FASB Proposes More Disclosures about Risks (for Financial Institutions)

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As part of its ongoing financial instruments projects,
the Financial Accounting Standards Board (FASB)
has proposed an Accounting Standards Update (ASU)
which requires additional disclosures by reporting
entities regarding information about liquidity and
interest rate risks arising from the entity’s use of
financial instruments. The FASB’s proposal for more
risk disclosures contains new disclosure requirements
for companies in all industries; however, several
disclosure requirements apply only to entities that
meet the definition of a financial institution. The
disclosure requirements applicable to financial
institutions also apply to any finance subsidiaries or
reporting segments that separately meet the definition
of a financial institution even though the company as
a whole does not otherwise meet the definition of a
financial institution.
The original version of this Messenger
(MHM Messenger 13-12a) discusses that the added
reporting requirements are designed to assist users
of financial statements in understanding a company’s
exposure to two types of risks: (1) liquidity risk, meaning
the risk that the reporting entity may encounter difficulty
in meeting obligations to be settled by delivering cash
or another financial asset, and (2) interest rate risk,
defined as the exposure of a financial institution’s
financial instruments to fluctuations in market interest
M AY E R H O F F M A N M C C A N N P . C . – A N I N D E P E N D E N T C P A F I R M
A publication of the Professional Standards Group
August 2012 MHMMessenger
FASB Proposes More Disclosures about Risks
for Financial Institutions
© 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
rates. The Proposed ASU does not address any
additional disclosures related to credit risk, as the
FASB believes such disclosures were adequately
addressed by ASU 2010-20. This Messenger provides
an overview of the proposed liquidity and interest rate
risk disclosures that apply to financial institutions.
See MHM Messenger 13-12a for a discussion of the
disclosure requirements and considerations applicable
to non-financial institutions.

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FASB Proposes More Disclosures about Risks (for Financial Institutions)

