[Global Financial Insights] FFASB Share-Based Consideration Update

Editorial Team – [2025] 174 taxmann.com 822 (Article)

Global Financial Insights is a weekly feature for the Accounts and Audit Module subscribers of Taxmann.com. It provides you with the latest updates on financial reporting and auditing practices from across the globe. Here is this week’s financial update:-

1. FASB issues update to improve accounting for share-based consideration payable to a customer

On May 15, 2025, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2025-04, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606) – Clarifications to Share-Based Consideration Payable to a Customer, aimed at reducing diversity in practice and enhancing the decision usefulness and operability of financial reporting. This update builds upon the prior guidance introduced in ASU 2019-08, which required entities to apply the stock compensation framework (Topic 718) when measuring and classifying share-based consideration payable to customers.

The amendments clarify how companies should treat vesting conditions in share-based awards granted to customers. Under the revised guidance, performance conditions now explicitly include targets based on the customer’s (or the customer’s customer’s) purchases of goods or services. As a result, entities must assess the likelihood of such conditions being met and adjust revenue accordingly.

Significantly, the amendments specify that entities should no longer apply the revenue guidance on constraining estimates of variable consideration to these share-based payments. Instead, the probability that an award will vest must be assessed using only Topic 718.

The amendments take effect for annual periods beginning after December 15, 2026, with early adoption permitted. Transition can be applied either retrospectively or on a modified retrospective basis, with specific guidance on how to handle cumulative adjustments to retained earnings and the treatment of prior period estimates.

Source – Financial Accounting Standards Board

2. FRC strengthens support for SME audit awareness with new guidance

On 21 May 2025, the Financial Reporting Council (FRC) published additional materials to support its ongoing campaign aimed at enhancing awareness and understanding of audit in the small and medium-sized enterprise (SME) sector. These resources are designed to help SMEs appreciate the value and relevance of audit, even when not legally required.

The campaign, which began in March 2025, underscores the importance of audit as a tool for building trust in financial reporting. As explained in the FRC’s summary document What is an Audit?, an audit is a professional engagement in which an independent auditor provides reasonable assurance that an entity’s financial statements are free from material misstatement. This assurance boosts confidence among stakeholders by enhancing transparency and accountability.

The document further outlines key audit principles, independence, professional scepticism, and risk-based assessment, ensuring that audits are proportionate, focused, and credible across all sizes. For SMEs, these principles are particularly important as they provide insight into business risks and internal controls, which can help strengthen financial stewardship without interfering in management decisions.

In promoting these foundational concepts, the FRC aims to clarify misconceptions around audits and encourage more SMEs to consider the benefits, such as improved access to capital, enhanced business credibility, and stronger financial governance, even when an audit is not mandatory.

Source – Financial Reporting Council

3. IAASB publishes new FAQ on auditor reporting of going concern matters

On 14 May 2025, the International Auditing and Assurance Standards Board (IAASB) released a new staff publication titled Frequently Asked Questions – Reporting Going Concern Matters in the Auditor’s Report. This document supports the implementation of ISA 570 (Revised 2024), which becomes effective for audits of financial statements for periods beginning on or after December 15, 2026. The FAQ provides practical insights and clarifies expectations for how auditors should report on going concern matters under the revised standard.

The FAQ covers a range of topics central to auditor responsibilities and communication regarding going concern, including guidance on when and how to include a “Going Concern” or “Material Uncertainty Related to Going Concern (MURGC)” section in the auditor’s report. It addresses the conditions under which each section is applicable, describes how significant management judgments should be handled, and offers illustrative language to enhance auditor transparency. Furthermore, the document outlines how auditors should describe their evaluation of management’s assessment, deal with situations where adequate disclosure is missing, and determine when additional information or emphasis paragraphs may be appropriate.

This resource is especially valuable for auditors of listed entities or entities facing financial uncertainties, helping ensure users of financial statements receive clear, consistent, and decision-useful information regarding an entity’s ability to continue as a going concern.

Source – International Auditing and Assurance Standards Board

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