Academic journal article Journal of Accountancy

The FASB's New ED on Disclosure: Disclosures about Off-Balance-Sheet Exposures and Credit Risk Concentrations Are the FASB's Targets

Academic journal article Journal of Accountancy

The FASB's New ED on Disclosure: Disclosures about Off-Balance-Sheet Exposures and Credit Risk Concentrations Are the FASB's Targets

Article excerpt


Disclosures about off-balance-sheet exposures and credit risk concentrations are the FASB's targets. Are companies adequately disclosing information about the new financial instruments with off-balance-sheet risk--interest rate swaps, options written, forward interest rate contracts and financial guarantees? Some critics claim current information disclosed in the notes to financial statements is incomplete and not comparable.

In July 1989, the Financial Accounting Standards Board issued for comment a revised exposure draft, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk. This ED is more narrowly focused than the 1987 ED it replaces. See EXHIBIT 1 Summaries of the major provisions of the 1987 and 1989 exposure drafts.


Two years ago the FASB issued Disclosures about Financial Instruments. The purposes of disclosure set forth in the 1987 ED and retained in the 1989 ED are to

* Describe both recognized and unrecognized items.

* Provide a useful measure of unrecognized items and other relevant measures of recognized items.

* Provide information to help users assess risks and potentials of both recognized and unrecognized items.

Although many respondents agreed with the purposes of disclosure set forth, many also argued that the proposed disclosure requirements in the first ED were too extensive and that the cost of implementing them would be excessive. The FASB viewed the proposals as evolutionary; constituents viewed them as revolutionary.

The due process steps that followed the issuance of the first ED revealed an abundance of hotly debated issues. Many constituents contended off-balance-sheet issues are a driving force behind many of the financial reporting problems facing companies and were an important reason the project was added to the FASB's agenda in 1986. However, they argued that off-balance-sheet issues weren't sufficiently emphasized in the first ED. They urged the FASB to concentrate first on off-balance-sheet issues.

In the fall of 1988 the FASB decided to address the disclosure issues in two phases. Phase one resulted in the issuance of the revised ED. As its title implies, the current ED focuses principally on off-balance-sheet issues but also includes concentrations of credit risk for all financial instruments. Phase two, which is expected to begin when a final statement is issued on phase one, will include all financial instruments and will consider the need for information beyond that proposed in the ED, including information about interest rates, future cash receipts and payments and market value.


The current ED focuses on the reporting issues in most immediate need of improvement. The set of proposed disclosure requirements draws on information used in managing off-balance-sheet risk. In developing the proposals, the FASB

* Reviewed annual reports of companies that provide additional disclosure of information about financial instruments with off-balance-sheet risk either voluntarily or because of regulatory requirements.

* Reviewed the various Securities and Exchange Commission and regulatory reporting requirements concerning off-balance-sheet items.

* Reviewed how other standard-setting bodies around the world are responding to these issues.

* Requested and reviewed specific comments on those issues from task force members and other interested parties and organizations.

The FASB discussed the proposed disclosure requirements at eight public meetings. In addition, a mini-exposure of an earlier draft of the document's proposals was made to certain task force members and other constituents actively involved in the financial instruments project. The FASB also met with the financial instruments task force in April to discuss the document's proposals. …

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