August 15, 2012

FASB Proposes Additional Disclosures for Liquidity and Interest Rate Risk

 

On June 27, 2012, the Financial Accounting Standards Board (“FASB”) issued a proposed Accounting Standards Update (“ASU” or “Update”) entitled Disclosures about Liquidity Risk and Interest Rate Risk.

The ASU contains several amendments that would apply only to financial institutions and some that would apply only to non-financial institutions. The purpose of the ASU is to provide users of financial statements with additional information about a reporting entity’s liquidity risk and interest rate risk. The proposed liquidity risk disclosures would provide information about the risks a reporting entity might encounter in meeting its financial obligations. For financial institutions, the proposed ASU would require tabular disclosure of the carrying amounts of classes of financial assets and liabilities segregated by their expected maturity date. These would include off-balance-sheet financial commitments and obligations. Expected maturity, as defined by the Update, is the expected settlement of the item resulting from its contractual terms (e.g., call dates, maturity dates, etc.). The proposal would also require a financial institution to disclose in a tabular format its available liquid funds, which would include such items as unencumbered cash and other highly liquid assets. In addition, the proposal would mandate that depository institutions also disclose information about their time deposit liabilities. This information would include, but not necessarily be limited to, information about the cost of funding from the issuance of time deposits and the acquisition of any brokered deposits during the previous four fiscal quarters.

The proposed interest rate risk disclosures are designed to provide users of financial statements with information about the exposure of a financial institution’s financial assets and financial liabilities to fluctuations in market interest rates. The disclosure would require displaying the carrying amounts of financial assets and liabilities broken out by time intervals, based on the contractual repricing of the financial instruments. A weighted-average contractual yield by financial instrument class would be disclosed as well. Another required disclosure for a financial institution would be an interest rate sensitivity table that shows hypothetical shifts in the entity’s net income and shareholders’ equity based on instantaneous shifts of interest rate curves as of the report date. Lastly, the proposal would require financial institutions to provide additional disclosures, in either a quantitative or narrative format, to assist users of the financial statements in understanding an entity’s exposure to interest rate risk. This would include a discussion of the reasons behind a significant change in a financial institution’s interest rate risk measurement from its previously issued financial statements.

 

The public has until September 25, 2012, to submit comments to the FASB on the proposed ASU. PYA will continue to follow developments about this exposure draft. To discuss how the professionals at PYA can assist your financial institution, please contact the experts listed below at (800) 270-9629.

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Read the FASB’s ASU in its entirety here

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