# ASC 815-40-35: Derivatives and Hedging — Contracts in Entity's Own Equity — 35 Subsequent Measurement Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/815/40/#35-subsequent-measurement) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:5a86877d4ddf724e4578c9d1c7f48c3c3d7ed8bad10d85eed6ad205cf66ab50b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 815-40-35: 35 Subsequent Measurement [Read section](https://asc.understandingaccounting.org/asc/815/40/#35-subsequent-measurement) SEC content: no #### Overall ##### [815-40-35-1](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:14c52b2638d94d2d9998e2db32415cbd4f35a50fe2304ef5f6801db600aa2fc8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. All contracts shall be subsequently accounted for based on the current classification and the assumed or required settlement method in Section 815-40-15 or Section 815-40-25 as follows. ##### [815-40-35-2](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:e781ddded8cd223cd356544bff285185097ff6e278389a104e3f6cafe0ee0a65 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Contracts that are initially classified as equity under Section 815-40-25 shall be accounted for in permanent equity as long as those contracts continue to be classified as equity. Subsequent changes in [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") shall not be recognized as long as the contracts continue to be classified as equity. Both of the following shall be reported in permanent equity: 1. a Contracts that require that the entity deliver shares as part of a [physical settlement](https://asc.understandingaccounting.org/glossary/p/#physical-settlement "The party designated in the contract as the buyer delivers the full stated amount of cash to the seller, and the seller delivers the full stated number of shares to the buyer.") or a [net share settlement](https://asc.understandingaccounting.org/glossary/n/#net-share-settlement "The party with a loss delivers to the party with a gain shares with a current fair value equal to the gain.") 2. b Contracts that give the entity a choice of either of the following: 1. 1 [Net cash settlement](https://asc.understandingaccounting.org/glossary/n/#net-cash-settlement "The party with a loss delivers to the party with a gain a cash payment equal to the gain, and no shares are exchanged.") or settlement in shares (including net share settlement and physical settlement that requires that the entity deliver shares) 2. 2 Either net share settlement or physical settlement that requires that the entity deliver cash. ##### [815-40-35-3](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:2c1536dd30dda1ed4db7513fc5f6a94c478dc96d011a539cec8e14d6b1264416 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. See paragraphs [815-40-35-14 through 35-18](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-14) for guidance on an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. ##### [815-40-35-4](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:fbbf64d4937e4dff22dcc29941422e37b3154ef28711d32c8e9ab85cd619afe3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. All other contracts classified as assets or liabilities under Section 815-40-25or paragraph [815-40-15-8A](https://asc.understandingaccounting.org/asc/815/40/#815-40-15-8A)shall be measured subsequently at fair value, with changes in fair value reported in earnings and disclosed in the financial statements as long as the contracts remain classified as assets or liabilities (see paragraph [815-40-50-1](https://asc.understandingaccounting.org/asc/815/40/#815-40-50-1)). #### Settlement Assumptions ##### [815-40-35-5](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:8ddfc599eb25625d66ff04800e82dd5d18984982dcf1e728e39c5ccd15f63f9a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Net share settlement should be assumed for contracts that are classified under Section 815-40-25 as equity instruments that provide the entity with a choice of either of the following: 1. a Net share settlement 2. b Physical settlement that may require that the entity deliver cash. ##### [815-40-35-6](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:f15c4c074cf1d52d00b505e9f3ac2ebad3d0de822950f015a39b4fed4187a643 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Physical settlement should be assumed for contracts that are classified under Section 815-40-25 as equity instruments that provide the counterparty with a choice of either of the following: 1. a Net share settlement 2. b Physical settlement that may require that the entity deliver cash. ##### [815-40-35-7](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:4f019a62f838bd05160d1110bf220d6e5a8fdf5861887334da14d8fc4b7788aa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). #### Reclassification of Contracts ##### [815-40-35-8](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:3053bc2a5c0e347cab3fab6d299403b72340488d90f47c7dfe58883d5f6965a0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The classification of a contract (including [freestanding financial instruments](https://asc.understandingaccounting.org/glossary/f/#freestanding-financial-instrument "A financial instrument that meets either of the following conditions: It is entered into separately and apart from any of the entity's other financial instruments or equity transactions. It is entered into in conjunction with some other transaction and is legally detachable and separately exercisable.") and embedded features) shall be reassessed at each balance sheet date. If the classification required under this Subtopic changes as a result of events during the period (if, for example, as a result of voluntary issuances of stock the number of authorized but unissued shares is insufficient to satisfy the maximum number of shares that could be required to net share settle the contract \[see discussion in paragraph [815-40-25-20](https://asc.understandingaccounting.org/asc/815/40/#815-40-25-20)\]), the contract shall be reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified. ##### [815-40-35-9](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:a84bdc2d3eff67fde9e2c12dc5ce5920d618c0ea621bdddffe68529164083ebb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If a contract is reclassified from permanent or temporary equity to an asset or a liability, the change in fair value of the contract during the period the contract was classified as equity shall be accounted for as an adjustment to stockholders' equity. The contract subsequently