October 3, 1989
TO: CLOSED-END FUND MEMBERS NO. 44-89
SEC RULES MEMBERS NO. 52-89
ACCOUNTING/TREASURERS MEMBERS NO. 4-89
INDEPENDENT ACCOUNTANTS ADVISORY GROUP
RE: INSTITUTE COMMENTS ON FASB EXPOSURE DRAFT ON
OFF-BALANCE-SHEET RISK DISCLOSURES
__________________________________________________________
Attached is the Institute's comment letter to the Financial
Accounting Standards Board (FASB) on the FASB's Exposure Draft,
Disclosure of Information about Financial Instruments with Off-
Balance-Sheet Risk and Financial Instruments with Concentrations
of Credit Risk. (See Memorandum to Accounting/Treasurers
Committee No. 33-89 dated August 16, 1989.)
The Exposure Draft would require all entities to disclose
information about the following for financial instruments with
off-balance-sheet risk:
1. The face, contract, or notional principal amount and
the amount recognized in the statement of financial
position
2. The nature and terms of the instruments and a
discussion of the credit, market, and liquidity risk
and related accounting policies
3. The loss the entity would incur if any counterparty to
the financial instrument failed to perform
4. The entity's policy for requiring collateral or other
security on financial instruments it accepts and a
description of collateral on instruments presently
held.
The Exposure Draft would also require disclosure of
information about significant concentrations of credit risk for
all financial instruments.
The FASB expects to adopt a final statement of the Exposure
Draft in November, 1989, which would be effective for financial
statements issued for fiscal years ending after December 15,
1989. However, the required disclosures in item No. 4 above
regarding collateral and the additional disclosure requirements
for concentrations of credit risk for all financial instruments
would be effective for financial statements issued after June 15,
1990.
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The Institute's comment letter makes the following points:
1. Because most of the narrative disclosures proposed in
the Exposure Draft are already provided in an investment
company's current prospectus, we recommended that the final
statement adopted by the FASB permit investment companies to
comply with the narrative disclosure requirements by referencing
in the financial statement footnotes the relevant prospectus
disclosures.
2. With respect to the proposed requirement to disclose
the possibility of loss, even if remote, from the failure of
another party to perform according to the terms of a contract
(credit risk), with the assumption that any collateral proved to
be of no value to the entity, we recommended that estimates of
the possibility of loss attributable to credit risk be based on
more realistic assessments of risk, as currently required by FASB
Statement No. 5 for other loss contingencies. We also
recommended deletion of the required assumption that any
collateral is worthless in favor of consideration of the actual
fair value of the collateral.
3. As to the proposed disclosure requirements regarding
concentrations of credit risk for all financial instruments, we
recommended that the FASB clarify in its final statement of the
Exposure Draft that an investment company's schedule of
investments constitutes compliance with this requirement, as the
securities are grouped by type, issuer and industry and are
stated at market or fair value, which inherently reflects their
credit risks.
4. We also requested that the effective date for all of
the provisions of the final statement be June 15, 1990, because
the short period of time between expected adoption of the
statement in November, 1989 and implementation at December 15,
1989 would not provide sufficient time to adequately prepare for
compliance.
We will keep you advised of further developments.
Donald J. Boteler
Director of Operations/
Fund Accounting
Attachment