Dive Brief:

• The Financial Accounting Standards Board this week voted for a proposed update to generally accepted accounting principles standards for derivatives to go into effect in less than a year, with all entities required to comply with the new rules for annual reporting periods and interim periods beginning after Dec. 15, 2026, according to the board’s report on a Wednesday board meeting.  
• The update relates to the scope of the rules formally known as Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (topic 606). The changes are a priority project that the U.S. standard setter undertook after hearing in 2021 that stakeholders found it challenging to determine what transactions were considered derivatives under the current accounting rules. 
• Under the update, the derivative accounting rules will not apply to certain ESG-linked financial instruments as well as research and development and litigation funding arrangements. 

Dive Insight:

The project arose at a time when corporate risk reporting was growing more complex amid the retirement of LIBOR and fluctuating interest rates, CFO Dive previously reported

The way existing derivative standards are written has led to “scope creep,” with some companies treating too many financial instruments as derivatives, FASB Chair Richard Jones said during Wednesday’s meeting. That has obscured the true economic picture of some financial situations, he said. 

“Since 1998 we’ve been fighting this view that more and more things go into the scope,” Jones said. “The natural tendency we’re going to face in practice is people are going to continually try to pull things into the scope of this guidance…and what we’re trying to do as a board is really draw a line and say, ‘No, this stuff doesn’t belong.’” 

During the comment period the proposal drew support from such companies as automaker Ford Motor Co. and pharmaceutical giant Eli Lilly. 

“We support this proposed ASU in relation to research and development funding arrangements in our industry, where payments are contingent upon development milestones or regulatory approvals, as we believe there is existing US GAAP guidance that better aligns with the nature of these transactions,” Donald Zakrowski, Eli Lilly’s chief accounting officer wrote in an Oct. 21, 2024 letter to FASB.

“The scope exception helps to reduce the burden of documentation related to such transactions and additionally prevents the broad definition of a derivative from overreaching beyond what was intended by the Board in its development,” he wrote.