FASB Votes to Finalize Accounting Rules on Derivatives, Share-Based Payments

The FASB on April 9, 2025, unanimously voted to finalize proposed changes to refine derivative accounting and clarify how revenue rules apply when a customer pays a company in shares, instead of cash, for goods or services.

The changes, which will take effect for annual reporting periods beginning after December 15, 2026, are expected to result in more intuitive accounting that aligns better with the economics of transactions. The board permitted early adoption of the new rules.

"We actually had poor economic representation of what was happening through these transactions. I think that's why it resonated so much with investors as well as preparers," noted FASB Chair Richard Jones. "It wasn't 'I don't just like the accounting outcome', it was 'it doesn't reflect the economics of my transactions'."

The proposal, Accounting Standards Update (ASU) No. 2024-ED100, Derivatives and Hedging (Topic 815) and Revenue from Contract with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for a Share-Based Payment from a Customer in a Revenue Contract, aims to address concerns about applying derivative accounting to contracts with features tied to a party's operations and to clarify the accounting for share-based payments from customers in exchange for goods or services.

The changes will prevent the misuse of certain accounting rules, ensuring they are applied in a way that makes sense for businesses, according to board discussions. Specifically, the rules will provide clarity on the application of Topic 606, Revenue from Contracts with Customers to share-based payments from customers, thereby reducing diversity in practice and promoting consistency in revenue contract accounting. This, in turn, would enhance comparability of financial information across different entities.

Further, companies would also benefit from cost savings, as they would no longer be required to apply derivative accounting to excluded arrangements, simplifying their accounting processes and reducing complexity, board members said.

"Ever since I joined the board, I've heard about over-application of derivative accounting and concerns that it was being applied to transactions beyond what the board's intent was," FASB member Christine Botosan said. "And so I'm glad that we are putting out a principle that will hopefully reign in some of that preference maybe that's out there for derivative accounting in situations where I don't think the board intended for derivative accounting to be applied."

Further Refinements

Board redeliberations on April 9 included:

• Derivative Scope Define Exceptions: The board affirmed the proposed amendments to add a derivative scope exception for contracts with variables based on operations or activities specific to one party.
• Exclusions from Scope Exceptions: The board deliberated on three options and ultimately decided to retain the existing exclusions in the proposed scope exception, while also expanding them to include contracts related to an entity's own equity and debt call/put options. This decision was driven by stakeholder input, which cautioned that including such contracts could introduce unnecessary complexity and inconsistencies with current guidelines. This approach aims to minimize judgment and operational burdens for entities.
• Predominant Characteristics Assessment: The board decided to retain the existing correlation assessment, rather than revising the proposed fair value assessment, due to concerns that changes could introduce unintended complexities and judgments that hadn't been thoroughly discussed with stakeholders. This decision preserves the current guidance, which utilizes both the predominant characteristics assessment and the correlation assessment to evaluate financial contracts, such as derivatives, maintaining stability and consistency in accounting practices.
• Share-Based Payments in Revenue Contracts: The board reaffirmed its stance on applying Topic 606 and other relevant guidelines to share-based payments received from customers in revenue contracts. To enhance clarity, the board supported staff recommendations to revise the proposal, ensuring that share-based payments are not prematurely subject to other topics before their variability is fully resolved under Topic 606. This includes complex scenarios where payments vest upon contingent events beyond performance obligations. The board also considered adding illustrative examples to facilitate understanding and approved a terminology change from "share-based payment" to "share-based non-cash consideration" to align with existing guidance and reduce scope confusion in Topic 606.
• Consequential Amendments: The board decided to make targeted amendments to Topics 815 (Derivatives and Hedging) and 321 (Investments-Equity Securities) to clarify that their guidance does not apply to share-based payments from customers until Topic 606 has been applied. The board chose not to amend other topics, deeming it unnecessary and impractical, but will include a general clarification that other topics, including Topics 815 and 321, should not be applied prematurely to share-based payments from customers, ensuring consistent application of Topic 606.
• Transition: The board agreed on a prospective transition approach with an option for modified retrospective application, with early adoption permitted for both annual and interim financial statements.

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