FASB proposes liquidity risk, interest rate risk disclosures

FASB issued a proposed standard Wednesday that is intended to help financial statement users better understand organizations’ exposure to liquidity risk and interest rate risk.

The proposed liquidity risk disclosures would provide information about the risk encountered by the reporting organization when meeting its financial obligations. It would apply to all private, public, and not-for-profit organizations. But the nature of the disclosures will depend on whether the reporting organization is considered a financial institution.

Interest rate risk disclosures would apply only to financial institutions. They are structured to provide information about the exposure of financial assets and liabilities to market interest rate fluctuations.

The liquidity risk disclosures would require:

• Financial institutions to disclose the carrying amounts of classes of financial assets and liabilities in a table, segregated by their expected maturities. These would include off-balance-sheet financial commitments and obligations.
• Financial institutions that are depository institutions to disclose information about time deposit liabilities, including the cost of funding, in a table or list during the previous four fiscal quarters.
• Organizations that are not financial institutions to disclose their expected cash flow obligations in a table, segregated by their expected maturities, without being required to include the reporting organization’s financial assets in that table.
• All reporting organizations to provide their available liquid funds in a table, which includes unencumbered cash, high-quality liquid assets, and borrowing availability.
• All reporting organizations to provide additional quantitative or narrative disclosure of the organization’s exposure to liquidity risk, including discussion about significant changes in the amounts and timing in the quantitative tables and how the reporting organization managed those changes during the current period.

The interest rate risk disclosures would require financial institutions to disclose:

• The carrying amounts of classes of financial assets and financial liabilities according to time intervals based on the contractual repricing of the financial instruments.
• An interest rate sensitivity table that presents the effects that shifts of interest rate curves could have on net income and shareholders’ equity.
• Quantitative or narrative disclosures of the organization’s exposure to interest rate risk, including discussion about significant changes in the amounts and timing in the quantitative tables and how the reporting organization managed those changes during the current period.

FASB published a proposal separately from the classification and measurement aspects of its ongoing project on accounting for financial instruments, which it is undertaking along with the International Accounting Standards Board (IASB) in a convergence effort.

Another Proposed ASU, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815), was issued in May 2010 by FASB. Deliberations on that proposal continue, but feedback from stakeholders in that project led to the separate publication of Wednesday’s Proposed ASU.

“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,” FASB Chairman Leslie Seidman said in a statement. “Therefore, the board is proposing guidance that would help users of financial statements better understand organizations’ exposures to risks and the ways in which those risks are managed.”

The board invited public comments on the Proposed ASU ED, which is available on FASB’s website. Comments are due Sept. 25. FASB will conduct additional outreach with stakeholders before the comment period ends.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.