New Liquidity Risk Disclosures Proposed for Independent Institutions
July 12, 2012
The Financial Accounting Standards Board (FASB) has proposed new financial statement disclosures about risks arising from an entity's recorded and unrecorded financial instruments and cash flow obligations. The proposed Accounting Standards Update (ASU) would require both quantitative and qualitative disclosures aimed at helping users of its financial statements better assess an institution's ability to meet its financial obligations.
In the wake of the financial crisis of 2008, financial statement users identified several areas that, if appropriately disclosed, would allow them to better understand the inherent risks associated with certain financial instruments and how those might contribute to an entity's broader risks. To address some of those concerns, the FASB has issued a proposed ASU aimed at helping financial statement users better assess an organization's ability to meet its financial obligations.
The proposal, "Disclosures about Liquidity Risk and Interest Rate Risk - Financial Instruments (Topic 825)," calls for new financial statement disclosures about risks arising from an entity's recorded and unrecorded financial instruments and cash flow obligations. While many of the proposed disclosures would be required only for financial institutions, all entities-including not-for-profits-would have to disclose both quantitative and qualitative information about risks associated with liquidity.
For example, an independent institution would be required to provide a table showing its expected cash flow obligations segregated by expected maturities. This would include both recorded liabilities and off-balance sheet obligations, such as unfunded investment commitments. In a separate table, the institution would have to disclose available liquid funds.
The proposal defines available liquid assets as unencumbered cash, high-quality liquid assets, and borrowing availability (such as lines of credit). In addition to presenting the quantitative information in the tables, an institution would need to provide a narrative about its exposure to liquidity risk. The proposed disclosures would also require an explanation of any significant changes in cash flow obligations from the prior period.
NACUBO staff and its Accounting Principles Council (APC) are studying the proposed ASU to determine the effort involved in providing the required disclosures and the value of those disclosures to users of financial statements. The APC will provide feedback to FASB on these issues by the September 25, 2012, comment deadline.
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