Derivatives and Revenue Recognition Issues (Proposal).

To reduce diversity in practice and simplify US GAAP, the FASB is addressing two topics that broadly relate to derivative accounting. ● Derivatives in contracts with variables that are based on the operations or activities of one of the parties to the contract. Questions about the applicability of derivative accounting arise when a debt agreement, research and development funding arrangement or similar contract ties payments to the achievement of a financial statement metric or the occurrence of an operating event. An example is a bond whose interest rate is based on the borrower's achievement of a greenhouse gas emissions target. Under the proposal, this type of provision in a contract would not result in derivatives accounting. ● Share-based payments received from a customer as payment for goods or services. Here the question is whether a seller should recognize warrants, stock options or other share-based payments from a customer based on the derivative rules or the revenue recognition rules. The Proposal would clarify that the revenue rules govern recognition. This means warrants that vest upon the transfer of goods or services should not be recognized until the seller satisfies its performance obligations. The proposal would apply to public and private companies. No effective date has been set. Transition is specific to each issue, but companies would not restate previously issued financial statements. [ABSTRACT FROM AUTHOR]

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