SEC Market-Risk Disclosures: Enhancing Comparability

Abstract

In 1997, the U.S. SEC mandated through Financial Reporting Release No. 48 (FRR48) the disclosure of forward-looking market risk information. Because of the recency of the required risk disclosures, little has been written about them or about how analysts might use them. FRR48 allows three disclosure formats—sensitivity measures, value at risk, and a tabular format. The issue is that variations among the disclosure formats and the discretion allowed about assumptions underlying sensitivity and VAR measures may impair analysts' use of the disclosures. We demonstrate how sensitivity and VAR measures can be derived from the tabular format. Our methodology allows financial analysts to derive risk measures based on consistent assumptions among companies. Tabular data provide a common denominator by which companies may be compared and provide a means of overcoming the limitations of sensitivity and VAR measures.