FinREC and TIC Respond to FASB’s Proposed ASU on Liquidity and Interest Rate Risk Disclosures

October 18, 2012

The American Institute of CPAs’ Financial Reporting Executive Committee (FinREC) issued a comment letter to the Financial Accounting Standards Board (FASB) on the Board’s recent Proposed Accounting Standards Update (ASU), Financial Instruments (Topic 825):  Disclosures about Liquidity Risk and Interest Rate Risk.  FinREC said in its letter that it does not believe FASB will achieve its intended objective by finalizing this proposal. 

FinREC pointed out that while it is FASB’s intent to put in place corrective guidance in response to the past financial crisis, the proposed disclosures would not have provided users with an early warning sign of these past companies’ failures.  One of the fatal flaws is that the proposed disclosures are static; that is, they provide a point-in-time picture of a company’s financial position using unrealistic assumptions.  The proposed “expected maturity” framework is simply not the way companies manage their liquidity and interest rate risks and uncertainties.  

FinREC also said it believes that the proposed disclosures seem counterintuitive to the FASB’s ongoing disclosure project aimed at improving the effectiveness of disclosures.  FASB should strive to simplify financial reporting rather than add on additional complex requirements that will not be useful to investors.

Furthermore, FinREC said implementing the proposed ASU will be costly and burdensome for all entities.  Current systems will have to be redesigned to capture the required information under the financial reporting system.  Third-party services may have to be utilized to capture the data for smaller entities. 

FinREC observed that audit fees may rise as a result of the added cost of auditors to train their staff and assume the additional risk of auditing information normally found in the MD&A, which is currently afforded safe harbor protection. 

For this reason, FinREC said it believes that requiring disclosures in the financial statements is not the appropriate place to report much of the requested information.  “Many of the proposed disclosures are forward looking and should be left in the MD&A,” FinREC wrote.  Any identified issues would be better addressed through a Securities and Exchange Commission project to enhance the MD&A, rather than moving forward along the FASB’s current path.  For private companies, this issue should be taken on by the Private Company Council before proceeding, FinREC said.  

FinREC said it further believes that the liquidity issue would be better addressed in FASB’s going concern project, which also considers liquidity constraints, as well as other risk, in the context of identifying events and conditions that could have a severe impact on future operations. 

The Technical Issues Committee (TIC) of the AICPA's Private Companies Practice Section shares this sentiment.  The TIC issued a separate comment letter to the FASB on this proposed ASU.  Both the TIC and FinREC recommended that the project be deferred for private entities until FASB’s newly created Private Company Council can reassess the proposed disclosures in connection with its review of the upcoming proposed Going Concern ASU.

Overall, both FinREC and TIC believe that the additional cost of developing the disclosures will outweigh the benefits derived by the users of private company financial statements.  With regard to the proposed interest rate risk disclosures that only apply to financial institutions, FinREC and TIC recommended that financial institutions with less than $1 billion in assets be exempt from the proposed disclosure requirements.