shall be marked to fair value through earnings. If an embedded feature no longer qualifies for the derivatives scope exception under this Subtopic, the feature shall be separated from its host contract and accounted for as a [derivative instrument](https://asc.understandingaccounting.org/glossary/d/#derivative-instrument "Paragraphs 815-10-15-83815-10-15-84815-10-15-85815-10-15-86815-10-15-87815-10-15-88815-10-15-89815-10-15-90815-10-15-91815-10-15-92815-10-15-93815-10-15-94815-10-15-95815-10-15-96815-10-15-97815-10-15-98815-10-15-99815-10-15-100815-10-15-101815-10-15-102815-10-15-103815-10-15-104815-10-15-105815-10-15-106815-10-15-107815-10-15-108815-10-15-109815-10-15-110815-10-15-111815-10-15-112815-10-15-113815-10-15-114815-10-15-115815-10-15-116815-10-15-117815-10-15-118815-10-15-119815-10-15-120815-10-15-121815-10-15-122815-10-15-123815-10-15-124815-10-15-125815-10-15-126815-10-15-127815-10-15-128815-10-15-129815-10-15-130815-10-15-131815-10-15-132815-10-15-133815-10-15-134815-10-15-135815-10-15-136815-10-15-137815-10-15-138815-10-15-139 define the term derivative instrument.") in accordance with Subtopic 815-10 and Subtopic 815-15 (if all of the criteria in paragraph [815-15-25-1](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1) are met). ##### [815-40-35-10](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:09d29bfdffb7317dc49eab0ccb200cc276266662d20596e90885a53d34d96709 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If a contract is reclassified from an asset or a liability to equity, gains or losses recorded to account for the contract at fair value during the period that the contract was classified as an asset or a liability shall not be reversed. The contract shall be marked to [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") immediately before the reclassification. An [embedded derivative](https://asc.understandingaccounting.org/glossary/e/#embedded-derivative "Implicit or explicit terms that affect some or all of the cash flows or the value of other exchanges required by a contract in a manner similar to a derivative instrument.") that qualifies for the derivatives scope exception upon reassessment under this Subtopic that was separated from its host contract and accounted for as a derivative instrument in accordance with Subtopic 815-10 shall be reclassified to equity. The previously bifurcated embedded derivative shall not be recombined with its host contract. ##### [815-40-35-11](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:4667327f7103be3a4e2fb97a4c8ceb98ac3afb0e4bc6db1013c4457879a8ff21 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If a contract permits partial net share settlement and the total [notional amount](https://asc.understandingaccounting.org/glossary/n/#notional-amount "A number of currency units, shares, bushels, pounds, or other units specified in a derivative instrument. Sometimes other names are used. For example, the notional amount is called a face amount in some contracts.") of the contract no longer can be classified as permanent equity, any portion of the contract that could be net share settled as of that balance sheet date shall remain classified in permanent equity. That is, a portion of the contract shall be classified as permanent equity and a portion of the contract shall be classified as an asset, a liability, or temporary equity, as appropriate. ##### [815-40-35-12](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:0078e66739dfd0bc0bf0a9452a298fe3bf826f76f19fbf2c5d5b13ebae744a3d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If an entity has more than one contract subject to this Subtopic, and partial reclassification is required, there may be different methods that could be used to determine which contracts, or portions of contracts, shall be reclassified. Methods that would comply with this Section could include any of the following: 1. a Partial reclassification of all contracts on a proportionate basis 2. b Reclassification of contracts with the earliest inception date first 3. c Reclassification of contracts with the earliest maturity date first 4. d Reclassification of contracts with the latest inception or maturity date first 5. e Reclassification of contracts with the latest maturity date first. ##### [815-40-35-13](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:9279bac8d9a1c361e72dd8e98291bed8a0d5b9cc65ae9ffbef5710ddf850990c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The method of reclassification shall be systematic, rational, and consistently applied. #### Issuer's Accounting for Modifications or Exchanges of Freestanding Equity-Classified Written Call Options ##### [815-40-35-14](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:46b7d883819c9a79aa21319e710b96dfd9db244987618dfd956d422fe5c79b49 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in paragraphs [815-40-35-15 through 35-18](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-15) applies to an issuer's accounting for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (for example, a warrant) that remains equity classified in accordance with this Subtopic after the modification or exchange and is not within the scope of another Topic. An entity shall account for the effects of a modification or an exchange in accordance with paragraphs [815-40-35-15 through 35-18](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-15) . The disclosure requirements in paragraphs [815-40-50-5 through 50-6](https://asc.understandingaccounting.org/asc/815/40/#815-40-50-5) and [505-10-50-3](https://asc.understandingaccounting.org/asc/505/10/#505-10-50-3) shall apply to a modification or an exchange of a freestanding equity-classified written call option. The guidance in paragraphs [815-40-35-16 through 35-17](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-16) does not apply to freestanding equity-classified written call options that are modified or exchanged to compensate grantees in a [share-based payment arrangement](https://asc.understandingaccounting.org/glossary/s/#share-based-payment-arrangements "An arrangement under which either of the following conditions is met: One or more suppliers of goods or services (including employees) receive awards of equity shares, equity share options, or other equity instruments. The entity incurs liabilities to suppliers that meet either of the following conditions: The amounts are based, at least in part, on the price of the entity's shares or other equity instruments. (The phrase at least in part is