FASB issues ASU on derivatives scope refinements

The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update 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 (ASU 2025-07 or the ASU).

The ASU introduces two sets of amendments designed to reduce complexity and diversity in practice:

• Derivatives scope refinements that expand an existing scope exception to exclude certain contracts from derivative accounting.
• Clarification that Topic 606 governs the accounting for share-based noncash consideration received from a customer. This means such consideration is accounted for under Topic 606 unless and until the right to receive or retain it becomes unconditional, at which point other generally accepted accounting principles (GAAP) may apply.

Background

Stakeholders raised concerns that the definition of a derivative in Topic 815 is applied too broadly to contracts whose variables are tied to the operations or activities of one of the parties to the contract. Examples include ESG-linked bond provisions, research and development funding arrangements, and litigation funding arrangements. Stakeholders noted that accounting for these contracts as derivatives measured at fair value often does not provide decision-useful information and creates unnecessary cost and complexity.

Separately, diversity in practice has arisen regarding how to account for share-based noncash consideration received from a customer in exchange for goods or services. Questions centered on whether such instruments should be accounted for immediately under derivative or equity securities guidance, or only when the related performance obligations under Topic 606 are satisfied.

As discussed below, ASU 2025-07 responds to this feedback by refining scope and clarifying existing guidance.

Derivatives scope refinements

The amendments in ASU 2025-07 expand an existing scope exception under Topic 815 to exclude non-exchange-traded contracts with underlyings based on the operations or activities of one of the parties to the contract. As a result, more contracts and embedded features are expected to be excluded from the scope of Topic 815. However, the amended scope exception does not apply to:

• Variables based on market rates, market prices or market indexes
• Variables based on the price or performance of a financial asset or liability of a party to the contract
• Contracts (or features) involving the issuer’s own equity evaluated under Subtopic 815-40
• Call or put options on debt instruments

Share-based noncash consideration from a customer in a revenue contract

The amendments in ASU 2025-07 clarify that an entity should apply the guidance in Topic 606, including the guidance on noncash consideration in paragraphs 606-10-32-21 through 32-24, to a contract with share-based noncash consideration (e.g., shares, share options, warrants or other equity instruments) from a customer for the transfer of goods or services. The guidance in other GAAP (e.g., Topic 815 on derivatives and hedging and Topic 321 on equity securities) does not apply to share-based noncash consideration from a customer for the transfer of goods or services unless and until the entity’s right to receive or retain the share-based noncash consideration is unconditional under Topic 606.

Effective date and transition

The amendments are effective for all entities for annual reporting periods beginning after December 15, 2026, including interim periods within those annual periods. Early adoption is permitted.

Entities may apply the amendments either:

• Prospectively to new contracts entered into on or after the adoption date
• On a modified retrospective basis through a cumulative-effect adjustment to opening retained earnings at the start of the annual period of adoption for contracts existing at that time

For the issue related to derivatives scope refinements, if an entity applies the modified retrospective transition method upon adoption the entity may elect on an instrument-by-instrument basis to:

• Measure contracts previously accounted for as derivatives that are no longer accounted for as derivatives in their entirety under the amendments in ASU 2025-07 at fair value with changes in fair value recognized in earnings, and
• Stop applying the fair value option for contracts that contained embedded features that otherwise would have been bifurcated but are no longer accounted for as derivatives under the amendments in ASU 2025-07.

For the issue related to share-based noncash consideration from a customer, the option to apply the amendments prospectively also applies to contracts that are modified on or after the date of adoption that are accounted for as separate contracts in accordance with paragraph 606-10-25-12.