IFRS 7 Financial Instruments Disclosures

Here we are going to introduce you with IFRS 7 Financial Instruments Disclosures. This is a high-level summary of broad objectives, categories and nature of the disclosure required by the standard. Thus, readers should not consider this to be a comprehensive or complete listing of the disclosure requirements under IFRS 7.

 

Background

IFRS 7 outlines all necessary disclosure requirements in relation to financial instruments to enable users of financial statements to evaluate the significance of financial instruments for the entity’s financial position and performance. It prescribes guidelines for both qualitative and quantitative disclosure to achieve the objective.

 

Objective

The objective of this IFRS 7 is to require entities to provide disclosures in their financial statements that enable users to evaluate:

(a) the significance of financial instruments for the entity’s financial position and performance; and

(b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and by the end of reporting period, and handing of those risks.

The principles in this IFRS complement the principles for recognising, measuring and presenting financial assets and financial liabilities in IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments.

 

Scope

• ·       This IFRS shall be applied to all types of financial instruments by all entities, except:

(a) those interests in subsidiaries, associates or joint ventures that are accounted for in accordance with IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and Joint Ventures. However, in some cases, IFRS 10, IAS 27 or IAS 28 require or permit an entity to account for interest in a subsidiary, associate or joint venture using IFRS 9 and in those cases, entities shall apply the requirements of this IFRS and, for those measured at fair value, the requirements of IFRS 13 Fair Value Measurement. Entities shall also apply this IFRS to all derivatives linked to interests in subsidiaries, associates or joint ventures unless the derivative meets the definition of an equity instrument in IAS 32.

(b) employers’ rights and obligations arising from employee benefit plans, to which IAS 19 Employee Benefits applies.

(c) contracts within the scope of IFRS 17 Insurance Contracts. However, this IFRS applies to:

(i) derivatives that are embedded in contracts within the scope of IFRS 17, if IFRS 9 requires the entity to account for them separately; and

(ii) investment components that are separated from contracts within the scope of IFRS 17, if IFRS 17 requires such separation.

Moreover, an issuer shall apply this IFRS to financial guarantee contracts if the issuer applies IFRS 9 in recognising and measuring the contracts, but shall apply IFRS 17 if the issuer elects, in accordance with paragraph 7(e) of IFRS 17, to apply IFRS 17 in recognising and measuring them.

(d) financial instruments, contracts and obligations under share‑based payment transactions to which IFRS 2 Share‑based Payment applies, except that this IFRS applies to contracts within the scope of IFRS 9.

(e) instruments that are required to be classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D of IAS 32.

• ·       This IFRS applies to recognised and unrecognised financial instruments. Recognised financial instruments include financial assets and financial liabilities that are within the scope of IFRS 9. Unrecognised financial instruments include some financial instruments that, although outside the scope of IFRS 9, are within the scope of this IFRS.
• ·       This IFRS applies to contracts to buy or sell a non‑financial item that are within the scope of IFRS 9.
• ·       The credit risk disclosure requirements in paragraphs 35A–35N apply to those rights that IFRS 15 Revenue from Contracts with Customers specifies are accounted for in accordance with IFRS 9 for the purposes of recognising impairment gains or losses. Any reference to financial assets or financial instruments in these paragraphs shall include those rights unless otherwise specified.

 

Key definition

credit risk

Any risk that will cause a financial loss to other party by failing on completing an obligation

 

credit risk rating grades

Determine on the basis of the risk of a default occurring on financial instrument.

 

currency risk

The risk that occur due to the fluctuation in fair value or future cash flows of a financial instrument because of variations in foreign exchange rates.

 

interest rate risk

The risk that occur due to the fluctuation in fair value or future cash flows of a financial instrument because of variations in market interest rates.

 

liquidity risk

Any risk result of difficulty in meeting obligations linked with financial liabilities those should be settled by delivering cash or any other financial asset.

 

loans payable

Loans payable are classified as financial liabilities, except the short‑term trade payables on normal credit terms.

 

market risk

The risk that occur due to the fluctuation in fair value or future cash flows of a financial instrument because of changes in market prices. It includes three type of risks: interest rate risk, currency risk and other price risk.

 

other price risk

The risk that occur due to the fluctuation in fair value or future cash flows of a financial instrument result of changes in market prices.

 

Classes of Financial Instruments and Level of Disclosure

An entity shall group financial instruments into classes whenever the IFRS requires disclosures by class of financial instrument. That should be appropriate to the nature of the information disclosed and that consider the characteristics of those financial instruments. An entity shall provide enough information to permit reconciliation to the line items presented in the statement of financial position.