used because an award may be indexed to both the price of the entity's shares and something other than either the price of the entity's shares or a market, performance, or service condition.) The awards require or may require settlement by issuance of the entity's shares. The term shares includes various forms of ownership interest that may not take the legal form of securities (for example, partnership interests), as well as other interests, including those that are liabilities in substance but not in form. Equity shares refers only to shares that are accounted for as equity. Also called share-based compensation arrangements."). An entity shall recognize the effect of such modifications of freestanding equity-classified written call options by applying the requirements in Topic 718; however, classification of the instrument will remain subject to the requirements in this Subtopic. ##### [815-40-35-15](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:0faf6b744ec3d52f26354f24bb38614053b230cabd12aade49d3ebde4ad232b8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity shall consider the circumstances of the modification or exchange of a freestanding equity-classified written call option to determine whether the modification or exchange is related to a financing or other arrangement or a multiple-element arrangement (for example, an arrangement involving both debt financing and equity financing). In making that determination, an entity shall consider all of the terms and conditions of the modification or exchange, other [transactions](https://asc.understandingaccounting.org/glossary/t/#transaction "An external event involving transfer of something of value (future economic benefit) between two (or more) entities. (See FASB Concepts Statement No. 6, Elements of Financial Statements.)(P) December 16, 2024; (N) December 16, 2025105-10-65-9An external event involving transfer of something of value (future economic benefit) between two (or more) entities.") entered into contemporaneously or in contemplation of the modification or exchange, other rights and privileges obtained or obligations incurred (including services) as a result of the modification or exchange, and the overall economic effects of the modification or exchange. If the modification or exchange is not within the scope of another Topic, an entity shall apply the guidance in paragraphs [815-40-35-16 through 35-18](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-16) . ##### [815-40-35-16](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:6a10363145a8de49570c3f0c6b9fa642bf4c68a05ade07f39a8de2d732d791d4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity shall treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option as an exchange of the original instrument for a new instrument. In substance, the entity repurchases the original instrument by issuing a new instrument. For transactions recognized in accordance with paragraph [815-40-35-17(c)](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-17), the effect of a modification or an exchange shall be measured as the difference between the [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") of the modified or exchanged instrument and the fair value of that instrument immediately before it is modified or exchanged. For all other transactions recognized in accordance with paragraph [815-40-35-17](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-17), the effect of a modification or an exchange shall be measured as the excess, if any, of the fair value of the modified or exchanged instrument over the fair value of that instrument immediately before it is modified or exchanged. In a multiple-element transaction, the total effect of the modification or exchange shall be allocated to the respective elements in the transaction. ##### [815-40-35-17](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:956e4ccb879416d0c628652dc7e5448a5cb869b0b9c9e920dc92e5ae531822f7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity shall recognize the effect of a modification or an exchange (calculated in accordance with paragraph [815-40-35-16](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-16)) in the same manner as if cash had been paid as consideration, as follows: 1. a Equity issuance. An entity shall recognize the effect of a modification or an exchange that is directly attributable to a proposed or actual equity offering as an equity issuance cost. For additional guidance see SAB Topic 5.A, Expenses of Offering (paragraph [340-10-S99-1](https://asc.understandingaccounting.org/asc/340/10/#340-10-S99-1)). 2. b Debt origination. An entity shall recognize the effect of a modification or an exchange that is a part of or directly related to an issuance of a debt instrument as a debt discount or debt issuance cost in accordance with the guidance in Topic 835 on interest. 3. c Debt modification. An entity shall recognize the effect of a modification or an exchange that is a part of or directly related to a modification or an exchange of an existing debt instrument in accordance with the guidance in Subtopic 470-50 on debt modifications and extinguishments and Subtopic 470-60 on troubled debt restructurings by debtors. 4. d Other. An entity shall recognize the effect of a modification or an exchange that is not related to a financing transaction in (a) through (c) and is not within the scope of any other Topics (such as Topic 718) as a dividend. Additionally, for an entity that presents earnings per share (EPS) in accordance with Topic 260, that effect shall be treated as a reduction of income available to common stockholders in [basic earnings per share](https://asc.understandingaccounting.org/glossary/b/#basic-earnings-per-share "The amount of earnings for the period available to each share of common stock outstanding during the reporting period.") in accordance with the guidance in paragraph [260-10-45-15](https://asc.understandingaccounting.org/asc/260/10/#260-10-45-15). ##### [815-40-35-18](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:39:05.251Z to 2026-09-10T01:39:05.251Z Record version: sha256:9ef000bc4641435603e46bf3c7ffd4072abc58de388600cd52bb23b531b7533f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Example 22 (see paragraphs [815-40-55-49 through 55-52](https://asc.understandingaccounting.org/asc/815/40/#815-40-55-49) ) illustrates the application of the guidance in paragraphs [815-40-35-14 through 35-17](https://asc.understandingaccounting.org/asc/815/40/#815-40-35-14) .