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Derivative vs. revenue: Key impacts of new FASB guidance · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC's National Office.
• 0:07
  SPEAKER_02: Hello, and welcome to PWC's Accounting Podcast.
• 0:11
  SPEAKER_02: I'm Heather Horn.
• 0:12
  SPEAKER_02: Thanks for joining us today as we jump into current topics in accounting and reporting.
• 0:17
  SPEAKER_02: For today's discussion, I'm pleased to welcome guest host, Diana Stoltzfiss, a partner in PWC's National Office and a podcast regular.
• 0:27
  SPEAKER_02: I'll hand it over to Diana for more details on today's episode.
• 0:34
  SPEAKER_03: Today we're discussing new FASB guidance impacting derivatives, specifically the ASU 202507.
• 0:41
  SPEAKER_03: The guidance introduces a new derivative scope exception for contracts tied to a company's own operations, and it also clarifies whether to apply revenue guidance or financial instruments guidance when share-based consideration is received from a customer.
• 0:56
  SPEAKER_03: Joining me for today's discussion is Brett Dooley Deputy Chief Accountant in PWC's national office, and Angela Ferguson, a partner and standard setting leader in our national office.
• 1:06
  SPEAKER_03: Thanks so much for joining me today.
• 1:08
  SPEAKER_03: So the title of this new standard is a bit of a mouthful: Derivative Scope Refinements and Scope Clarification for Share-Based Non-Cash Consideration from a Customer in a Revenue Contract.
• 1:20
  SPEAKER_03: So that's a lot.
• 1:21
  SPEAKER_03: So maybe, Brett, you could help explain just high-level like what is this standard?
• 1:26
  SPEAKER_01: Yeah, I think I would have called the standard the financial instrument beatdown and revenue wins.
• 1:32
  SPEAKER_01: But really, like Angela's celebrating here.
• 1:38
  SPEAKER_01: But really, there's a couple of main issues that this standard is trying to address.
• 1:41
  SPEAKER_01: And I think the connection between them is when derivative should accounting should be applied.
• 1:47
  SPEAKER_01: You know, we start with a very broad derivative scope where we think everything's a derivative, or at least I do.
• 1:52
  SPEAKER_01: And sometimes derivative accounting comes first.
• 1:55
  SPEAKER_01: And I think this ASU kind of chips away at both.
• 1:58
  SPEAKER_01: Um the first issue the standard addresses is a new derivative scope exception for non-exchange traded contracts, uh, where the underlying to the contract is an activity or operations of one of the parties to the contract.
• 2:11
  SPEAKER_01: And the second issue is clarifying, I think, a conflict that that exists in a gap about when to apply 606 or the revenue guidance versus financial instrument guidance uh in 815 or or 321.
• 2:24
  SPEAKER_01: I think it's probably best to unpack each individually.
• 2:27
  SPEAKER_03: Okay.
• 2:27
  SPEAKER_03: So that makes sense.
• 2:28
  SPEAKER_03: So maybe what we'll do is Brett, we'll have you take the scope exception and then Angela will turn to you to understand whether revenue or the derivative guidance wins.
• 2:38
  SPEAKER_03: Sounds good.
• 2:39
  SPEAKER_03: Okay.
• 2:40
  SPEAKER_03: So maybe starting with what is a derivative scope exception.
• 2:43
  SPEAKER_01: So remember the definition of what a derivative is is actually very broad in the accounting literature.
• 2:50
  SPEAKER_01: And the guidance says that in order to be a derivative, something must have an underlying, a notional or payment provision, little or no initial net investment, and the characteristic of net settlement.
• 3:01
  SPEAKER_01: And going into a deep dive of all that, it's another podcast or several.
• 3:06
  SPEAKER_01: But without going into the detail, you find that a lot of contracts for embedded features meet all of those criteria to be a derivative.
• 3:14
  SPEAKER_01: And specifically, the definition of what isn't underlying in particular is quite broad.
• 3:20
  SPEAKER_01: Some things we commonly expect and think of in traditional derivatives, like interest rate indices or commodity prices, are examples of underlings.