 

Significance of Financial Instruments for Financial Position and Performance

Statement of financial position

Categories of financial assets and financial liabilities- Carrying value of each of the following needs to present in financial position or in notes:

(a) financial assets measured at fair value through profit or loss, showing separately

(i) those designated as such upon initial recognition or subsequently in accordance with paragraph 6.7.1 of IFRS 9;

(ii) those measured as such in accordance with the election in paragraph 3.3.5 of IFRS 9;

(iii) those measured as such in accordance with the election in paragraph 33A of IAS 32 and

(iv) those mandatorily measured at fair value through profit or loss in accordance with IFRS 9.

(e) financial liabilities at fair value through profit or loss, showing separately

(i) those designated as such upon initial recognition or subsequently in accordance with paragraph 6.7.1 of IFRS 9 and

(ii) those that meet the definition of held for trading in IFRS 9.

(f) financial assets measured at amortised cost.

(g) financial liabilities measured at amortised cost.

(h) financial assets measured at fair value through other comprehensive income, showing separately

(i) financial assets that are measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A of IFRS 9; and

(ii) investments in equity instruments designated as such upon initial recognition in accordance with paragraph 5.7.5 of IFRS 9.

 

Financial assets or financial liabilities at fair value through profit or loss (FVTPL) - If the entity has measured any financial instrument at fair value through profit or loss (FVTPL) that would otherwise be considered at fair value through other comprehensive income (FVOCI)or amortised cost then the fixed aseett shall disclose:

• Ø   Maximum exposure to credit risk
• Ø   Amount of any credit derivative or similar instruments which mitigate the exposure of credit risk
• Ø   Any change in fair values of financial asset which attributable to change in the credit risk
• Ø   Change in the fair value of any related credit derivative

If the entity has measured the financial liability by fair value through profit or loss:

• Ø    the cumulative amount of change in the fair value of the financial liability due to the changes in the credit risk of said liability
• Ø    the change between the financial liability carrying value and the cost the entity would be contractually obliged to pay on the maturity to the holder of the obligation.
• Ø    transfers of any cumulative gain or loss within equity in the period also including the reason for such transfers.
• Ø    At the time of liability derecognition during the period if there is any amount presented in other comprehensive income (OCI) that was realised at derecognition.

 

Equity instrument Investments measured at fair value through other comprehensive income - It shall disclose:

(a) The investments in equity instruments which have been measured at fair value through other comprehensive income (FVOCI).

(b) the reasons for opting FVOCI.

(c) the fair value of each such investment by end of period.

(d) dividends acknowledged during the period. Separate discloser required for derecognised investments (during the reporting period) and the residual investments which are held at the end of the reporting period.

(e) any transfers of the cumulative gain or loss within equity during the period including the reason for such transfers.

 

Reclassification - An entity shall disclose if in any reporting periods (current or previous), it has reclassified any financial assets in accordance with paragraph 4.4.1 of IFRS 9. For every such event, an entity shall disclose:

(a) Reclassification date.

(b) Detailed explanation note on the change in business model with a qualitative description of its impact on the entity’s financial statements.

(c) the amount reclassified into and out of each category.

 

An entity shall disclose for every reporting period the reclassification until derecognition, for assets reclassified from fair value through profit or loss (FVTPL) category to amortised cost or fair value through other comprehensive income (FVOCI) in accordance with paragraph 4.4.1 of IFRS 9:

(a) the effective interest rate determined on the date of reclassification; and

(b) the interest revenue recognised.

 

Offsetting financial assets or financial liabilities - An entity shall disclose information to enable users of its financial statements to evaluate the impact or potential impact of netting arrangements on the entity’s financial position. This includes the effect or potential effect of rights of set‑off associated with the entity’s recognised financial assets and recognised financial liabilities.

 

Collateral - An entity requires to disclose:

(a) the carrying value of financial assets which is pledged as collateral against liabilities (or contingent liabilities) which includes amounts that have been reclassified in accordance with paragraph 3.2.23(a) of IFRS 9; and

(b) pledge related terms & conditions.

 

Allowance account for credit losses - The carrying amount of financial assets measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A of IFRS 9 is not reduced by a loss allowance and an entity shall not present the loss allowance separately in financial position as a reduction of the carrying amount of the financial asset. However, an entity shall disclose the loss allowance in the notes to the financial statements.

Compound financial instruments with multiple embedded derivatives - If an entity has issued an instrument that contains both a liability and an equity component (see paragraph 28 of IAS 32) and the instrument has multiple embedded derivatives whose values are interdependent (such as a callable convertible debt instrument), it shall disclose the existence of those features.

 

Defaults and breaches- For loans payable recognised at the end of the reporting period, an entity shall disclose:

(a) details of any defaults during the period of principal, interest, sinking fund, or redemption terms of those loans payable;

(b) the carrying amount of the loans payable in default at the end of the reporting period; and

(c) whether the default was remedied, or the terms of the loans payable were renegotiated, before the financial statements were authorised for issue.

