Considerations for derivative instruments under ASC 815

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.)

Updates to ASU 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. In addition, ASU 2020-06 removes some of the required conditions for equity classification. Contracts in an entity’s own equity that do not qualify as equity under ASC 815-40 must be accounted for at fair value, with changes in fair value recognized in earnings, irrespective of whether such contracts meet the definition of a derivative in ASC 815. For further details, see Deloitte’s August 5, 2020, Heads Up.

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For a comprehensive discussion of the disclosure requirements for these securities, see Deloitte’s Roadmap: Roadmap: Derivatives (May 2023) | DART - Deloitte Accounting Research Tool