
The Financial Accounting Standards Board (FASB) has proposed an accounting standards update (ASU) focusing on two matters. One is "the application of derivative accounting to contracts with features based on the operations or activities of one of the parties to the contract," and the other on "diversity in accounting for a share-based payment from a customer that is consideration for the transfer of goods or services." The proposed ASU aims to respond to stakeholder feedback on these issues. FASB encourages stakeholders to review and provide input on the proposed ASU by Oct. 21.
With regard to scope of derivatives, FASB reported that "stakeholders noted challenges in applying guidance in FASB Accounting Standards Codification Topic 815, Derivatives and Hedging." This topic, FASB explained, "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 interpretation of the definition of a derivative, many types of contracts are evaluated and potentially accounted for as derivatives, including certain research and development funding arrangements and bonds in which interest payments may vary based on [environmental, social and governance]-linked metrics."
The section of the proposed ASU focusing on derivatives scope refinements would improve this area by excluding from derivative accounting certain contracts with underlyings that are based on the operations or activities of one of the parties to the contract, the regulatory agency explained. It would also change the predominant characteristics assessment applicable to certain contracts that are not traded on an exchange.
The proposed ASU 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.
The section of the proposed ASU focusing on scope clarification for a share-based payment from a customer in a revenue contract would clarify the applicability of Topic 606, Revenue from Contracts with Customers, and its interaction with other topics, in the accounting for share-based payments, such as warrants or shares, received from a customer that are consideration for the transfer of goods or services.
“The proposed ASU would provide investors with more comparable information and would reduce accounting complexity and related reporting costs for preparers and auditors,” the agency said in its announcement.
The proposed ASU includes information on how to submit comments.