This week, the FASB issued a proposal that would require companies to provide new disclosures about liquidity and interest rate risks. The proposal calls for quantitative exhibits and qualitative disclosures about risks arising from an entity's recorded and unrecorded financial instruments and cash flow obligations. This In brief article provides an overview of the proposal.
This week, the FASB issued a proposal that would require companies to provide new disclosures about liquidity and interest rate risks.1 The proposal calls for quantitative exhibits and qualitative disclosures about risks arising from an entity's recorded and unrecorded financial instruments and cash flow obligations.
During its outreach efforts, the FASB received feedback that financial statement users desire more information about these risks. This information would be provided in a standardized format to enhance comparability among entities. In addition, these disclosures are intended to complement existing risk disclosures in the financial statements and other communications, including management’s discussion and analysis.
Liquidity risk disclosures
The liquidity risk disclosures focus on an entity’s ability to meet its financial obligations. They consist of the following quantitative exhibits:
Interest rate risk disclosures
The interest rate risk disclosures are only required for entities defined as financial institutions. These disclosures aim to convey an entity's exposure to fluctuations in market interest rates. The following quantitative exhibits are required:
The proposed requirements are similar to existing disclosures required under IFRS. Both existing IFRS guidance and the FASB's proposal require liquidity and interest rate risk disclosures. However, while interest rate risk disclosures are required for all entities under IFRS, they would only be required for entities defined as financial institutions under the FASB's proposal. The FASB's proposal is more prescriptive on the time intervals to be used in the exhibits. In addition, there are no required IFRS disclosures of time deposits or repricing gap analyses.
Disclosures about liquidity risk would be required for all entities, but only financial institutions would provide disclosures about interest rate risk. Entities with reportable segments that meet the definition of a financial institution would be required to provide the financial institution disclosures for those reportable segments.
The FASB has proposed that “financial institutions” include entities or reportable segments for which the primary business activity is either: (1) to earn, as a primary source of income, the difference between interest income generated by earning assets and interest paid on borrowed funds, or (2) to provide insurance. An entity that measures substantially all of its assets at fair value with changes recognized in net income is not considered a financial institution. Therefore, broker dealers, investment banks, investment companies, and most investment funds would not be considered financial institutions under this proposal.
The FASB expressed its desire to make these disclosures effective as soon as possible, but will consider constituent feedback before establishing an effective date. Comparative amounts would be prepared prospectively.
Comments on the FASB's proposal are due September 25, 2012.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Financial Instruments team in the National Professional Services Group (1-973-236-7803).
1Proposed Accounting Standards Update, Financial Instruments (Topic 825), Disclosures about Liquidity Risk and Interest Rate Risk
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