Perspectives

Considerations for derivative instruments under ASC 815

On the Radar: Financial reporting for derivatives

What is an embedded derivative? How are derivatives measured and recognized? While the guidance surrounding financial reporting for derivative instruments has not changed much in recent years, it’s still a complex issue that involves careful consideration. Familiarize yourself with these definitions and standards to ensure that you’re aligned with the requirements outlined in ASC 815.

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Although the guidance on accounting for derivatives has not changed significantly in recent years, derivative accounting continues to be one of the most complex areas of US GAAP. ASC 815 prescribes the guidance on instruments and contracts that meet the definition of a derivative. Some instruments and contracts that meet this definition are eligible for a scope exception, while others that do not meet the definition of a derivative in their entirety must still be evaluated to determine whether they contain embedded derivatives that would be within the scope of ASC 815. In addition, some derivatives are designated in a qualified hedging relationship and eligible for specialized hedge accounting (see Deloitte’s Roadmap Hedge Accounting for further information on this topic.)

On the Radar: Derivatives

Financial reporting considerations

Standard-setting activity

Sustainability-linked debt instruments

Entities that seek to demonstrate their corporate social responsibility may issue debt instruments whose payment terms vary depending on specified environmental factors (sometimes also referred to as sustainability factors). The inclusion of such features in debt instruments has become more common over the past several years as investors, credit rating agencies, lenders, regulators, policy makers, and other interested parties have increasingly focused on environmental, social, and governance (ESG) matters. Holders and issuers of sustainability-linked debt instruments must evaluate whether such arrangements contain an embedded feature or features that must be separately accounted for as a derivative under ASC 815-15. Given the wide variety of environmentally linked terms and the evolving nature of these instruments, entities are strongly encouraged to discuss their accounting analyses with their advisers. It is possible that the FASB’s project on derivative scope refinements (discussed above) could change the application of guidance that is relevant to these types of instruments and features, but no final standard has been released to date.

Continue your derivatives learning

Deloitte’s Roadmap Derivatives provides a comprehensive discussion of the identification, classification, measurement, and presentation and disclosure of derivative instruments, including embedded derivatives. For further guidance on the application of hedge accounting to a qualified hedging relationship, see Deloitte’s Roadmap Hedge Accounting.

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