Financial Statements for Financial Institutions Just Got Longer
At the same time when the FASB is trying to address the issue of disclosure overload, a failed attempt to converge standards has resulted in the FASB and IASB issuing new requirements for increased disclosures related to net positions on various contracts. US GAAP allows companies to present derivatives on a net basis when they meet certain criteria. In contrast, IFRS requires that all positions on financial instruments be reported on a gross basis. The Boards began a joint project with the objective of converging on this issue, and issued a proposed standard earlier this year that narrowed the circumstances when netting would be permitted. However, after receiving feedback from stakeholders, the Boards decided to retain their respective positions. The result: a new standard that requires additional disclosure meant to help financial statement users understand the effects of the different models.
At a minimum, an entity is to disclose (separately for financial assets and liabilities, including derivatives):
(a) The gross amounts of recognized financial assets and liabilities;
(b) The amounts offset under current U.S. GAAP;
(c) The net amounts presented in the balance sheet;
(d) The amounts subject to an enforceable master netting arrangement or similar agreement that were not included in (b); and
(e) The net amount (i.e., the difference between (c) and (d)).
These disclosures will have the greatest impact on institutions that hold derivatives, repurchase and reverse repurchase agreements, and securities lending and borrowing arrangements.
The outcome represents an interesting case where the Boards set out to converge on a topic, but ultimately could not agree. An implication might be that this experience reinforces the notion that the US must retain full authority over US GAAP and any attempts to integrate IFRS will be doomed to failure. After all, if we can’t agree on offsetting, how can we expect to agree on more substantive issues that come up down the road? On the other hand, this outcome might merely serve as an example of how the FASB would retain its role in standard-setting after the integration of IFRS. The FASB can actively voice its opinion with the IASB during deliberations, and establish different requirements in cases where there is disagreement – consistent with the SEC’s “condorsement” model. However, does this mean that if the SEC does decide on IFRS integration, we can expect carve-outs from IFRS to the extent where the potential benefits from adopting IFRS are mitigated, or even eliminated?