• 3:29
  SPEAKER_01: But that definition of underlying also includes the occurrence or non-occurrence of an event.
• 3:35
  SPEAKER_01: So because of how broad that definition is, the FASB, you know, had we've developed a long list of scope exceptions within the guidance.
• 3:44
  SPEAKER_01: The results in contracts that would otherwise meet this very broad definition not being accounted for as derivatives.
• 3:50
  SPEAKER_01: And the scope exceptions, I think, have generally been established for types of contracts where the FASB believed and stakeholders had given feedback that there's other gap that would account for that agreement outside of derivative accounting.
• 4:04
  SPEAKER_01: And they think that derivative accounting would not be meaningful financial reporting.
• 4:08
  SPEAKER_03: Okay.
• 4:09
  SPEAKER_03: So maybe we can go to this scope exception and why the FASBE thought this new one was necessary.
• 4:15
  SPEAKER_01: So even with the list of scope exceptions that existed, um the FASBE continued to get feedback that the definition was still too broad, and certain contracts identified, such as RD funding arrangements or litigation financing agreements, were being accounted for as derivatives uh in practice and just wasn't providing decision useful information.
• 4:38
  SPEAKER_01: So the FASBI did think about a couple of paths here to address this, providing maybe scope exceptions for specific transactions or even amending the core definition of a derivative.
• 4:49
  SPEAKER_01: But ultimately they decided to add a more principle-based uh new scope exception to address these types of contracts.
• 4:56
  SPEAKER_01: And it specifically scopes out, like I mentioned, non-exchange traded contracts or features with payments that are based on the operations or activities that's specific to one of the parties to the contract.
• 5:08
  SPEAKER_01: Remember, there is already a derivative scope exception uh for these types of contracts that had an underlying based on revenue for one of the parties.
• 5:16
  SPEAKER_01: And so the scope exception is actually in addition to that one, but in some ways it feels like an extension of it because it just broadens the underlying uh based on revenue to all underlings based on activity or operations.
• 5:29
  SPEAKER_01: So I think this new scope exception will apply to a broader set of financial statement metrics such as net income or eBIT DA expenses that that weren't in the prior revenue scope out, uh, but it would also apply to underlings linked to, like I said, the occurrence or non-occurrence of an event related to operations.
• 5:47
  SPEAKER_01: You know, one example is obtaining regulatory approval for a product.
• 5:50
  SPEAKER_03: Aaron Powell So it sounds like this could apply in a lot of different scenarios into a lot of different types of contracts.
• 5:55
  SPEAKER_03: So are there limits on how this can be used?
• 5:58
  SPEAKER_01: You know, th there are.
• 5:59
  SPEAKER_01: Um and you just go to the standard for a complete list, but things that have underlines that are based on like a market rate, a market price, a market index, um, underlines that are based on the price or performance of a financial asset or a financial liability, even if one of the parties to the contract holds that.
• 6:18
  SPEAKER_01: Um and and some other some other examples are scoped out.
• 6:22
  SPEAKER_01: Um FASBI wanted to make sure that kind of traditional derivatives didn't get scoped out of derivative accounting.
• 6:28
  SPEAKER_01: You know, one example, you know, part of companies' operations may involve managing interest rate risk, but the FASBI didn't want a vanilla interest rate swap to get to get scoped out.
• 6:39
  SPEAKER_01: Or if an oil company enters into an arrangement um that's based on the market price of crude oil, they didn't want that scoped out either.
• 6:47
  SPEAKER_03: Okay, that makes sense.
• 6:48
  SPEAKER_03: So we've talked a lot about what it doesn't apply to, but maybe we could talk about some transactions that would benefit.
• 6:55
  SPEAKER_03: I know you gave a couple examples, but but maybe we can talk into a a little bit more detail into some of those.
• 7:00
  SPEAKER_01: Yes.
• 7:01
  SPEAKER_01: Yeah.
• 7:01
  SPEAKER_01: Um maybe three, I'll give three examples.
• 7:03
  SPEAKER_01: One is the RD funding arrangement I talked about.
