Derivatives scope refinements (ASC 815) — FASB recognition and measurement project
On July 23, 2024, the FASB issued a proposed ASU that would (1) refine the scope of the guidance on derivatives in ASC 815 and (2) clarify the scope of the guidance on share-based payments from a customer in ASC 606. The proposed ASU is intended to address concerns about the application of derivative accounting to contracts that have features based on the operations or activities of one of the parties to the contract and to reduce diversity in the accounting for share-based payments in revenue contracts. Comments on the proposal are due by October 21, 2024.
The proposed ASU would refine the scope of ASC 815 to exclude certain “contracts with underlyings based on operations or activities specific to one of the parties to the contract.” Contracts that may qualify for this exception would include those in which the underlying is a business operation or an event such as obtaining regulatory approval or achieving specific business milestones. The proposal would also change how the “predominant characteristics” of a contract are assessed when a contract has multiple underlyings, some of which qualify for scope exceptions and some of which do not.
The proposed ASU would also clarify that when an entity has a right to receive a share-based payment from its customer in connection with a contract with that customer, the share-based payment would be accounted for as a noncash consideration in the scope of ASC 606. That is, the proposed ASU provides that “unless and until the share-based payment is recognized as an asset” in accordance with ASC 606, the right to receive the share-based payment would not be in the scope of ASC 815 or ASC 321. Reporting entities would look to ASC 321 or ASC 815, as applicable, for subsequent measurement, which might result in the recognition of an immediate gain or loss once that share-based payment is received.
The Board will discuss feedback on the proposed ASU at future meetings. Entities should monitor this project on derivatives scope refinements with their accounting advisers for any new developments. For more information about the proposed ASU, see Deloitte’s August 2, 2024, Heads Up.
Definition of a derivative — FASB research project
As of the date of this Roadmap, the FASB’s research agenda still includes a project on the definition of a derivative. The objective of the research project is to consider possible refinements to the scope of ASC 815, including potential application guidance specific to certain arrangements such as research and development funding arrangements and sustainability-linked financial instruments (see below). Although this remains a separate research agenda project, some of these objectives may be addressed by the derivatives scope refinements project discussed above.
Entities should monitor this research project with their accounting advisers for any new developments.