Financial instruments disclosure: the FASB's intentions.

• Author: Blanchet, Jeannot
• Position: Financial Accounting Standards Board - Includes related article

In the March/April 1988 edition of Financial Executive, two of my FASB colleagues, Lynn C. Hynes and Halsey G. Bullen, wrote an article about a 1987 exposure draft, "Disclosures about Financial Instruments" ("FASB Moves to Improve Financial Instruments Disclosure") The exposure draft was the first document published since the Board added to its agenda a major project on financial instruments and off-balance-sheet financing.

The draft, intended to be an interim step to improve information about financial instruments in the financial statements, pending completion of the recognition and measurement part of the project, proposed a comprehensive set of disclosures about the credit, liquidity, market, and interest-rate risks of financial instruments, including both assets nd liabilities on and off balance sheet. The article concluded with: "The Board encourages commentators who disagree with provisions of the exposure draft to suggest alternative improved disclosures about financial instruments that would satisfy the objectives set forth in the exposure draft. Comment letters providing that kind of information will have a major influence in deliberations on the final statement, scheduled for issuance in the third quarter of 1988."

What happened to the 1987 exposure draft?

Many constituents took the opportunity to Comment on the disclosures proposal; over 450 comment letters were received. A majority of respondents voiced their concern at the comprehensiveness of the proposed disclosures, believing that too much was required at the same time. The Board considered these comments and eventually concluded that the disclosure part of the financial instruments project should be addressed in phases; the 1987 ED never became a final statement,

The Board then decided to proceed with the first phase of the project, dealing mainly with financial instruments with off-balance-sheet risk because of the greater lack of adequate information on these instruments. The FASB issued a revised exposure draft in 1989 and, in March 1990, FASB Statement 105, "Disclosure of Information about Financial Instruments with Off-balance-sheet Risk and Financial Instruments with Concentrations of Credit Risk," was issued to complete the first phase.

At the same time, the Board decided to commence a second disclosure phase, focusing on market value disclosures. The first milestone on this project was issuing the exposure draft "Disclosures about Market Value of Financial Instruments," on December 31, 1990.

What's different this time? Of the disclosures proposed in the 1987 ED, the requirement to disclose the market value of all financial instruments was the most controversial. Respondents gave a variety of reasons for their opposition (the fact th t too many disclosures were required at the same time was certainly a compounding factor), but the problems could be broadly summarized by two words: subjectivity and costs. Some critics said that the lack of guidance on how to estimate the market value of a financial instrument would lead companies to use a wide array of methods and assumptions, resulting in a lack of comparability of the market value information among financial statements of entities, and even within the financial statements of the same entity, from year to year. Others said the costs of developing the systems necessary to provide the information were excessive, although many respondents acknowledged that they could not clearly estimate those costs.

Those two arguments were carefully considered by the Board in developing the 1990 ED. However, some similarities between the new exposure draft and the 1987 ED remain:

* The general requirement is to disclose an estimate of the market value of all financial instruments, both assets and liabilities on and off balance sheet (with a few exceptions), when it is practicable to estimate that value.

* When it is not practicable to estimate market value, other information pertinent to the market value of a financial instrument should be provided such as carrying amount, interest rate, maturity).

* There is no prescribed way to disclose the information in the financial statements as long as it is included in the body of the financial statements or in the accompanying notes.

* The requirements apply to all types of entities, including nonfinancial, private, or smaller entities.

Yet, despite the current similarities between the two EDs, the FASB did make significant changes in the 1990 version in response to comments received in 1987. In general, these changes aim at reducing the costs of complying with the disclosure...