IFRS 7 FINANCIAL INSTRUMENTS: DISCLOSURE
OBJECTIVE
IFRS 7 requires entities to provide disclosures in their financial statements that enable users to evaluate: the significance of financial instruments for the entity's financial position and performance, the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period and how the entity manages those risks The principles outlined in IFRS 7 complement the principles for recognising, measuring and presenting financial assets and financial liabilities in IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement.
SCOPE
IFRS 7 applies to all financial instruments, except for
- Interests in subsidiaries, associates, and joint ventures accounted for under IAS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements, IAS 28 Investments in Associates and Joint Ventures unless these standards require IAS 39 to be applied.
- Employers' rights and obligations under employee benefit plans to which IAS 19 Employee Benefits applies.
- Insurance contracts as defined in IFRS 4 Insurance Contracts. However, IFRS 7 applies to derivatives that are embedded in insurance contracts if IAS 39 requires an entity to account for them separately. •
- Financial instruments, contracts and obligations under share-based payment transactions to which IFRS 2 Share-based Payment applies; except that IFRS 7 applies to contracts within the scope of paragraph 5 -7 of IAS 39.
- Puttable instruments that are required to be classified as equity instruments. Furthermore, the standard applies to contracts to buy or sell a non-financial item that are within the scope of IAS 39.
The main principle of disclosure for IFRS 7 is that an 'entity shall disclose information that enables users of its financial report to evaluate the significance of financial instruments for its financial position and performance. There are no recognition or measurement requirements included within IFRS 7.
Statement of financial position
The carrying amount of each of the following categories is disclosed either in the statement of financial position or in the notes:
a. financial assets at fair value through profit or loss, showing separately:
i. those designated as such upon initial recognition, and
ii. those classified as held for trading in accordance with IAS 39;
b. held-to-maturity investments;
c. loans and receivables;
d. available-for-sale financial assets;
e. financial liabilities at fair value through profit or loss, showing separately:
i. those designated as such upon initial recognition, and
ii. those classified as held for trading in accordance with IAS 39; and
f. financial liabilities measured at amortised cost.
Allowance account for credit losses When financial assets are impaired by credit losses and the entity records the impairment in a separate account, it shall disclose a reconciliation of changes in that account during the period for each class of financial assets, for example bad debt provisions. Defaults and breaches for loans payable recognised at the end of the reporting period, an entity shall disclose details of any defaults, the carrying amount of the loan payable in default and whether the default was remedied or renegotiated before the financial statements was authorised for issue. Statement of comprehensive income An entity shall disclose the following items of income, expense, gains or losses either on the face of the financial statements or in the notes:
a. net gains or net losses on all financial instruments - separated into classes;
b. total interest income and total interest expense for financial assets or financial liabilities that are not at fair value through profit or loss;
c. fee income and expense from financial assets or financial liabilities that are not at fair value through profit or loss, and trust/fiduciary activities (holding or investing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions);
d. interest income on impaired financial assets; and e. the amount of any impairment loss for each class of financial asset.
Other disclosures Accounting policies Disclosure of the measurement basis (or bases) and other accounting policies used in preparing the financial statements that are relevant to an understanding of the financial statements. Hedge accounting An entity shall disclose the following details separately for each type of hedge described in IAS 39 (i.e. fair value hedges, cash flow hedges, and hedges of net investments in foreign operations): a. description of each type of hedge; b. description of the financial instruments designated as hedging instruments and their fair values at the end of the reporting period; and c. the nature of the risks being hedged. In relation to cash flow hedges, an entity shall disclose separately: a. the periods when the cash flows are expected to occur and when they are expected to affect the profit or loss; b. a description of any forecast transaction for which hedge accounting had previously been used, but which is no longer expected to occur; c. the amount that was recognised in other comprehensive income during the period d. the amount that was reclassified from equity to profit or loss for the period, showing the amount included in each line item in the statement of comprehensive income; and e. the amount that was removed from equity during the period and included in the initial cost or other carrying amount of a non-financial asset or non-financial liability whose acquisition or incurrence was a hedged highly probable forecast transaction Fair value
For each class of financial assets and financial liabilities, an entity shall disclose the fair value of that class of assets and liabilities so as to permit comparisons with its carrying amount. Fair value measurements are to be classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy should have the following levels: a. quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); b. inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and c. inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).
Disclosures of fair value are not required: a. where the carrying amount is a reasonable approximation of fair value; e.g. short term trade receivables and payables; b. investment in equity instruments that do not have a quoted market price in an active market or derivatives linked to such equity instruments, that is measured at cost in accordance with IAS 39 because the fair value cannot be reliably measured; and c. for a contract containing a discretionary participation feature (as described in IFRS 4 Insurance Contracts) if the fair value of that feature cannot be measured reliably. Nature and extent of risks arising from financial instruments An entity shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period. The required disclosures focus on the risks that arise from financial instruments and the risk management initiatives. The following types of risks are typically included but not limited to: (i) credit risk, (ii) liquidity risk and (iii) market risk. Qualitative and quantitative disclosures are required to elaborate on the nature and extent of risks arising from the financial instruments. Qualitative disclosures shall include: a. the exposures to risk and how they arise; b. the objectives, policies and processes for managing the risk and the methods used to measure the risk; and c. any changes in (a) or (b) from the previous period. Quantitative disclosures shall comprise of data about its exposure to that risk (including concentration of risk) at end of the reporting period. Credit Risk By class of financial instrument, an entity shall disclose: • The amount that best represents its maximum exposure to credit risk at the end of the reporting period without taking account of any collateral held or credit enhancements. • Description of collateral held as security and of other credit enhancements, and their financial effect in respect of the amount that best represents the maximum exposure to credit risk. • Information about the credit quality of financial assets that are neither past due nor impaired.
Liquidity Risk An entity shall disclose: a. a maturity analysis for non-derivative financial liabilities (including issued financial guarantee contracts) that shows the remaining contractual maturities; b. a maturity analysis for derivative financial liabilities. The maturity analysis shall include the remaining contractual maturities for those derivative financial liabilities for which contractual maturities are essential for an understanding of the timing of the cash flows; and c. a description of how it manages the liquidity risk inherent in (a) and (b). Market Risk An entity shall disclose: a. a sensitivity analysis for each type of market risk to which the entity is exposed at the end of the reporting period, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date; b. the methods and assumptions used in preparing the sensitivity analysis; and c. changes from the previous period in the methods and assumptions used, and the reasons for such changes. If the entity prepares a value-at-risk sensitivity analysis that reflects interdependencies between risk variables (e.g. interest rates and exchange rates) and uses it to manage financial risks, it may use such a sensitivity analysis. If so, the entity shall also disclose an explanation of the method used in preparing the analysis including the parameters and assumptions. An explanation of the objective of the method used and of limitations that may result in the information not fully reflecting the fair value shall be disclosed as well.