If your organization uses financial instruments, you'll want to pay attention to a recent proposal by the Financial Accounting Standards Board (FASB) to update the accounting standards covering the liquidity and interest rate risks inherent in financial instruments -- the two areas in which users of financial statements expressed strong demand for improved disclosures. "As part of the FASB's financial instruments project, stakeholders consistently requested improved disclosures about an organization's exposure to interest rate risk and liquidity risk," says FASB chair Leslie Seidman. The amendments included in the update would apply to public, private and non-profit firms, although the specific disclosures required of financial institutions (as defined in the proposal) would vary from those required of other entities.
The primary provisions of the proposal include the following:
Liquidity risk: Companies would have to provide information about the risks and uncertainties that a reporting entity might encounter in meeting its financial obligations. For instance, the proposed amendments would require a non-financial institution to disclose in a table its expected cash flow obligations, categorized by expected maturities. The organization also would be required to separately disclose its available liquid funds. Financial institutions would have to disclose the carrying amounts of classes of financial assets and liabilities in a table, segregated by expected maturities. All reporting companies would have to provide additional narrative disclosures that would allow users of the financial statements to understand the entity's exposure to liquidity risk. They also would need to disclose any significant changes in the amounts and timing of the assets included in the tables.
Interest rate risk: This provision would apply only to financial institutions. It would require them to disclose, among other information, the carrying amounts of classes of financial assets and financial liabilities according to time intervals that are based on the contractual re-pricing of the financial instruments. The institution also would have to disclose, in an interest rate sensitivity table, the effects on net income and shareholders' equity of specified hypothetical, instantaneous shifts in the interest rate curves as of the measurement date.
These disclosures would provide users of financial statements with more information than they can obtain under current U.S. generally accepted accounting principles, FASB states. The disclosures are similar to those required under International Financial Reporting Standards (IFRS) 7, albeit with a few differences.
FASB is looking for input on the proposal, and will accept comments through September 25, 2012. As of early July, just one comment had been received; it was from a CFO with a $2.5 billion financial institution. The writer was not in support of the proposals, stating, "The proposed disclosures would only serve to clutter our already over-disclosed financial statements, and due to the hundreds of numbers contained in the extensive tables, would prove to add even more confusion to our few users."
The FASB is planning to conduct outreach sessions with stakeholders over the summer. An effective date for the proposals has not yet been set.