FASB update refines reporting scope for derivatives

FASB issued an Accounting Standards Update (ASU) responding to challenges in FASB ASC Topic 815, Derivatives and Hedging, and the clarifying related applicability of Topic 606, Revenue From Contracts With Customers.

According to a news release, the ASU addresses stakeholders’ concerns about 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 diversity in accounting for share-based noncash consideration from a customer that is consideration for the transfer of goods or services.

Topic 815 establishes accounting requirements for contracts that meet the definition of a derivative based on certain characteristics and are not otherwise excluded from its scope. In response to “the broad and evolving application of the definition of a derivative,” the ASU adds a derivative scope exception for certain contracts with underlying assets that are based on the operations or activities of one of the parties to the contract.

The ASU, according to FASB, aims 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 the broad application of the current guidance and changing business environment.

The ASU also addresses the interaction of Topic 606 with Topic 815 (as well as with Topic 321, Investments — Equity Securities) in the accounting for share-based noncash consideration (such as warrants or shares) received from a customer for the transfer of goods or services. The ASU aims to provide investors with more comparable information and to reduce accounting complexity and related reporting costs for preparers and auditors.

The amendments in the ASU, first proposed a year ago, are effective for annual reporting periods beginning after Dec. 15, 2026, and interim reporting periods within those annual reporting periods. Early adoption is permitted.

FASB proposes update to initial measurement of paid-in-kind dividends

FASB is seeking public comment through Oct. 27 on a proposed ASU that would provide authoritative guidance on how an issuer should initially measure paid-in-kind (PIK) dividends on equity-classified preferred stock.

According to a news release, current GAAP doesn’t address how an issuer should initially measure PIK dividends on equity-classified preferred stock, creating diversity in practice. The proposal would require that PIK dividends on equity-classified preferred stock be initially measured on the basis of the PIK dividend rate stated in the preferred stock agreement.

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.