• 7:06
  SPEAKER_01: Uh in these arrangements, one party um receives cash from an investor and then agrees to repay amounts based on whether the product it's developing, maybe a drug, receives regulatory approval.
• 7:18
  SPEAKER_01: In that case, maybe from the FDA.
• 7:20
  SPEAKER_01: In that case, getting approval from the drug is considered to be an event related to the operations or activities to one of the parties to the contract.
• 7:28
  SPEAKER_01: A similar analysis for litigation financing arrangements.
• 7:31
  SPEAKER_01: These are where a company is looking to finance the costs of litigation that it's in, and so it receives cash from an investor and agrees to repay amounts based on whether it's successful in that litigation filed.
• 7:44
  SPEAKER_01: Again, winning the lawsuit in that example is considered a vent.
• 7:47
  SPEAKER_01: It's an underlying, but it's related to the operations or activities of one of the parties to the contract.
• 7:53
  SPEAKER_01: We also see these in some called ESG debt arrangements, where some debt had was issued that had a feature that requires a company to make additional interest payments if it fails to receive a target, such as reducing greenhouse gas emissions, for example.
• 8:10
  SPEAKER_01: Again, it's qualifies for that scope exception because the amount of emissions produced is considered to be related to the company's operations.
• 8:18
  SPEAKER_03: Aaron Powell Sure, that makes sense.
• 8:20
  SPEAKER_03: Are there any other aspects of this new standard that we haven't touched on?
• 8:24
  SPEAKER_01: Aaron Powell Maybe a couple things.
• 8:26
  SPEAKER_01: First, in those examples, you can see that, and the standard makes clear the underlying doesn't need to be in control of one of the parties for the contract to be considered related to the activities or operations.
• 8:37
  SPEAKER_01: You know, think of regulatory approval for a drug that's not in control of the company necessarily, but it's still related to its operations.
• 8:45
  SPEAKER_01: And the other thing I would mention is that the standard talks about party to the contract, probably in more broad terms than we would typically think about.
• 8:54
  SPEAKER_01: It's not just the party, not just the legal entity entering the contract, but it also includes parent subsidiaries or other entities consolidated by the parent.
• 9:04
  SPEAKER_03: Seems like a lot of companies who take advantage of these new scope exceptions.
• 9:08
  SPEAKER_03: What if a contract has more than one underlying?
• 9:12
  SPEAKER_01: You should seek some help.
• 9:13
  unknown: Okay.
• 9:14
  SPEAKER_01: Because it's it's complicated.
• 9:16
  SPEAKER_01: Um it's something the guidance already contemplated before the standard, obviously, and something that we we struggle with in practice sometimes.
• 9:23
  SPEAKER_01: Um the concept is based on predominant characteristics.
• 9:27
  SPEAKER_01: And so it basically says if you have multiple underlines in a contract and not all of those underlines qualify for one of these scope exceptions, you have to consider whether the contract as a whole would qualify a scope exception.
• 9:40
  SPEAKER_01: And to do that, you determine whether all of the underlines considered in combination behave in a manner that's highly correlated with the behavior of any of the component variables that don't qualify for the scope exception.
• 9:55
  SPEAKER_01: So that's very complicated.
• 9:58
  SPEAKER_01: You have to go through like some detailed examples to apply it in practice.
• 10:02
  SPEAKER_01: But I think what's important for listeners to understand is that the this ASU didn't change that.
• 10:08
  SPEAKER_01: But I do think it will maybe reduce the number of situations where you have multiple underlings because maybe some of or multiple underlines that don't qualify, uh, because this will uh you know include a new scope exception.
• 10:21
  SPEAKER_03: Okay.
• 10:22
  SPEAKER_03: Well, now that we've covered the the scope exception, and so companies now they're not in derivative accounting anymore.
• 10:29
  SPEAKER_03: So where do they look to to determine how to account for these transactions?
• 10:33
  SPEAKER_01: That's a that's a good question.
• 10:34
  SPEAKER_01: And I think I'm gonna leave a cliffhanger here because it's probably another podcast.
• 10:39
  SPEAKER_01: Um I think it probably depends on the terms and and nature of the arrangement.
