Two Questions on FASB’s Liquidity and IRR Proposal

What are the consequences of including this information in the audited financial statements of a non-public financial institution?
The primary users of the financial statements of a non-public financial institution are management, members of the Board of Directors or Trustees, regulators, insurers and counterparties.   While most would agree that such information is meaningful and relevant to the financial institution, we expect that the question of whether it belongs in audited financial statements will be hotly debated in comment letters to the FASB.  For public companies, one could argue that placement of relevant information related to liquidity and interest rate risk should reside in “Management’s Discussion and Analysis” sections of SEC filings.  For non-public companies, one could argue that those who are interested in such information have access to it through internal management reports.  Including the proposed disclosures in the footnotes to the audited financial statements elevates management’s responsibility for the information, and creates an audit responsibility on the part of external auditors.  The following are issues to consider, whether an entity is a public or non-public financial institution:

• Internal controls over financial reporting would be expanded to include controls over the preparation, completeness and accuracy of the disclosures.
• Accounting systems and technologies may need to be enhanced in order to accumulate the required information in an accurate and timely manner.
• Whereas in some instances a third party may currently be responsible for preparation of certain of the information, specifically as it pertains to interest rate sensitivity, management would assume greater  responsibility for this information and would necessarily be required to obtain the relevant knowledge to provide appropriate oversight over its preparation.
• There will be added personnel costs associated with the new disclosures, as well as additional audit costs.

As part of the FASB’s outreach, they interacted with over 40 users of financial statements and 12 financial institutions that are preparers of financial statements.  Users expressed a need for standardized, consistent information on financial instruments beyond credit risk.  However, thus far, feedback on this proposal has not been positive.   Does the benefit of providing this level of disclosure justify the additional cost?

By requiring industry-specific disclosures for financial institutions, is FASB introducing a troubling precedent?

The disclosure requirements in the proposed ASU specifically carve out the financial institution industry.  Recent trends from a standard setting perspective have been to differentiate between public and non-public companies, but generally have not differentiated between various industries.

At its April 25, 2012 Board Meeting, the FASB decided that a privately held financial institution, including mutually held institutions, should be included in the definition of a private company.  This conclusion is  extremely important as the definition of a private company will be used for standard-setting purposes and to determine which entities ultimately will be included in the scope of the private company decision-making framework.  However, as noted in this proposed ASU, the definition of a private company could become less relevant to a community financial institution if the FASB continues to carve out this industry for disclosures that it believes are relevant.

As the leaves continue to change color and the Red Sox close up shop for the year, we will continue to follow the activities of the FASB and communicate any relevant information to you.

Please contact Daniel F. Morrill, CPA, Principal, Professional Practice group at dmorrill@wolfandco.com or James T. McGough, CPA, Senior Audit Manager at jmcgough@wolfandco.com if you have any questions.