FASB Update: Project added to technical agenda to refine the scope of ASC Topic 815, Derivatives and Hedging.

The FASB Board Meeting on December 6, 2023, focused on a research project related to the definition of a derivative. The key points of discussion were:

1. Agenda Decision: The board considered whether to add a project to its technical agenda about the scope of Topic 815 on derivatives and hedging. This stemmed from feedback and comment letters on the June 2021 invitation for agenda consultation. The board unanimously agreed that such a project should be added to the technical agenda.
2. Stakeholder Feedback: Stakeholders had raised concerns that the current derivatives guidance in Topic 815 often captures transactions not originally intended to be accounted for as derivative instruments. This includes a broad range of agreements such as R&D funding arrangements, ESG-linked financial instruments, and litigation funding arrangements.
3. Derivative Definition and Application: The definition of a derivative includes three criteria, with a focus on the criterion that has led to many transactions falling under the derivative guidance. This criterion involves a derivative having an underlying and a notional or payment provision. The board discussed the scope and application of this criterion in various contexts.
4. Scope Exception Alternatives: Two alternatives were proposed to refine the scope of Topic 815:Alternative A: A characteristics-based scope exception, expanding the existing specified volumes sales scope exception to capture more arrangements.
5. Alternative B: Contract-specific solutions for each arrangement, with the board determining which specific arrangements to exclude from Topic 815.
6. Board's Consensus: The board generally supported Alternative A, emphasizing the need for guardrails to avoid overly broad application. This approach would address future arrangements with similar characteristics without additional standard setting.
7. Considerations for Refining the Predominant Characteristics Test: Finally, the board agreed to explore refining the test for contracts with multiple underlyings, where some qualify for a scope exception and others do not.

Overall, the meeting focused on addressing the complexities and potential inconsistencies in the current application of derivative accounting, with an aim to provide more clarity and better reflect the economic realities of various business transactions.