Article
FASB revises scope for derivatives accounting and clarifies accounting for share-based noncash consideration
Nov. 12, 2025
The Financial Accounting Standards Board (FASB or the "Board") has issued Accounting Standards Update (ASU) No. 2025-07, Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for Share-Based Noncash Consideration from a Customer in a Revenue Contract, with the purpose of addressing stakeholder concerns around the application of derivative accounting under FASB Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging, to:
• Contracts with features tied to the operations or activities of a party to the contract (i.e., Issue 1); and
• Share-based payments received from a customer as noncash consideration for the transfer of goods or services (i.e., Issue 2).
The amended rules are intended to reduce the cost and complexity of evaluating these contracts as derivatives, improve the decision-usefulness of financial reporting, reduce diversity in practice that has resulted from the broad application of current guidance in a changing business environment and the accounting treatment for share-based noncash consideration from customers for the transfer of goods or services.
Background
In June 2021, the FASB issued an invitation to comment (ITC) No. 2021-004, Agenda Consultation, soliciting stakeholder feedback on its standard-setting agenda. Based on the ITC feedback received, stakeholders expressed concerns regarding the broad application of the definition of a derivative (and its related scope exceptions) to certain types of emerging and longstanding transactions (e.g., bonds with variable interest payments based on environmental, social, and governance (ESG)-linked metrics, research and development funding arrangements and litigation funding arrangements), potentially leading to contracts being evaluated and accounted for as derivatives.
Under existing United States generally accepted accounting principles (US GAAP), certain exceptions are provided for contracts not traded on an exchange. However, stakeholders expressed concerns regarding the complexity of applying these scope exceptions to certain contracts with variables (or "underlyings") that are based on the operations or activities of one of the parties to the contract, citing that the accounting for these contracts as derivatives measured at fair value when they are contingent on the performance of a party to the contract may result in less decision-useful information. The amended rules expand the scope of exception to include these types of non-exchange-traded contracts with underlyings, with certain limitations.
The Board received feedback from some stakeholders about unclear guidance regarding the recognition of share-based noncash consideration (e.g., shares, share options, warrants or other equity instruments) received from a customer in exchange for goods or services. For example, when an entity receives share-based noncash consideration from a customer contingent on satisfying performance obligations, some stakeholders indicated uncertainty about whether that consideration should (1) be recognized at contract inception as a derivative asset under FASB ASC 815 or an equity security under FASB ASC 321, Investments-Equity Securities, or (2) not be recognized until the entity satisfies its performance obligations under FASB ASC 606, Revenue from Contracts with Customers. In response, the Board decided to clarify the accounting for these transactions.
Amended guidance
The amendments in this ASU related to derivatives scope refinements apply to all entities that enter non-exchange-traded contracts with underlyings based on operations or activities specific to one of the parties to the contract. Following is a discussion of key takeaways:
ASU No. 2025-07 expands the scope exception at FASB ASC Paragraph 815-10-15-59, Derivatives and Hedging-Overall-Scope and Scope Exceptions-Certain Contracts That Are Not Traded on an Exchange, for certain contracts not traded on an exchange. Under the expanded scope exception, contracts with underlyings that are based on operations or activities specific to a party to the contract are excluded from the scope of Topic 815, including underlyings based on:
- Financial operating results (or related components) of one of the parties to the contract (e.g., EBITDA (earnings before interest, taxes, depreciation and amortization), net income or expenses).
- The occurrence or nonoccurrence of an event specific to the operations or activities of one of the parties to the contract (e.g., receiving regulatory approval, reaching a product development goal, achieving a successful litigation outcome or achieving (or failing to achieve) a greenhouse gas (GHG) emissions target).
For the purpose of applying the scope exceptions, the parties to the contract may include the parent, subsidiaries or other entities consolidated by the parent. Note that entities do not need to consider whether the outcomes are within their control when evaluating the above scope exceptions.
The scope exceptions listed above do not apply to:
- Underlyings based on a market rate, market price or market index
- Underlyings based on the price or performance of a financial asset or financial liability of one of the parties to the contract (e.g., rate of return or credit event)
- Contracts (or features) involving the issuer's own entity
- Call options and put options on debt instruments
If a contract contains multiple underlyings and some of the underlyings qualify for the scope exception while some do not, then the entity would need to evaluate the predominant characteristics of the contract under FASB ASC 815-10-15-60 to determine whether the contract (or the embedded feature) is subject to FASB ASC 815.
The amendments in this ASU related to scope clarification for share-based noncash consideration from a customer in a revenue contract apply to all entities that enter contracts to receive such consideration (e.g., shares, options or other equity instruments) from customers for the transfer of goods or services.
When accounting for such consideration, entities shall apply the guidance under FASB ASC 606. The guidance in other Topics (including FASB ASC 815 and 321) does not apply unless and until the entity's right to receive or retain the consideration is unconditional. The right to consideration may be deemed unconditional if the passage of time is required before payment of that consideration is due, and no other factor is required.
Effective dates and transitions
The amendments in this ASU are effective for all entities for annual reporting periods beginning after Dec. 15, 2026, and for interim reporting periods within those annual periods, with early adoption permitted.
Entities may apply the guidance:
- Prospectively to new contracts entered on or after the date of adoption; or
- On a modified retrospective basis, by recognizing a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the beginning of the annual reporting period of adoption for contracts existing as of that date. When using this approach:
If an entity had contracts or embedded features accounted for as derivatives that are no longer accounted for as such after applying the amended rules, the entity may optionally elect to apply the fair value option on an instrument-by-instrument basis and measure the contract in its entirety at fair value (with changes in fair value recognized in earnings) as of the beginning of the annual period of adoption.
For financial liabilities, entities should present separately in accumulated other comprehensive income the change in fair value of the liability resulting from a change in the instrument-specific credit risk.
If the entity previously elected the fair value option for contracts with embedded derivatives that no longer need to be bifurcated after applying the amended rules, the entity may optionally revoke the fair value option on an instrument-by-instrument basis and recognize a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate component of equity or net assets) as of the beginning of the annual period of adoption.
Entities may apply the guidance:
- Prospectively to new contracts entered into on or after the date of adoption, including modified contracts accounted for as separate contracts in accordance with FASB ASC 606-10-25-12, Revenue from Contracts with Customers-Overall-Recognition-Contract Modifications; or
- On a modified retrospective basis, recognizing a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the beginning of the annual reporting period of adoption for contracts existing as of that date.
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