  1. 1. August 2012MHMMessenger TM M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M A publication of the Professional Standards Group FASB Proposes More Disclosures about Risks for Financial Institutions As part of its ongoing financial instruments projects, rates. The Proposed ASU does not address any the Financial Accounting Standards Board (FASB) additional disclosures related to credit risk, as the has proposed an Accounting Standards Update (ASU) FASB believes such disclosures were adequately which requires additional disclosures by reporting addressed by ASU 2010-20. This Messenger provides entities regarding information about liquidity and an overview of the proposed liquidity and interest rate interest rate risks arising from the entity’s use of risk disclosures that apply to financial institutions. financial instruments. The FASB’s proposal for more See MHM Messenger 13-12a for a discussion of the risk disclosures contains new disclosure requirements disclosure requirements and considerations applicable for companies in all industries; however, several to non-financial institutions. disclosure requirements apply only to entities that meet the definition of a financial institution. The How would financial institutions be affected? disclosure requirements applicable to financial institutions also apply to any finance subsidiaries or The FASB’s proposed requirements are contained reporting segments that separately meet the definition in Proposed ASU, Financial Instruments (Topic 825), of a financial institution even though the company as Disclosures about Liquidity Risk and Interest Rate a whole does not otherwise meet the definition of a Risk. Interest rate risk disclosure requirements are financial institution. applicable only to entities that meet the definition of a financial institution. Additional and unique liquidity risk The original version of this Messenger disclosures are also required for financial institutions. (MHM Messenger 13-12a) discusses that the added Highlights of these disclosure requirements are as reporting requirements are designed to assist users follows. of financial statements in understanding a company’s exposure to two types of risks: (1) liquidity risk, meaning A. Definitions and guidelines. To determine if a the risk that the reporting entity may encounter difficulty reporting entity must comply with the disclosure in meeting obligations to be settled by delivering cash requirements applicable to financial institutions, or another financial asset, and (2) interest rate risk, companies would look to the following definition. defined as the exposure of a financial institution’s financial instruments to fluctuations in market interest – The term financial institution includes entities or reportable segments within an entity whose primary business activity is to either: (a) earn, as a primary source of income, the difference between interest income generated by earning assets and interest paid on borrowed funds, or (b) provide insurance. roots run deep® TM (Continued on Page 2) our © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
  2. 2. MHMMessenger(Continued from Page 1) An entity that measures substantially all of its on its contractual terms. This analysis requires assets at fair value with changes in fair value judgment for instruments that contain items such recognized in net income, such as a broker-dealer as puts/call, prepayments and other provisions; or investment company, does not meet the definition however, it does not include consideration of of a financial institution, thus only the liquidity management’s intent to either sell or transfer disclosures applicable to non-financial institutions the financial instruments. If the expected are required for such entities. However, such maturity differs significantly from the contractual companies would need to consider the nature of maturity, additional disclosures regarding the business activities of their reportable segments. management’s assumptions in determining the If a reportable segment meets the definition of a expected maturities are required. financial institution, the applicable disclosures are required for that individual reportable segment – Financial institutions would also need to or segments. Disclosures for multiple reportable disclose off-balance sheet commitments and segments that meet the definition of a financial obligations, including open lines of credit and institution may be combined. unextended loan commitments.LIQUIDITY RISK DISCLOSURES – The liquidity gap maturity analysis would be provided in lieu of the expected financial cashB. Available liquid funds analysis. All companies, flow obligations table required for non-financial including financial institutions, would be required companies (as described in MHM Messenger to disclose in a tabular format their available liquid 13-12a). funds as described and illustrated in Messenger 13-12a. D. Issuance of time deposits. In addition to the above requirements, depository institutions wouldC. Liquidity gap maturity analysis. To help users need to provide a table showing the issuance of of financial statements understand the expected time deposits (both insured and uninsured) and timing of cash inflows vs. the expected timing of brokered deposits over the previous four quarters, cash outflows, a financial institution would also along with the weighted average contractual yield be required to provide a tabular liquidity gap and weighted average contractual life for the maturity analysis of its financial instruments. The deposits issued or acquired over the previous four rows of the table would reflect types of financial quarters. instruments broken down by individual classes of financial assets and liabilities. The columns would INTEREST RATE RISK DISCLOSURES show the expected maturities disaggregated by specific time intervals and total carrying amount E. Repricing gap analysis. To help users of financial for each class of financial instrument. Key points: statements understand an entity’s strategies for matching the duration of interest-bearing assets – The expected maturities used for this table and liabilities as well as exposures to fluctuations would generally relate to the expected in market interest rates,financial institutions would settlement of each financial instrument based be required to provide a repricing gap analysis (Continued on Page 3) © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
  3. 3. MHMMessenger(Continued from Page 2) table that shows when interest rates for financial OTHER instruments reset or reach maturity. The columns would represent predefined time intervals, and G. Supplemental disclosures. For both liquidity and the table would also provide information about interest rate risks, financial institutions would be weighted average contractual yields and carrying required to include any additional quantitative or amounts. narrative disclosures necessary to provide users of financial statements with an understanding ofF. Interest rate sensitivity analysis. In addition to their exposures to these risks. Such disclosures the repricing gap analysis, financial institutions should include significant changes in strategies would be required to provide an interest rate over the past year. sensitivity analysis that shows the effects on the following 12 months after-tax net income and Open questions shareholders’ equity of hypothetical instantaneous interest rate shifts. The hypothetical scenarios The Exposure Draft is open for comment through would include various 100 and 200 basis point September 25, 2012. The FASB is asking for comments parallel shifts as well as flattening and steeping on a number of open questions for users, preparers, shifts in the yield curve. In order to allow for better and auditors, including operational concerns, how comparability, the FASB determined that such much lead time would be required to prepare for and disclosures should be based on the current portfolio implement the proposed amendments and whether and should not incorporate expected changes to the effective date should be delayed for nonpublic asset mix or other potential strategies that may entities. result due to the changes in the rate curve. The disclosures are similar to those currently required For more information by public entities in Management’s Discussion and Analysis; however, the proposed ASU would If you have any specific questions, comments or make similar information available in the notes concerns, please share them with Mike Loritz of MHM’s to the financial statements, thereby extending Professional Standards Group or your MHM service the reporting requirement to private companies professional. You can reach Mike directly by email at and subjecting the reported information to audit mloritz@cbiz.com or by telephone at 913-234-1226. and internal control assessments (as applicable). Examples of the required disclosures are shown in the illustrative tables on the following page. The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM service provider to further discuss the impact on your financial statements. © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
  4. 4. MHM Messenger 13‐12b for Financial Institutions: FASB Proposes More Disclosure about Risks Illustrative Tables – Interest rate sensitivity Hypothetical Yield Curve, December 31, 20X1 3-Month 6-Month 1-Year 2Year 3-Year 5-Year 7-Year 10-Year 20-Year 30-YearYield curve at Dec. 31, 20X1 1.50% 1.60% 1.70% 2.00% 2.50% 3.50% 4.40% 5.00% 5.45% 5.80% +200 bps 3.50% 3.60% 3.70% 4.00% 4.50% 5.50% 6.40% 7.00% 7.45% 7.80% +100 bps 2.50% 2.60% 2.70% 3.00% 3.50% 4.50% 5.40% 6.00% 6.45% 6.80% -100 bps 0.50% 0.60% 0.70% 1.00% 1.50% 2.50% 3.40% 4.00% 4.45% 4.80% -200 bps 0.00% 0.00% 0.00% 0.00% 0.50% 1.50% 2.40% 3.00% 3.45% 3.80%100 bp flattening of curve Short end 2.50% 2.60% 2.70% 3.00% 2.50% 3.50% 4.40% 5.00% 5.45% 5.80% Long end 1.50% 1.60% 1.70% 2.00% 2.50% 3.50% 4.40% 4.00% 4.45% 4.80%100 bp steepening of curve Short end 0.50% 0.60% 0.70% 1.00% 2.50% 3.50% 4.40% 5.00% 5.45% 5.80% Long end 1.50% 1.60% 1.70% 2.00% 2.50% 3.50% 4.40% 6.00% 6.45% 6.80% Interest Rate Sensitivity, December 31, 20X1 Estimated Increase/(Decrease) Estimated Increase/(Decrease) In Net Income In Shareholders’ Equity Shareholders’Parallel Change in Interest Rates Net Income Amount Percent Equity Amount Percent+200 bps $ xx,xxxx $ x,xxx x.xx% $ xx,xxxx $(x,xxx) (x.xx)%+100 bps $ xx,xxxx $ x,xxx x.xx% $ xx,xxxx $(x,xxx) (x.xx)%Yield curve at Dec. 31, 20X1 $ xx,xxxx -- -- $ xx,xxxx -- ---100 bps $ xx,xxxx $(x,xxx) (x.xx)% $ xx,xxxx $ x,xxx x.xx%-200 bps $ xx,xxxx $(x,xxx) (x.xx)% $ xx,xxxx $ x,xxx x.xx%100 bp Flattening of curve Short end $ xx,xxxx $ x,xxx x.xx% $ xx,xxxx $(x,xxx) (x.xx)% Long end $ xx,xxxx $(x,xxx) (x.xx)% $ xx,xxxx $ x,xxx x.xx%100 bp steepening of curve Short end $ xx,xxxx $(x,xxx) (x.xx)% $ xx,xxxx $ x,xxx x.xx% Long end $ xx,xxxx $ x,xxx x.xx% $ xx,xxxx $(x,xxx) (x.xx)% © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.

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