In brief: FASB proposes new disclosures about liquidity and interest rate risks (No. 2012-18)

In brief 06/28/2012 by Assurance services

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.

What's new?

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.

What are the key provisions?

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:

  • For all entities, an available liquid funds table. This table shows the liquid funds available to the entity, including unencumbered cash and high-quality liquid assets, and borrowing availability (such as lines of credit).
  • For entities defined as financial institutions, a liquidity gap maturity analysis table. This table shows the expected maturity of financial instruments by predefined time intervals, disaggregated by classes of financial assets and liabilities, including off-balance-sheet financial commitments. In addition, qualitative disclosures are required to explain significant changes in the liquidity gaps from the prior period.
  • For entities not defined as financial institutions, an expected cash flow obligations table. This table shows an entity’s expected cash flow obligations by predefined time intervals, as of period end, including recorded liabilities and off-balance-sheet commitments. In addition, qualitative disclosures are required to explain significant changes in cash flow obligations from the prior period.
  • For depository institutions, a time deposits table. This table shows the issuance of time deposits and brokered deposits over the previous four quarters.

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:

  • A repricing gap analysis table that shows when interest rates for financial instruments reset by predefined time intervals, and includes carrying amounts, yields, and duration.
  • An interest rate sensitivity table that shows the effect on after-tax net income and shareholders' equity of instantaneous predefined movements in market interest rates from parallel, flattening, and steeping shifts in the yield curve.

Is convergence achieved?

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.

Who's affected?

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.

What's the proposed effective date?

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.

What's next?

Comments on the FASB's proposal are due September 25, 2012.

Questions?

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

Authored by:

Christopher Gerdau
Partner
Phone: 1-973-236-5010
Email: christopher.gerdau@us.pwc.com

Steven Halterman
Director
Phone: 1-973-236-4179
Email: steven.g.halterman@us.pwc.com

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