The update is regarding the scope of the rules previously called Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (topic 606).

The changes are a priority project that FASB undertook after hearing in 2021 that stakeholders found it difficult to determine what transactions were seen as derivatives under the existing accounting rules, CFO Dive reports. 

The manner in which current derivative standards are written has led to “scope creep,” with some firms treating too many financial instruments as derivatives, FASB Chair Richard Jones noted during the April 9 meeting. This has obfuscated what the real economic picture of some financial situations is, Jones noted

“Since 1998 we’ve been fighting this view that more and more things go into the scope,” Jones stated. "The natural tendency we’re going to face in practice is people are going to continually try to pull things into the scope of this guidance…and what we’re trying to do as a board is really draw a line and say, ‘No, this stuff doesn’t belong.’” 

According to the update, the derivative accounting rules will not be applicable to certain ESG-linked financial instruments, research and development and litigation funding arrangements, CFO Dive says.

Prominent companies such as auto manufacturer Ford Motor Co. and pharmaceutical behemoth Eli Lilly supported the proposal during its comment period.

“We support this proposed ASU in relation to research and development funding arrangements in our industry, where payments are contingent upon development milestones or regulatory approvals, as we believe there is existing U.S. GAAP guidance that better aligns with the nature of these transactions,” Donald Zakrowski, Eli Lilly’s chief accounting officer stated in a letter to the board dated Oct. 21, 2024.

“The scope exception helps to reduce the burden of documentation related to such transactions and additionally prevents the broad definition of a derivative from overreaching beyond what was intended by the Board in its development,” Zakrowski added. 

The large accounting firms also commented on the proposal including KPMG and BDO USA.

KPMG noted in its Oct. 21 letter that it encourages "the Board to consider a separate standard-setting project to address the accounting for certain arrangements that would be excluded from the scope of Topic 815 after the adoption of this proposed [Accounting Standards Update]. However, we believe that a final ASU on the scope of Topic 815 could be issued prior to completion of such a project."

In terms of the scope clarification for a share-based payment from a customer in a revenue contract, KPMG recommended that "the proposed guidance be amended to further clarify when to apply the guidance in Topic 321 or Topic 815 to the noncash consideration (share-based payment) from a customer for the transfer of goods or services in a revenue contract."

Meanwhile, the Oct. 21 BDO letter said, "Our suggestions for the proposed amendments in Topic 815 include expanding the derivative scope exception by adding the term “achieving a production target” to capture certain lending activities based on loan production volumes, as well as considering alternatives to the proposed predominant characteristics assessment. We believe the Board’s proposed requirement to analyze future changes in fair value could lead to costly and complex analyses when applied to common embedded features."