FASB seeks public comment on Proposed Derivatives Scope Refinements

FASB has published a proposed Accounting Standards Update (ASU) to address stakeholder feedback related to (1) the application of derivative accounting to contracts with features based on the operations or activities of one of the parties to the contract, and (2) the diversity in accounting for a share-based payment from a customer that is consideration for the transfer of goods or services.  

Issue 1: Derivatives Scope Refinements 

During the FASB’s recent agenda consultation and other outreach, stakeholders noted challenges in applying guidance in FASB Accounting Standards Codification Topic 815, Derivatives and Hedging. Topic 815 establishes accounting requirements for contracts that meet the definition of a derivative based on certain characteristics and are not otherwise excluded from its scope. Because of the broad and evolving interpretation of the definition of a derivative, many types of contracts are evaluated and potentially accounted for as derivatives, including certain research and development funding arrangements and bonds in which interest payments may vary based on ESG-linked metrics. 

The proposed ASU would improve this area by excluding from derivative accounting certain contracts with underlyings that are based on the operations or activities of one of the parties to the contract. It would also change the predominant characteristics assessment applicable to certain contracts that are not traded on an exchange. 

The proposed ASU is expected to (1) reduce the cost and complexity of evaluating whether these contracts are derivatives, (2) better portray the economics of those contracts in the financial statements and (3) reduce diversity in practice resulting from changing interpretations of the existing guidance. 

Issue 2: Scope Clarification for a Share-Based Payment from a Customer in a Revenue Contract 

The proposed ASU would also clarify the applicability of Topic 606, Revenue from Contracts with Customers, and its interaction with other Topics, in the accounting for share-based payments, such as warrants or shares, received from a customer that are consideration for the transfer of goods or services. The proposed ASU would provide investors with more comparable information and would reduce accounting complexity and related reporting costs for preparers and auditors. 

Stakeholders are encouraged to review and provide input on the proposed ASU by Oct. 21, 2024.