Disclosure financial assets and liabilities

Disclosure financial assets and liabilities

– provides a narrative providing guidance on users of financial statements’ needs to present financial disclosures in the notes to the financial statements grouped in more logical orders. But there is and never will be a one-size fits all.

Here it has been decided to separately disclose financial assets and liabilities and non-financial assets and liabilities, because of the distinct different nature of these classes of assets and liabilities and the resulting different types of disclosures, risks and tabulations.

Disclosure financial assets and liabilities guidance

Disclosing financial assets and liabilities (financial instruments) in one note

Users of financial reports have indicated that they would like to be able to quickly access all of the information about the entity’s financial assets and liabilities in one location in the financial report. The notes are therefore structured such that financial items and non-financial items are discussed separately. However, this is not a mandatory requirement in the accounting standards.

Accounting policies, estimates and judgements

For readers of Financial Statements it is helpful if information about accounting policies that are specific to the entityand about significant estimates and judgements is disclosed with the relevant line items, rather than in separate notes. However, this format is also not mandatory. For general commentary regarding the disclosures of accounting policies refer to note 25. Commentary about the disclosure of significant estimates and judgements is provided in note 11.

Scope of accounting standard for disclosure of financial instruments

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IFRS 7 does not apply to the following items as they are not financial instruments as defined in paragraph 11 of IAS 32:

1. prepayments made (right to receive future good or service, not cash or a financial asset)
2. tax receivables and payables and similar items (statutory rights or obligations, not contractual), or
3. contract liabilities (obligation to deliver good or service, not cash or financial asset).

While contract assets are also not financial assets, they are explicitly included in the scope of IFRS 7 for the purpose of the credit risk disclosures. Liabilities for sales returns and volume discounts (see note 7(f)) may be considered financial liabilities on the basis that they require payments to the customer. However, they should be excluded from financial liabilities if the arrangement is executory. the Reporting entity Plc determined this to be the case. [IFRS 7.5A]

Classification of preference shares

Preference shares must be analysed carefully to determine if they contain features that cause the instrument not to meet the definition of an equity instrument. If such shares meet the definition of equity, the entity may elect to carry them at FVOCI without recycling to profit or loss if not held for trading.

If they do not, they must be further analysed to determine the underlying business model and whether the contractual cash flows are solely payments of principal and interest. the Reporting entity Plc undertook this analysis and concluded that the preference shares should be held at fair value through profit or loss, as the shares do not meet the definition of equity and their cash flows relating to interest payments can be deferred and such deferral does not result in interest accruing on the deferred amount (such that the contractual cash flows are not solely payments of principal and interest).

Where the classification involves significant judgement and the relevant amounts are material, the entity should consider disclosing the rationale for classifying such shares as debt instruments. [IFRS 9.4.1.2(b), IFRS 9.B4.1.7-B4.1.26, IAS 1.122]

Fair value disclosures: financial instruments carried at other than fair value

An entity shall disclose the fair value for each class of financial assets and financial liabilities in a way that permits it to be compared with its carrying amount. However, fair values do not need to be disclosed for the following: [IFRS 7.25, IFRS 7.29]

• where the carrying amount is a reasonable approximation of fair value (eg for cash, short-term trade receivables and payables), or
• for lease liabilities

Guidance on what are appropriate classes of financial assets and liabilities is given in paragraph 6 of IFRS 7, see guidance in section ‘Classes of financial instruments‘ in Financial risk management.

Carrying amounts are a reasonable approximation of fair value

A statement that the carrying amount of financial assets or financial liabilities is a reasonable approximation of their fair value should only be made if it can be substantiated. That is, entities must have made a formal assessment of the carrying amounts of their financial assets and liabilities in comparison to their fair values and documented this assessment. If the fair values are not a reasonable approximation of the carrying amounts, the fair values must be disclosed.

Holding more than 50% of voting rights without control

IFRS 12 Disclosure of Interests in Other Entities requires disclosure of the reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential voting power of an investee does not constitute control. We have used the example of a corporate trustee for one of the group’s pension plans to illustrate this requirement.

