Plan to amend interest rate risk disclosure guidance is dropped from standard-setting agenda

It was supposed to have been a consolation prize to investors stung by the FASB’s decision not to require that financial instruments be measured at fair value.

But the board’s 2012 Proposed Accounting Standards Update (ASU) No. 2012-200 Financial Instruments (Topic 825) Disclosures About Liquidity Risk and Interest Rate Risk — which included the draft of a requirement for banks to disclose information about short-term access to cash and the risks they faced from fluctuating interest rates — unleashed a torrent of criticism from businesses concerned about the detail in the disclosure requirements and the work it would take to compile the information. Others said the information was better suited for the Management's Discussion and Analysis (MD&A) section of a regulatory filing, which is covered by SEC rules. In 2014, the FASB took a step back, deciding to focus only on disclosures about interest rate risk and made the project less of a priority by moving it to its research agenda and removing from the active standard-setting initiatives.

On Sept. 21, 2017, the board decided to bring all work on the project to an end.

“The proposed disclosures are not relevant, as they do not reflect how a financial institution manages its risk,” a FASB staffer told board members. “The staff also believes this project is better in the purview of the SEC.”

A 6-1 majority of the accounting board agreed, with FASB member Marc Siegel casting the dissenting vote. Siegel, a former analyst, said investors found information about exposure to interest rate fluctuations key to their analysis, especially at times when interest rates are volatile. Some information is available in the MD&A section of quarterly and annual filings and registration statements, but the information is based on how a business manages its risk, he said.

“When you are trying to figure out which bank to spend your time looking at, there aren’t any comparable disclosures from one to the other,” he said.

Some analysts and investors might see the project’s termination coming at a sensitive time, given that interest rates have remained at historic lows for an extended period as central banks around the world shored up the markets that were damaged during the financial crisis. Now as the Federal Reserve in the U.S. and its overseas counterparts unwind the unprecedented stimulus they injected into the markets, some analysts and economists are anticipating that interest rates will rise.

If rates do climb, the footnote disclosures about interest rate risk could help analysts evaluate the effect of rate increases on banks’ financial performance. But some market participants have spent most of the post-crisis years warning that because of the stimulus, interest rates were destined to soar, and there has been no rate spike since the financial markets recovered from the crisis.

FASB member Harold Schroeder, also a former analyst, voted in favor of scrapping the project because of the topic’s complexity.

“This is one where I don’t think there’s a clear solution that’s cost effective,” Schroeder said.

The FASB made several other decisions about its standard-setting priorities, agreeing to continue with its research agenda work to simplify the accounting for income taxes, inventory, and cost of sales, and improvements to the statement of cash flows.

The examination of inventory accounting could be a significant undertaking if the FASB adds it to its active agenda, and it could offer an improvement to the disparate inventory accounting guidance in U.S. GAAP, Chairman Russell Golden said.

“We’ve done a lot to have an aligned top line,” Golden said, referring to the revenue recognition standard, which goes into effect for public companies in 2018. “But we don’t have necessarily an aligned margin, which are both critical numbers that investors in manufacturing and retail use.”

The board also agreed to keep looking for ways to have not-for-profit organizations present their financial status, including the direct method of presentation in the statement of cash flows and a consistent operating measure that would be required for all not-for-profits. The effort would be part of the board’s larger work on performance reporting, which the board separately agreed would be its next major, active standard-setting initiative. (See Projects to Move Forward to Amend Guidance for Performance Reporting, Liabilities and Equity in the Sept. 21, 2017, edition of Accounting & Compliance Alert.)

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