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The Financial Accounting Standards Board has decided it will establish some new disclosure requirements for all companies to say more about their risks related to liquidity, but only financial institutions will also be required to make further disclosures about risks tied to changes in interest rates.
The board has made some preliminary decisions to require public companies to make liquidity risk disclosures in every interim and annual reporting period. Related to financial instruments, FASB plans to require entities to disclose exposure to liquidity and interest rate risks and explain how they arise. Companies would also tell investors their methods use to measure those risks and their objectives, policies, and processes for managing the risks.
With respect to liquidity risk, companies would be required to disclose their available liquid funds, including cash and high-quality liquid assets, and their ability to borrow, such as through lines of credit. The narrative would explain any effect of regulatory, tax, legal, and other restrictions that could limit an entity's ability to transfer funds among entities in a consolidated group, such as between a parent company and its subsidiaries.
Financial institutions would face a further requirement to provide a tabular disclosure based on expected maturities of their various classes of financial assets and financial liabilities. The table would include a company's off-balance-sheet commitments, such as loan commitments and lines of credit, FASB says. The tabular disclosure for nonfinancial entities would focus only on undiscounted cash obligations, including any off-balance-sheet obligations.
For financial institutions, the disclosures regarding interest rate risk also would be provided in a tabular format, arranged according to when interest rates would reset for classes of financial assets and financial liabilities, causing them to reprice. The table would also include the weighted-average yield and the duration of the classes. Financial institutions would also provide a tabular disclosure illustrating the effect of possible interest rate shifts in any interest-sensitive financial assets and liabilities.
In deliberating a larger project to write a new standard on accounting for financial instruments, FASB says it has heard from users of financial statements that there's a need for more information about liquidity and interest rate risk. FASB has not yet determined when it will publish a proposal related to the new disclosures.
Source: Compliance Week
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