The Financial Accounting Standards Board (FASB) has published an Accounting Standards Update (ASU) that addresses stakeholders’ concerns about (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 share-based noncash consideration from a customer that is consideration for the transfer of goods or services.
Issue 1: Derivatives Scope Refinements
During the FASB’s 2021 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 application of the definition of a derivative and changing business environment, many types of contracts are evaluated and potentially accounted for as derivatives. These contracts include (1) certain emerging transactions, such as bonds in which interest payments may vary based on certain performance metrics, and (2) certain longstanding transactions, such as research and development funding arrangements and litigation funding arrangements.
The ASU addresses these stakeholders’ concerns by adding a derivative scope exception for certain contracts with underlyings that are based on the operations or activities of one of the parties to the contract. This will (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 the broad application of the current guidance and changing business environment.
Issue 2: Scope Clarification for Share-Based Noncash Consideration from a Customer in a Revenue Contract
The ASU also clarifies the applicability of Topic 606, Revenue from Contracts with Customers, and its interaction with other Topics (including Topic 815 on derivatives and hedging and Topic 321 on equity securities), in the accounting for share-based noncash consideration (such as warrants or shares) received from a customer for the transfer of goods or services. This is expected to provide investors with more comparable information and reduce accounting complexity and related reporting costs for preparers and auditors.
The amendments in this ASU are effective for all entities for annual reporting periods beginning after Dec. 15, 2026, and interim reporting periods within those annual reporting periods. Early adoption is permitted.
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