The Financial Accounting Standards Board (FASB) has had a busy November, with a recent issuance of several updates to assist with the application of accounting standards. Here are highlights of what you need to know:

Derivatives and hedging

FASB issued a proposed Accounting Standards Update on Nov. 12, to clarify and improve more consistent application of certain areas of the hedge accounting guidance in ASU No. 2017-12.

ASU 2017-12, issued in August 2017, had the objectives of making targeted improvements to the financial reporting of hedge accounting and simplifying the guidance based on stakeholder feedback.

This proposed ASU includes additional clarification of the following issues:

  • Changes in hedged risk due to changes in forecasted transactions in a cash flow hedge;
  • Contractually specified components in cash flow hedges of nonfinancial forecasted transactions; and
  • Accounting for foreign-currency-denominated debt instruments as both a hedging instrument and a hedged item in a dual hedging strategy.

These proposed amendments would impact any entity that applies hedge accounting under Topic 815.

Comments on the proposed ASU are due by Jan. 13, 2020. The proposed amendments would be effective for all entities for fiscal years beginning after Dec. 15, 2020, and for public business entities for interim periods within fiscal years beginning after Dec. 15, 2020. Early adoption is permitted after this proposed ASU is final if the amendments in ASU 2017-12 have been adopted.

Share-based payments to customers

On Nov. 11, FASB issued Accounting Standards Update 2019-08 to clarify the accounting for share-based payments, like options or warrants, issued to customers.

ASU 2018-07, issued in June 2018, expanded the scope of stock compensation guidance to include share-based payments to nonemployees for awards granted in exchange for goods and services. It indicated that awards issued to customers in connection with selling goods or services as part of a contract should be accounted for under revenue guidance in Topic 606. But there was some resulting diversity in practice as to whether to measure the award to a customer at the inception of the revenue contract under Topic 606 or at the award grant date under Topic 718, and whether to classify the award as a liability or equity.

ASU 2019-08 clarifies that these awards should be measured by applying Topic 718, based on the grant-date fair value of the award and classified as liabilities or equity under Topic 718. The grant date is the date that the supplier and customer agree to the terms and conditions of the award. This date may or may not be the same date as the contract inception date. The award should be recorded as a reduction in the transaction price based on the guidance in Topic 606. This ASU applies to all entities.

For those that have not adopted the amendments in Update 2018-07, the amendments in ASU 2019-08 are effective for public business entities for fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years, and for other entities for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020. Early adoption is permitted if the amendments in Update 2018-07 have been adopted.

Reference rate reform

On Nov. 13, FASB approved issuance of an ASU to provide optional guidance for recognizing the effects of reference rate reform.

Refence rate reform will result in a move away from LIBOR, the most commonly used reference rate in global financial markets, and other interbank offered rates and the use of new alternative reference rates that are more observable or transaction-based. Because of the pervasive use of LIBOR in financial contracts, FASB recognized the broad impact of this change on the accounting and reporting for arrangements impacted by it and proposed this guidance to ease the burden.

This proposed ASU will provide practical expedients and exceptions for accounting for contract modifications and hedges. It will apply only to contracts (including loans, debt, leases) or hedging relationships that reference LIBOR or other discontinued reference rates. If a contract meets the criteria in the proposed ASU, a change in the contract’s reference interest rate would not be accounted for as a new contract but would be accounted for as a continuation of the original contract. Existing hedge accounting could be preserved, although hedging relationships may be modified in response to the reform.

The proposed ASU would be effective upon issuance, which is expected to be in early 2020. It would be temporary, to help with the accounting transition. The accounting relief would apply until Jan. 1, 2023, and it would not apply to contract modifications and hedges entered into or evaluated after Dec. 31, 2022.