FASB proposes changes to scope of derivative accounting

Key impacts

The proposed ASU would exclude from derivative accounting contracts that are not exchange traded with underlyings that are based on operations or activities of one of the parties to the contract. However, contracts based on certain underlyings, such as market rates or indexes, would not qualify for the proposed scope exception. This change is expected to result in more contracts and embedded features being excluded from the scope of ASC 815.  As a result of the proposed scope exclusions, entities would need to determine how to account for such contracts.   

Additionally, the proposal further clarifies that the revenue guidance in ASC 606 would apply when a share-based payment is consideration from a customer, in exchange for the transfer of goods or services. Under the noncash consideration guidance in ASC 606, a share-based payment is measured at fair value at contract inception and recognized as an asset when the right to receive or retain the share-based payment is no longer contingent on the satisfaction of a performance obligation. The guidance on derivatives (ASC 815) and equity securities (ASC 321) would not be applied unless and until the share-based payment is recognized as an asset under the revenue guidance in ASC 606.