The Financial Accounting Standards Board has proposed a new accounting standard to require companies to explain more to investors about where companies may face risks due to liquidity or interest rates.
The proposed Accounting Standards Update is intended to draw out disclosures about exposures to certain risks related to financial assets, liabilities, obligations, and other financial instruments, with a special focus on disclosures around potential problems with liquidity and interest rate changes. Those are two of the big risks that emerged during the financial crisis and continue to figure prominently for many organizations on an ongoing basis, said FASB member Marc Seigel in a podcast explaining the proposal. The board addressed disclosures about credit risk earlier in a 2010 update to accounting standards to call for more disclosures about the credit quality of financing receivables and the allowance for credit losses.
FASB is establishing liquidity risk disclosures to give investors more information when a company will have trouble meeting its financial obligations due to liquidity problems. Financial institutions will be required to provide more and different information than public companies, but the requirements will apply broadly to all types of entities. Disclosures around interest rate risk are intended to help investors see where financial institutions may have financial assets or financial liabilities that are exposed to risk because of fluctuations in interest rates. Those disclosures will apply only to financial institutions as they are defined in the proposed standard.
Seigal said the board's work on new rules for financial instruments and derivatives led users to point out that regardless of the accounting the board chooses, users of financial statements still need more transparency into the risks entities face related to those financial instruments. That prompted the board to develop the disclosure requirements, he said. “It is my hope that this proposal, which generally provides for expanded, standardized, tabular disclosures, would meet users' needs while balancing costs to preparers,” he said.
For all entities subject to the liquidity risk disclosures, the proposed change to accounting rules would require financial institutions to disclose the carrying amounts of classes of financial assets and financial liabilities in a table, separated by expected maturities, including any off-balance-sheet commits or obligations. Financial institutions that are also depository institutions would disclose information about time deposit liabilities, including the cost of funding. Entities that are not financial institutions would disclose expected cash flow obligations in a table, according to maturities. All entities would also provide information on available liquid funds, borrowing availability, and additional qualitative or narrative disclosures about exposure to liquidity risk.
FASB is accepting comments on the proposal through Sept. 25. It has not yet established a planned effective date for the final standard.