Derivatives scope refinements and clarifications to share-based consideration

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 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.

To address stakeholders’ concerns and to reduce diversity in practice, the amendments clarify the application of derivative accounting to contracts with features based on the operations or activities of one of the parties to a contract. In addition, the amendments clarify the scope and accounting for share-based noncash consideration from a customer that’s consideration for the transfer of goods or services.

The derivative scope refinements apply to all entities that enter into nonexchange-traded contracts with variables (referred to as underlyings) based on operations or activities specific to one of the parties to the contract.

The scope clarifications to share-based noncash consideration apply to all entities that enter into contracts to receive share-based noncash consideration from a customer for the transfer of goods or services.

Derivatives scope refinements

Feedback received during the 2021 FASB Invitation to Comment noted challenges in applying the guidance in Topic 815, Derivatives and Hedging, and indicated that the definition of a derivative is too broad.

Because of the broad application of the definition of a derivative, many types of contracts are being evaluated and potentially accounted for as derivatives, including:

• Certain emerging transactions, such as bonds in which interest payments may vary based on environmental, social, and governance (ESG)-linked metrics.
• Certain longstanding transactions, such as research and development funding arrangements and litigation funding arrangements.