Key Takeaways

  • The Financial Accounting Standards Board (FASB) voted this week to update its derivatives-related guidance under Generally Accepted Accounting Principles (GAAP), setting an effective date: all entities must comply with the new rules for annual and interim reporting periods beginning after December 15, 2026. The decision is based on a report from the board's meeting on Wednesday, April 9.
  • The update involves the scope of the standards formally known as "Derivatives and Hedging (Topic 815)" and "Revenue from Contracts with Customers (Topic 606)." The change, listed as a priority project for the U.S. standard-setting body, stems from stakeholder feedback received in 2021 indicating that under current rules it was difficult to determine which transactions should be treated as derivatives.
  • Under the update, derivative accounting rules will not apply to certain ESG-linked financial instruments, as well as research and development and litigation financing arrangements.

Deep Dive

The project was launched as corporate risk reporting was becoming increasingly complex due to the LIBOR transition and interest rate volatility, CFO Dive previously reported.

FASB Chair Richard Jones said at Wednesday's meeting that the current wording of the derivatives standard had led to "scope creep," with some companies treating too many financial instruments as derivatives, obscuring the true economic picture of certain financial positions.

"Since 1998, we have been wrestling with the idea that more and more items should be brought into scope," Jones said. "The natural tendency we face in practice is that people will continually try to pull more items into the scope of this guidance... and what we really want to do as a board is draw a line and clearly say, 'No, these don't belong here.'"

During the comment period, the proposal received support from companies including automaker Ford Motor Company and pharmaceutical giant Eli Lilly and Company.

"We support this proposed accounting standards update, particularly the provisions related to research and development funding arrangements in our industry—where payments depend on development milestones or regulatory approvals. We believe existing U.S. GAAP guidance is more aligned with the nature of these transactions," wrote Donald Zakrowski, chief accounting officer at Eli Lilly, in an October 21, 2024, letter to the FASB.

He added: "The scope exemption helps reduce documentation burdens for such transactions and prevents the broad definition of derivatives from extending beyond the scope the board intended when it was developed."