summary:

Question 1: Do you agree with the amendments in this proposed Update that would incorporate performance targets based on customer purchases into the Master Glossary term performance condition for share-based consideration payable to a customer?

The FRC agrees with the proposed amendments and believes believe the revised definition of a performance condition should enhance the operability of the guidance and encompass the range of share-based payments that vest due to customer activity.

Question 2: In addition to customer purchases, do you agree with the proposed amendments that would incorporate performance targets based on purchases by parties that purchase the grantor’s goods or services (its customer’s customers) into the Master Glossary term performance condition?

The FRC agrees with the proposed amendments incorporating performance targets based on purchases by parties that buy the grantor's goods or services into the Master Glossary term performance condition. It also supplementally noted that there are circumstances where an entity may issue incentive payments to a customer’s customer based on purchases of goods and services that are not sold by the grantor entity.

Question 3: Do you agree with the proposed amendments that would remove the accounting policy election for forfeitures in paragraph 718-10-35-1D for share-based consideration payable to a customer that includes a service condition?

The FRC agrees with the proposed amendments to remove the accounting policy election for forfeitures in paragraph 718-10-35-1D for share-based consideration payable to a customer that includes a service condition. This change aligns the recognition of revenue with the economic substance of the arrangement by requiring entities to estimate forfeitures.

Question 4: Should grantors that have previously made an entity-wide policy election to estimate forfeitures for nonemployee share-based payment awards, including share-based payment awards granted to customers, be permitted to make a one-time change upon transition to account for forfeitures as they occur?

The FRC endorses allowing a one-time change for grantors to account for forfeitures as they occur. This flexibility enables entities that previously elected to estimate forfeitures to reassess this choice for other nonemployee share-based payment awards, aligning their accounting policies more closely with actual forfeiture occurrences, if desired.

Question 5: Are the proposed amendments that would clarify that the guidance in Topic 606 on constraining estimates of variable consideration does not apply to share-based consideration payable to a customer clear and operable?

The FRC agrees with the proposed amendments clarifying that the guidance in Topic 606 on constraining estimates of variable consideration does not apply to share-based consideration payable to a customer.

Question 6: Would the proposed amendments reduce diversity and improve the decision usefulness of a grantor’s revenue information?

The FRC believes the proposed amendments would reduce practice diversity and enhance the decision usefulness of a grantor's financial statements. By providing clear guidance on handling share-based consideration payable to a customer, the amendments will better align accounting practices with the economic substance of such arrangements, aiding stakeholders in making more informed decisions.