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FASB Tentatively Decides on Package of Disclosures for Financial Instruments

Published on: 09 Sep 2011

In response to a request made at the Board’s December 21, 2010, meeting, the FASB staff has been developing a package of potential disclosure requirements for risks associated with financial instruments. During that meeting, the Board asked the staff to obtain input from financial statement users, preparers, and regulators about the usefulness of potential disclosure requirements related to risks associated with financial instruments and about how easy or difficult it might be for preparers to comply with these requirements. At its June 22, 2011, meeting, the Board heard a summary of the research and outreach performed to date and tentatively decided to improve disclosures about liquidity risk and interest rate risk rather than to require disclosures about all risks.

This week, the Board made considerable progress when it tentatively decided to adopt a package of new disclosures, requiring qualitative and quantitative disclosures about liquidity and interest rate risk. Specifically, the Board decided to require all entities (both financial institutions1 and nonfinancial institutions, public and nonpublic) to provide disclosures about liquidity risk and to require only financial institutions to provide disclosures about interest rate risk. The proposed disclosures would be required for interim and annual periods, although nonpublic, nonfinancial entities would only be required to provide the liquidity risk disclosures for annual reporting periods.

Editor’s Note: The FASB’s Project Update for its project on accounting for financial instruments indicates that it has “not decided whether to include . . . risk disclosures in the final Accounting Standards Update that will be issued for this project or to issue a separate document for those risk disclosures.” During the Board’s September 7, 2011, discussion, some members expressed the view that the disclosure requirements (reprinted below) could be incorporated into an exposure draft that includes the FASB’s proposals on the classification and measurement of financial instruments, which is expected to be issued later this year.

Disclosure Requirements

The FASB’s September 7, 2011, Action Alert describes the proposed disclosure requirements as follows:

Qualitative

For interest rate risk and liquidity risk arising from financial instruments, an entity would disclose the following:

1. The exposure to risks and how they arise

2. Its objectives, policies, and processes for managing the risks and the methods used to measure the risks

3. Any changes in item (1) or (2) from the previous period and the reasons for the changes.

Liquidity Risk—Quantitative

1. All entities would provide disclosure about their available liquid funds, which includes unencumbered cash and high-quality liquid assets, and borrowing availability such as lines of credit. This disclosure would include a discussion about the effect of regulatory, tax, legal, and other restrictions that could limit the transferability of funds among entities in the consolidated group, for example, between the parent company and subsidiaries.

2. Financial institutions would provide a tabular disclosure based on expected maturities of classes of financial assets and financial liabilities. Financial instruments that are classified at fair value through net income, with the exception of derivatives, would not be placed in maturity buckets and would only show the total carrying amount. The term expected maturity relates to contractual settlement of the instrument, not the entity’s expected timing of the sale of the instrument. The table would include the entity’s off-balance-sheet commitments, for example, loan commitments and lines of credit.

3. Nonfinancial entities would provide a tabular disclosure of their undiscounted cash obligations, including off-balance-sheet obligations.

Interest Rate Risk—Quantitative

Only financial institutions would provide disclosures about interest rate risk.

1. A financial institution would provide a tabular disclosure about when its classes of financial assets and financial liabilities would reprice (that is, when their interest rate would be reset). This table also would include the weighted-average yield and duration of the classes of financial assets and financial liabilities.

2. A depository institution would provide a tabular disclosure about its issuance of time deposits during the last four quarters. This disclosure would show the entity’s average rate and average life for insured, uninsured, and brokered deposits.

3. A financial institution would provide a tabular disclosure of the effect of prospective, hypothetical interest rate shifts on the entity’s interest-sensitive financial assets and liabilities. The table would present the effect of parallel shifts, flatteners, and steepeners. This disclosure does not incorporate the effects of certain assumptions such as a company’s strategy related to assumed growth rate or change in asset mix.

Editor’s Note: IFRS 72 currently requires entities that prepare their financial statements in conformity with IFRSs to provide disclosures about the “nature and extent of risks arising from financial instruments.” Required disclosures include:

  • Qualitative disclosures about:
    • Risk exposures for each type of financial instrument.
    • Management’s objectives, policies, and processes for managing those risks.
    • Changes from the prior period.
  • Quantitative disclosures about credit risk, liquidity risk, and market risk.

See the summary of IFRS 7 on Deloitte’s IAS Plus Web site for more information.

The FASB staff presented examples of tabular disclosures about liquidity and interest rate risk to the Board in its September 7, 2011, Board Meeting Handout. Appendix A of the handout shows tabular disclosures about liquidity risk for both financial and nonfinancial institutions and disclosures about interest rate risk for financial institutions.

Editor’s Note: At the September 7, 2011, meeting, some Board members expressed the view that these tables should be modified to:

  • Present classes of financial liabilities by category (i.e., FV-NI or amortized cost) in the same manner as financial assets in financial institutions’ and insurance institutions’ disclosures about liquidity risk (i.e., tables 1 and 1A in Appendix A of the Board Meeting Handout).
  • Disaggregate and present required information about liquidity risk by quarters for certain periods.
  • Ensure that the tables “cross foot,” which may require a column that reconciles the financial assets’ and liabilities’ maturity amounts to their carrying amounts (i.e., tables 1 and 1A in Appendix A of the Board Meeting Handout).

For information about the Board’s previous tentative decisions on disclosures about liquidity and interest rate risk, see Deloitte’s June 22, 2011, journal entry.

 


[1] The FASB defined financial institutions, in this context, in the same manner as they are defined in ASC 942-320-50-1. Thus, financial institutions include banks, savings and loan associations, savings banks, credit unions, finance companies, and insurance entities. Further, the disclosures required for financial institutions would apply to reportable segments of entities, including those that engage in transactions that involve lending to or financing the activities of others.

[2] IFRS 7, Financial Instruments: Disclosures.

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