FASB clarifications include plans for qualitative disclosures for financial instruments

FASB on Wednesday clarified its plans regarding requirements for specific qualitative disclosures and the definition of “financial institution” that will be included in the liquidity disclosures section of its proposed Accounting Standards Update (ASU) on accounting for financial instruments.

The board decided that a reporting entity should provide any additional quantitative or narrative disclosure necessary to help financial statement users understand the entity’s exposure to liquidity risk and interest rate risk, according to a summary of board decisions posted on FASB’s website.

To accomplish that objective, FASB decided, a reporting entity should discuss the significant changes in timing and amounts, as reflected by proposed tabular disclosures, that occur from the last reporting period to the current period. Reasons for any changes and actions taken during the current period to manage the exposure must be discussed.

Conclusions reached at board meetings are tentative and may be changed at future board meetings.

FASB also decided to create a definition of the term “financial institution” to be used in the proposed ASU that would use the basic premise that a financial institution intends to earn its primary source of income as a result of managing the difference between returns paid on its financial liabilities and returns received on its financial assets.

The board decided that entities or reportable segments that meet this definition, as well as those that provide insurance, should be required to provide the same disclosures.

Entities that carry substantially all assets at fair value with changes in fair value recognized in net income will not be required to provide the disclosures in the proposed ASU that apply only to financial institutions.

FASB also made tentative decisions regarding how modified debt instruments should be considered within the “three bucket” model with regard to impairment. The board tentatively decided that an entity would use a credit impairment allowance measurement objective of “lifetime expected credit losses” for modified debt instruments in which the lender, because of the debtor’s financial difficulties, grants a concession to the borrower that the lender would not otherwise consider. These are known as “troubled debt restructurings” under U.S. GAAP.

In these circumstances, the board concluded, a modified debt instrument is a continuation of the existing instrument and would be evaluated for credit deterioration in accordance with the instrument’s original concerns.

FASB is jointly conducting the accounting for financial instruments project with the International Accounting Standards Board (IASB) in an effort to create converged standards. According to FASB’s current technical plan, an exposure draft on liquidity and interest rate disclosures is expected in the second quarter of 2012. An ED on impairment is scheduled for the second half of 2012, although FASB is continuing to deliberate the issues in that project.

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