• 10:44
  SPEAKER_01: You know, some of these arrangements could uh fall into the sale of future revenue guidance, uh, some maybe uh some sort of contingent debt payment, or there might may be other appropriate models to think about.
• 10:55
  SPEAKER_01: Um I'll probably need some help for my revenue accounting friends like Angela.
• 10:59
  SPEAKER_01: So we'll keep talking and stay tuned.
• 11:01
  SPEAKER_03: Okay, that's sure.
• 11:02
  SPEAKER_03: I'm sure we'll be debating it further.
• 11:04
  SPEAKER_01: Can't wait.
• 11:05
  SPEAKER_03: Well, Angela, maybe to turn to you now and switching to our second topic, can you explain what share-based non-cash consideration received from a customer means and what types of payments might fall into this?
• 11:19
  SPEAKER_04: Sure.
• 11:19
  SPEAKER_04: And I'd say this was a little bit of an unrelated issue, but another issue that came up around the same time.
• 11:25
  SPEAKER_04: So they decided to just put them both into this single ASU.
• 11:30
  SPEAKER_04: So share-based non-cash consideration refers to payments from a customer in the form of equity, such as shares of the customer or warrants to buy the customer's stock.
• 11:42
  SPEAKER_04: And we are seeing this a little more frequently where a customer pays for goods or services, maybe partially in cash and partially in warrants, or maybe even entirely with warrants.
• 11:54
  SPEAKER_04: And often those warrants have vesting conditions.
• 11:58
  SPEAKER_04: So, a simple example is a company is providing services to a customer.
• 12:04
  SPEAKER_04: And as part of payment for those services, the customer is going to give them warrants that will vest as those services are performed.
• 12:14
  SPEAKER_03: Okay.
• 12:15
  SPEAKER_03: And you mentioned in your intro a little bit this topic went into the same time because this issue came up.
• 12:20
  SPEAKER_03: So, what was the background on what the issue was and why the FASBI felt there was additional guidance that was needed in this area?
• 12:27
  SPEAKER_04: Well, previously there was a lack of uh clarity about when the revenue guidance should be applied versus the financial instruments guidance.
• 12:37
  SPEAKER_04: So it really, this is all about the handoff.
• 12:40
  SPEAKER_04: When is the handoff between the revenue folks and the revenue guidance to the financial instruments world?
• 12:47
  SPEAKER_04: Um, and for example, the warrants with vesting conditions, like the example that I provided, might me the definition of a derivative.
• 12:55
  SPEAKER_04: Because as we just heard from Brett, that definition is very broad, right?
• 13:00
  SPEAKER_04: But from a revenue perspective, we would hear something like that, and it would sound like a contingent fee, so variable consideration.
• 13:08
  SPEAKER_04: But if you apply those different pieces of guidance, you could get a you know very different outcome outcome.
• 13:14
  SPEAKER_01: Yeah, and I'll I'll take some responsibility here because I think, you know, in in the world of derivatives, we see all types of derivatives with contingencies in them.
• 13:22
  SPEAKER_01: Uh, and we just tend to include them in the valuation of a derivative, just like any other feature, um, or assess it in the accounting for the equity instrument.
• 13:31
  SPEAKER_03: Okay.
• 13:32
  SPEAKER_03: And Angela, you mentioned that, you know, whether you're applying the revenue guidance or if you look to derivative guidance, that you come to different outcomes.
• 13:39
  SPEAKER_03: So, under this new model, how are these arrangements accounted for?
• 13:43
  SPEAKER_04: So, again, the purpose of this new standard is to clarify that handoff between the revenue guidance and the financial instruments guidance.
• 13:52
  SPEAKER_04: So it clarifies that share-based non-cash consideration from a customer, such as warrants received in exchange for goods or services, so under a revenue contract, is subject to the revenue guidance in ASC 606, unless and until the company's right to receive or retain that consideration is unconditional, which I will put a pin in that.
• 14:18
  SPEAKER_04: I'll get back to what that means.
• 14:20
  SPEAKER_04: When the right to receive or retain that consideration is unconditional, then we have the pass off and it's accounted for under the relevant financial instruments guidance, such as ASC 815 derivative accounting or other financial instruments in ASC 321.
