Accountants will not be the only ones relying on tables to explain financial data, if the Financial Accounting Standards Board’s (FASB) liquidity disclosure proposal moves forward. CFOs and CEOs of nonfinancial companies will have to use more of them in their company’s financial reporting.
FASB asked for comments on June 27 regarding its plan to improve financial reporting, specifically regarding liquidity risk for nonfinancial institutions. Under the plan, all nonfinancial companies would have to disclose their expected cash-flow obligations in a table that is segregated according to expected maturity. At the same time, they would not have to include financial assets in the table.
In another requirement, nonfinancial companies would have to provide their available liquid funds in a table, as financial companies currently do. Those assets include unencumbered cash, high-quality liquid assets, and borrowing availability. And both financial and nonfinancial companies would also have to be prepared to discuss significant changes in the quantitative table — in particular, how they managed those changes during the current period.
Why all the tables? Comments on previous FASB proposals showed there was a significant divergence in comparable reporting styles between organizations. Without the table format, it was hard for market participants to assess the financial condition of similar companies in the area of liquidity risk and interest-rate risk. Users of financial statements consistently asked for expanded and standardized information, according to a FASB focus report.
FASB’s disclosure risk proposal hopes to curb those differences by requiring the table format to more easily disclose exposures a firm may have to certain risks related to financial assets and other obligations. The liquidity disclosure requirement is part of a broader proposal that also sets requirements for interest-rate risk disclosure for financial institutions.
FASB decided not to require interest-rate risk disclosures for organizations that are not financial institutions because “. . . managing the differences in re-pricing of interest earning assets and interest payments on financial liabilities and the difference in income that results was not a strategic imperative for these organizations.”
The disclosure risk requirements would also apply to private nonfinancial companies and not-for-profits, within moderation. FASB recommends that these organizations provide liquidity risk disclosures for annual reporting periods only and that private financial institutions provide interest-rate risk disclosures annually as well.
Comments on the disclosure proposal are due by September 25.