FASB proposes changes in scope of derivatives and shared-based payment rules

The Financial Accounting Standards Board issued a proposed accounting standards update to request public comments on possible changes to two of its standards.

The proposed ASU, released Tuesday, aims to respond to stakeholder feedback pertaining 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. 

Derivatives scope refinements

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

The proposed ASU would try to improve this area by excluding from derivative accounting certain contracts with “underlyings” 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 update is expected to reduce the cost and complexity of evaluating whether these contracts are derivatives, better portray the economics of those contracts in the financial statements, and reduce diversity in practice resulting from changing interpretations of the existing guidance, according to a FASB press release.

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 codification, in accounting for share-based payments, such as warrants or shares, received from a customer that are consideration for the transfer of goods or services.

FASB believes the proposed ASU would provide investors with more comparable information and reduce accounting complexity and related reporting costs for preparers and auditors. It’s asking its stakeholders to review and send input on the proposed ASU by Oct. 21, 2024.