• 14:39
  SPEAKER_04: But coming back to unconditional, when we're assessing whether the right is unconditional, we are only going to consider contingencies that relate to the company's performance under the contract or a specific outcome of the company's performance.
• 14:55
  SPEAKER_03: Okay.
• 14:56
  SPEAKER_03: Maybe it'd be helpful if we could walk through an example to bring it to life a little bit more.
• 15:00
  SPEAKER_04: Yeah, yeah, I think that will help.
• 15:01
  SPEAKER_04: So starting with a relatively straightforward fact pattern, we have a company that has a contract to deliver widgets to a customer.
• 15:11
  SPEAKER_04: In exchange, the customer is going to pay partially in cash and also grant the company warrants to purchase the customer's stock that vest upon delivery of, let's say, a thousand widgets.
• 15:24
  SPEAKER_04: So the right to receive or retain these warrants is not unconditional because it's contingent upon the company delivering a thousand widgets.
• 15:33
  SPEAKER_04: And this contingency relates to the company's performance, which is again delivering the widgets.
• 15:38
  SPEAKER_04: So based on the clarification in this new standard, the warrants are in the scope of the revenue standard until that contingency is resolved, which is when all 1,000 widgets are delivered.
• 15:52
  SPEAKER_04: When that occurs, when they've all been delivered and the warrants vest, then we have the handoff, then they're accounted for as a financial instrument, such as a derivative in the scope of 815.
• 16:03
  SPEAKER_03: One question if these widgets are delivered over time, maybe you have like 250 a quarter, do you do that handoff pro radar or do you wait till the full contingency is resolved?
• 16:14
  SPEAKER_04: We are going to, well, if they if they vest as the the warrants vest as they delivered, then some of the warrants that vest would then flip into the financial instrument.
• 16:23
  SPEAKER_03: Okay.
• 16:23
  SPEAKER_03: So it really is going to depend on the terms of the contract and when they vest.
• 16:27
  SPEAKER_03: Okay.
• 16:28
  SPEAKER_03: Maybe one other thing that that seemed important that you were talking about, Angela, is that the contingency has to be related to the company's performance.
• 16:36
  SPEAKER_03: Maybe can you give us an example of a contingency that doesn't relate to the company's performance?
• 16:42
  SPEAKER_04: Sure.
• 16:42
  SPEAKER_04: So this gets back to something that Brett kind of touched on earlier, which is that we wanted to make sure things that really are derivatives or derivative-like are still being accounted for as derivatives.
• 16:53
  SPEAKER_04: So there could be vesting conditions or contingencies that are really unrelated to the revenue contract.
• 17:00
  SPEAKER_04: Say a vesting condition that's based on the price of gold.
• 17:03
  SPEAKER_04: Right.
• 17:04
  SPEAKER_04: So that doesn't hold up doing the accounting under the financial instruments guidance.
• 17:09
  SPEAKER_04: We'd only be looking to resolution of contingencies that relate to the revenue contract.
• 17:16
  SPEAKER_04: And once those are resolved, then we do the handoff, even if there's another condition that's still out there but unrelated to the revenue contract.
• 17:26
  SPEAKER_04: You might think this wouldn't really come up that often, but some of these arrangements do have pretty complex features.
• 17:33
  SPEAKER_04: And there's one condition that we see that we have seen in practice, which is when the warrants vest based on the customer achieving an IPO.
• 17:44
  SPEAKER_04: And oftentimes that's not really going to be related to the company, the vendor's performance.
• 17:50
  SPEAKER_04: Right.
• 17:51
  SPEAKER_04: I mean, I guess unless they're helping them complete the IPO, right?
• 17:54
  SPEAKER_04: But so that may be the type of condition that ends up being unrelated to the company's performance.
• 18:00
  SPEAKER_04: But there's definitely going to be some judgment here.
• 18:03
  SPEAKER_03: Okay.
• 18:03
  SPEAKER_03: Maybe going back to your example, can you explain in more detail the impact of applying the revenue guidance versus the financial instruments guidance?
