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.

1. August 2012
MHMMessenger
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
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2. MHMMessenger
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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 cash
B. 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 would
C. 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
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3. MHMMessenger
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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 of
F. 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.
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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-Year
Yield 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)%
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