While the shares in these trustee companies are commonly held by the employer sponsor of the plan, the trustee company will not usually be controlled by the employer sponsor under the principles in IFRS 10, as the employer will not have the power to direct the relevant activities of the trustee company and will not be exposed, or have rights, to variable returns.

However, in many cases, these types of entities will not be significant to the group’s financial position and performance. Where this is the case, disclosure would not be necessary because of materiality. [IFRS 12.7, IFRS 12.9(a)]

Financial liabilities

Terms and conditions of financial instruments

Entities shall disclose sufficient information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance, and the nature and extent of risks arising from these financial instruments.

However, the intention of IFRS 7 was to decrease the potentially voluminous disclosures that were required by IAS 32 and replace them with shorter but more meaningful information. Under normal circumstances, entities will therefore not need to disclose the significant terms and conditions for each of their major borrowings.

Having said that, if an entity has a borrowing (or other financial instrument) with unusual terms and conditions, it should provide sufficient information to enable users to assess the nature and extent of risks associated with these instruments. [IFRS 7.7, IFRS 7.31]

Fair value measurements

Classes of assets and liabilities

The disclosures in IFRS 13 must be made separately for each class of assets and liabilities. Entities shall determine appropriate classes of assets and liabilities by considering:

1. the nature, characteristics and risks of the asset or liability, and
2. the level of the fair value hierarchy within which the fair value measurement is categorised. [IFRS 13.94]

A class of assets and liabilities will often require greater disaggregation than the line items presented in the balance sheet. The number of classes may also need to be greater for fair value measurements categorised within level 3 of the hierarchy, as those measurements have a greater degree of uncertainty and subjectivity. Entities shall disclose sufficient information to allow a reconciliation back to the line items disclosed in the balance sheet. [IFRS 13.94]

Unrealised gains and losses relating to recurring level 3 measures

IFRS 13 does not provide guidance on how to calculate the unrealised gains and losses for recurring level 3 measures. A similar requirement previously existed under US GAAP where three methods were acceptable. All of these methods would be acceptable under IFRS, provided they are consistently applied. The methods are:

1. Balance sheet view: determine unrealised gains and losses as the fair value of the security less its amortised cost base. Under this view, gains and losses are realised at maturity or sale date. Therefore the entire gain or loss is considered unrealised until maturity.
2. Statement of profit or loss view: determine unrealised gains and losses as the total gains and losses during the period less the cash received or paid for those items. Under this view each cash receipt or settlement represents a realised gain or loss in its entirety.
3. Cash flow view: first determine any realised gains or losses as the difference between the expected cash flows at the beginning of the period and the actual cash flows at the end of the period. Then determine unrealised gains or losses for items still held at the reporting date as the remaining expected cash flows for future periods at the end of the period less the remaining expected cash flows for future periods at the beginning of the period. [IFRS 13.93(f)]

Other potential disclosures

Financial assets and liabilities at fair value through profit or loss (FVPL)

Issue not disclosed	Relevant disclosures or references
The entity has financial assets measured at FVPL of which: some were designated as such upon initial recognition some were designated as such in accordance with paragraph 6.7.1 of IFRS 9 some are mandatorily measured at FVPL in accordance with the requirements of IFRS 9 [IFRS 7.8(a), IFRS 7.20(a)(i)]	Disclose each of these financial assets and the associated gains/losses separately. All of the Reporting entity Plc’s financial assets are mandatorily measured at FVPL; hence this disclosure does not apply.
The entity has designated financial assets at FVPL which would otherwise be measured at FVOCI or amortised cost	Provide additional disclosures as per paragraph 9 of IFRS 7.
The entity believes that the disclosures on how credit risk is calculated in relation to financial assets or liabilities designated at FVPL do not faithfully represent the fair value changes due to credit risk [IFRS 7.11(b)]	Disclose the reason for reaching this conclusion and what alternative factors would be relevant.
The entity has financial liabilities designated at FVPL	A number of additional disclosures apply as set out in paragraphs 8, 10, 10A, 11 and 20 of IFRS 7. Some, but not all of these, are illustrated below.