• 18:13
  SPEAKER_04: Sure.
• 18:13
  SPEAKER_04: So again, my example was the company's delivering widgets and they get the warrants that vest upon delivery of a thousand widgets.
• 18:22
  SPEAKER_04: So while we're in the revenue guidance, this is considered non-cash consideration and also variable consideration.
• 18:30
  SPEAKER_04: You're either going to get all of the warrants or none of the warrants in my more simple example here.
• 18:35
  SPEAKER_03: Sure.
• 18:36
  SPEAKER_04: So under the non-cash consideration guidance, we're going to measure the fair value of those warrants at contract inception.
• 18:43
  SPEAKER_04: So let's say that's$100,000.
• 18:46
  SPEAKER_04: And that amount is the only amount that's considered for revenue transaction price.
• 18:52
  SPEAKER_04: So we're going to lock in that value of$100,000 for purposes of applying the revenue guidance.
• 18:59
  SPEAKER_04: Then because it's variable consideration, we're going to look to that guidance to determine whether you put or if and when you put that$100,000 into the transaction price.
• 19:10
  SPEAKER_04: So there's certain thresholds to meet.
• 19:13
  SPEAKER_04: Essentially, if it's probable that it will not be subsequently reversed, then we would meet a threshold to include the$100,000 in the transaction price.
• 19:24
  SPEAKER_04: And then we'd be allocating that to the performance obligations, which are the widgets.
• 19:29
  SPEAKER_04: So I kept the math easy here:$100,000 for a thousand widgets.
• 19:33
  SPEAKER_04: So that's$100 per widget.
• 19:35
  SPEAKER_04: So you'd essentially be recognizing$100 of revenue as each widget is delivered and setting up a contract asset.
• 19:44
  SPEAKER_04: Because again, we're not yet accounting for that as a financial instrument.
• 19:49
  SPEAKER_04: Once all thousand are delivered and the contingencies resolved, that contract asset will have been built up to$100,000 and then it will be reclassified as a financial instrument.
• 20:02
  SPEAKER_04: And that accounting model would take over.
• 20:06
  SPEAKER_03: Okay.
• 20:06
  SPEAKER_03: So you mentioned that the amount of revenue is locked in at that fair value.
• 20:11
  SPEAKER_03: So your$100 in your example at the contract inception.
• 20:16
  SPEAKER_03: What if that value changes over time?
• 20:18
  SPEAKER_03: Like, for example, the company stock price increases.
• 20:22
  SPEAKER_04: Right.
• 20:22
  SPEAKER_04: And that's likely to happen as this contract is being fulfilled, right?
• 20:26
  SPEAKER_04: So in my example, I'm, you know, I mentioned how we're recording this contract asset as the as the widgets are delivered.
• 20:34
  SPEAKER_04: The standard doesn't actually specifically address the subsequent measurement of that contract asset.
• 20:41
  SPEAKER_04: It was something that we talked to the FASB about.
• 20:43
  SPEAKER_04: They decided not to expand the scope of the project to specifically speak to that.
• 20:49
  SPEAKER_04: And the challenge is that for contract assets, the only thing that the, you know, the guidance would tell you is that you need to apply Cecil and consider a credit risk.
• 20:59
  SPEAKER_04: But changes in the fair value of the warrants wouldn't get captured by, you know, the Cecil model.
• 21:05
  SPEAKER_04: So in this case, we believe that if the stock price were to go up, you're not going to increase that the value of that contract asset.
• 21:16
  SPEAKER_04: So that would just get captured potentially at the point in time when you flip it over to a financial instrument.
• 21:24
  SPEAKER_04: However, if the stock price went down, we do believe you should consider whether there's an impairment of the contract assets.
• 21:34
  SPEAKER_04: It's a kind of like a one-way model at that point.
• 21:37
  SPEAKER_04: Again, until you then flip it into the financial instruments model, which in that case, if you were doing derivative accounting, you're probably doing a mark to fair value after that.
• 21:49
  SPEAKER_04: But at that point, none of that mark to market would go through revenue.
