FASB: Proposal for disclosing liquidity and interest rate risk

27 June 2012

The FASB published for public comment a proposed Accounting Standards Update (ASU), intended to improve financial reporting on certain risks inherent in financial instruments and how they contribute to the reporting organisation's broader risks. Comments are requested by September 25, 2012.

The Update is intended to address stakeholders’ concerns about how organisations disclose their exposures to certain risks related to financial assets, liabilities, obligations, and other financial instruments. Specifically, the ASU proposes new disclosures related to liquidity risk and interest rate risk, two risks that were prominent during the recent financial crisis and that continue to be relevant to reporting organizations on an ongoing basis. The FASB previously issued enhanced disclosure requirements about credit risk.

The proposed liquidity risk disclosures are intended to provide information about the risk that the reporting organisation will encounter difficulty when meeting its financial obligations, and would apply to all public, private and not-for-profit organisations. However, the nature of the disclosures will depend on whether the reporting organisation is considered a financial institution, as defined by the proposed Update.

The proposed interest rate risk disclosures would apply only to financial institutions and are intended to provide information about the exposure of financial assets and financial liabilities to fluctuations in market interest rates.

The amendments in the proposed ASU on liquidity risk disclosures would require:

• A financial institution to disclose the carrying amounts of classes of financial assets and financial liabilities in a table, segregated by their expected maturities, including off-balance-sheet financial commitments and obligations.
• A financial institution that is also a depository institution to disclose information about its time deposit liabilities, including the cost of funding in a table or list during the previous four fiscal quarters.  
• An organisation that is not a financial institution to disclose its expected cash flow obligations in a table, segregated by their expected maturities, without being required to include the reporting organisation’s financial assets in that table.  
• All reporting organisations 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 organisation’s exposure to liquidity risk, including discussion about significant changes in the amounts and timing in the quantitative tables and how the reporting organisation managed those changes during the current period.

The amendments in the proposed ASU on interest rate risk disclosures would require a financial institution 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 on net income and shareholders’ equity of hypothetical, instantaneous shifts of interest rate curves.
• quantitative or narrative disclosures of the organisation’s exposure to interest rate risk, including discussion about significant changes in the amounts and timing in the quantitative tables and how the reporting organisation managed those changes during the current period.

Press release

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