IMA FRC comment letter response to proposed ASU on derivatives

October 28, 2024

IMA’s Financial Reporting Committee (FRC or Committee) issued a comment letter in response to the Financial Accounting Standards Board’s (FASB or Board) Proposed Accounting Standards Update, Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for a Share-Based Payment from a Customer in a Revenue Contract (Proposed Update).

The FRC applauded the Board for the Proposed Update and offered a few recommendations, below:

Issue 1: Derivatives Scope Refinements

The Committee is supportive of expanding the scope exceptions to derivative accounting for contracts with underlyings that are based on operations or activities specific to one of the parties to the contract. The Proposed Update more closely aligns to our first preference in our letter dated March 24, 2023. However, it offered a several recommendations for the Board to consider as it finalizes the Proposed Update.

Issue 2: Scope Clarification for a Share-Based Payment from a Customer in a Revenue Contract

The Committee is also supportive of the proposed updates in Issue 2, but it did offer the following recommendations to further clarify the intent of the updates:

• As drafted, the proposed paragraph 606-10-15-3A is not clear in certain respects.
• The intended interaction with the guidance in Topic 606, Revenue from Contracts with Customers, related to the application of constraint on variable consideration is not clear. The FRC encourages the FASB to reevaluate the recognition threshold for share-based payment consideration to align it with the requirements of ASC 606.
• The FRC recommends that disclosure requirements be included for the changes in the fair value (FV) of the share-based consideration received following the revenue contract’s inception and through the recording of the financial instrument. The FRC believes believe it is important for investors to be aware of the current value of future consideration receivable, especially when that value indicates a loss.
• The FRC recommends that the Standard or its basis for conclusions be updated to state that fair value should be measured without regard to vesting contingency / probability of performance, i.e. not based on the provisions of ASC 820. Currently ASC606-10-15-3A refers to the “estimated fair value” which can in practice be implied to refer to the fair value as defined in ASC 820, especially as it relates to financial instruments.