• 21:53
  SPEAKER_04: We've already we've just done a complete handoff at that point.
• 21:56
  SPEAKER_03: Okay.
• 21:56
  SPEAKER_03: That makes sense.
• 21:57
  SPEAKER_03: Angela, anything else you would want to highlight from the Steam?
• 22:01
  SPEAKER_04: Well, yeah, I'd say again that the you know the example I went through is pretty straightforward.
• 22:05
  SPEAKER_04: Um, you know, some of the live fact patterns that we've seen are you know much more complex, have a lot of complex terms.
• 22:12
  SPEAKER_04: And while the standard did help clarify, you know, which guidance we should be looking to and some scoping issues, there's still gonna be some judgment required and some of these arrangements.
• 22:23
  SPEAKER_04: Standard didn't necessarily like answer every question that's gonna come up.
• 22:26
  SPEAKER_04: It's part of that theme.
• 22:28
  SPEAKER_04: Another type of arrangement we see that's like this is when shares or warrants are received from a vendor as part of a revenue transaction, but from the other side.
• 22:40
  SPEAKER_04: So it's the customer receiving from a vendor.
• 22:44
  SPEAKER_04: Um and the FASB decided not to address that fact pattern in the standard, but there's similar, similar issues that come up.
• 22:52
  SPEAKER_04: Um, and we would expect there's probably gonna continue to be diversity in practice and how those arrangements are accounted for.
• 22:59
  SPEAKER_04: Okay.
• 23:00
  SPEAKER_03: Well, maybe to wrap up a little bit, Brett, I'll come back to you.
• 23:03
  SPEAKER_03: What's the effective date and in transition look for this new standard?
• 23:08
  SPEAKER_01: Uh sure.
• 23:09
  SPEAKER_01: The standard has a required adoption date of January 1st, 2027 for calendar year-end uh companies.
• 23:16
  SPEAKER_01: Early adoption is permitted, and we've seen some companies uh elect to early adopt.
• 23:21
  SPEAKER_01: If you do a lot, if a company does adopt in an interim period, they're required to adopt as of the beginning of the annual period that includes the interim period.
• 23:31
  SPEAKER_01: And I remind people that if you if a company elects to early adopt on any of these issues or either of these issues, you have to adopt for both.
• 23:39
  SPEAKER_01: You're adopting the entire standard.
• 23:41
  SPEAKER_01: You can't you can't pick and choose here.
• 23:43
  SPEAKER_01: The transition does allow for adoption either on a modified retro basis or on a prospective basis only for new contracts entered into after the date of adoption.
• 23:54
  SPEAKER_01: So there's a choice to be made there.
• 23:56
  SPEAKER_01: Uh, and if a company is adopting on that modified retro basis, there's certain elections that can be made for contracts that are impacted by this new derivative scope exception.
• 24:07
  SPEAKER_01: Uh the fair value option can be elected on the date of adoption for instruments that are no longer subject to the derivative accounting.
• 24:13
  SPEAKER_01: So if you want to continue to mark that contract to market, you'll have an option to do that.
• 24:18
  SPEAKER_01: Uh and if an instant if a company was applying the fair value option to an instrument because the embedded features would have met the definition of a derivative anyway prior to the new standard, but now qualify for a scope exception, the company is permitted to unelect the FEO for those instruments.
• 24:37
  SPEAKER_03: Okay, okay, great.
• 24:39
  SPEAKER_03: Well, I know we've kind of touched on these changes, but there's probably a lot more detail and a lot more to get into.
• 24:44
  SPEAKER_03: Angela, where can our listeners find out more information about this new standard?
• 24:49
  SPEAKER_04: Well, we published uh an in-depth publication back in November when the standard came out.
• 24:53
  SPEAKER_04: So that uh that would be a good place to start.
• 24:56
  SPEAKER_03: Okay, well, great.
• 24:57
  SPEAKER_03: Well, thank you both so much for joining me today.
• 24:59
  SPEAKER_03: It was a really good conversation.
• 25:00
  SPEAKER_04: Thanks.
• 25:02
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  SPEAKER_02: From Thought Leadership at PwC, I'm Heather Horn.
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