Statement of comprehensive income

Items of income, expense, gains or losses - An entity shall disclose the following items of income, expense, gains or losses either in the statement of comprehensive income or in the notes:    

    (a)  net gains or net losses on:

·       For financial liabilities designated as at fair value through profit or loss, an entity shall show separately the amount of gain or loss recognised in other comprehensive income and the amount recognised in profit or loss.

·       financial liabilities measured at amortised cost.

·       financial assets measured at amortised cost.

·       investments in equity instruments designated at fair value through other comprehensive income in accordance with IFRS 9.

(b)  total interest revenue and total interest expense (calculated using the effective interest method) for financial assets that are measured at amortised cost or that are measured at fair value through other comprehensive income

(c)   fee income and expense arising from:

·       financial assets and financial liabilities that are not at fair value through profit or loss; and

·       trust and other fiduciary activities that result in the holding or investing of assets on behalf of individuals, trusts, retirement benefit plans, and other institutions.

 

Other disclosures

Accounting policies- An entity discloses its significant accounting policies comprising the measurement basis (or bases) used in preparing the financial statements.

Hedge accounting- An entity shall disclose those risk exposures that an entity hedges and for which it elects to apply hedge accounting (refer para 21A of bear standard).

Fair value - In disclosing fair values, an entity shall group financial assets and financial liabilities into classes, but shall offset them only to the extent that their carrying amounts are offset in the statement of financial position. An entity shall disclose the fair value of that class of assets and liabilities in a way that permits it to be compared with its carrying amount.

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.

 

Qualitative disclosures

For each type of risk arising from financial instruments, an entity shall disclose:

(a) the exposures to risk and how they arise;

(b) its 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

For each type of risk arising from financial instruments, an entity shall disclose:

(a) summary quantitative data about its exposure to that risk at the end of the reporting period. This disclosure shall be based on the information provided internally to key management personnel of the entity (as defined in IAS 24 Related Party Disclosures), for example the entity’s board of directors or chief executive officer.

(b) the disclosures required by paragraphs 35A–42, to the extent not provided in accordance with (a).

(c) concentrations of risk if not apparent from the disclosures made in accordance with (a) and (b).

 

Credit risk

An entity shall apply the disclosure requirements in paragraphs 35F–35N to financial instruments to which the impairment requirements in IFRS 9 are applied. The credit risk disclosures made in accordance with paragraphs 35F–35N shall enable users of financial statements to understand the effect of credit risk on the amount, timing and uncertainty of future cash flows.

The credit risk management practices - An entity shall explain its credit risk management practices and how they relate to the recognition and measurement of expected credit losses.

Quantitative and qualitative information about amounts arising from expected credit losses - To explain the changes in the loss allowance and the reasons for those changes, an entity shall provide, by class of financial instrument, a reconciliation from the opening balance to the closing balance of the loss allowance, in a table, showing separately the changes during the period.

Collateral and other credit enhancements obtained- When an entity obtains financial or non‑financial assets during the period by taking possession of collateral it holds as security or calling on other credit enhancements (eg guarantees), and such assets meet the recognition criteria in other IFRSs, an entity shall disclose for such assets held at the reporting date.

 

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 (see paragraph B11B).

(c) a description of how it manages the liquidity risk inherent in both of above points.

 

Market risk

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 along with the disclose methods and assumptions used in preparation and any related change happened in the previous period.

When the sensitivity analyses disclosed in accordance with paragraph 40 or 41 are unrepresentative of a risk inherent in a financial instrument. The entity shall disclose that fact and the reason it believes the sensitivity analyses are unrepresentative.

 

Transfers of financial assets

An entity shall provide the required disclosures (nature, risk & rewards and other required disclosures according to paragraph 42D of bear standard) for all transferred financial assets that are not derecognised and for any continuing involvement in a transferred asset (not derecognized in its entirety), existing at the reporting date, irrespective of when the related transfer transaction occurred.

 

Initial application of IFRS 9

In the reporting period that includes the date of initial application of IFRS 9, the entity shall disclose the following information for each class of financial assets and financial liabilities as at the date of initial application (detail discloser requirement prescribed on paragraph 42I to 42H of bear standard):

(a) the original measurement category and carrying amount determined in accordance with IAS 39 or in accordance with a previous version of IFRS 9 (if the entity’s chosen approach to applying IFRS 9 involves more than one date of initial application for different requirements);

(b) the new measurement category and carrying amount determined in accordance with IFRS 9;

(c) the amount of any financial assets and financial liabilities in the statement of financial position that were previously designated as measured at fair value through profit or loss but are no longer so designated, distinguishing between those that IFRS 9 requires an entity to reclassify and those that an entity elects to reclassify at the date of initial application.