Financial assets at fair value through other comprehensive income (FVOCI)

Issue not disclosed	Relevant disclosures or references
A gain or loss recognised on disposal of debt instruments held at FVOCI [IFRS 7.20(a)(viii)]	Show separately: the amount of gain or loss recognised in other comprehensive income during the period, and the amount reclassified upon derecognition from accumulated other comprehensive income to profit or loss for the period.

Financial assets and liabilities at amortised cost

Issue not disclosed	Relevant disclosures or references
Disposal of financial assets at amortised cost [IFRS 7.20A]	Disclose an analysis of the gain or loss recognised and the reasons for derecognising the financial assets.
Disclosure in future periods for financial assets held at fair value reclassified to be held at amortised cost, where the new carrying amount is deemed to be the current fair value [IFRS 7.42N]	Disclose the effective interest rate determined at the date of reclassification and the interest revenue or expense recognised, in each period, until the financial asset is derecognised.

Other financial instrument disclosures

Issue not disclosed	Relevant disclosures or references
Defaults and breaches in relation to financial liabilities [IFRS 7.18, IFRS 7.19]	Disclose details of defaults (see illustrative example below).
Fair value determined using valuation techniques – gain or loss on initial recognition [IFRS 7.28]	Disclose the accounting policy for recognising the difference in profit or loss, the aggregate difference yet to be recognised, and why the transaction price was not the best evidence of fair value.
Fee income and expense on financial assets and liabilities that are not at FVPL [IFRS 7.20(c)]	Disclose amount, if material.
Transferred financial assets not derecognised in their entirety [IFRS 7.42D]	Provide additional disclosures where the entity has recognised the assets only to the extent of its continuing involvement and where the counterparty to the liabilities has recourse only to the transferred assets.
Reclassifications of financial assets from one measurement category to another made in accordance with paragraph 4.4.1 of IFRS 9 [IFRS 7.12B-12D]	Various disclosures, see paragraphs 12B – 12D of IFRS 7 for details.

Fair value disclosures

Issue not disclosed	Relevant disclosures or references
Fair values are not disclosed for financial liability contracts with discretionary participation features	Disclose information to help users make their own judgements about the extent of possible differences between the carrying amount and the fair value.
Financial assets and financial liabilities with offsetting positions in market risk or counterparty credit risk [IFRS 13.96]	Disclose the fact that the exception in paragraph 48 of IFRS 13 is applied.
Financial liabilities with inseparable third-party credit enhancements [IFRS 13.98]	Disclose the existence of that enhancement and whether it is reflected in the fair value measurement of the liability.

Other potential disclosures

The following illustrative disclosures may be useful where relevant to an entity:

Put option arrangements

(a) Entities that have put option arrangements should consider explaining the accounting for these, as the individual terms and conditions (and hence the accounting) may vary. An illustrative policy could read as follows (but will need to be tailored depending on the specific arrangements):

The group has written put options over the equity of its XYZ subsidiary which permit the holder to put their shares in the subsidiary back to the group at their fair value on specified dates over a five year period. The amount that may become payable under the option on exercise is initially recognised at the present value of the redemption amount within borrowings with a corresponding charge directly to equity. The charge to equity is recognised separately as written put options over non-controlling interests, adjacent to non-controlling interests in the net assets of consolidated subsidiaries. [IAS 32.11, IAS 32.23]

The liability is subsequently accreted through finance charges up to the redemption amount that is payable at the date at which the option first becomes exercisable. In the event that the option expires unexercised, the liability is derecognised with a corresponding adjustment to equity.

Financial liabilities designated at FVPL

(b) Entities that have designated financial assets or financial liabilities as at fair value through profit or loss must disclose the nature of the relevant assets and liabilities and provide additional information in relation to the designation. This could read along the following lines: [IFRS 7.B5(a), IFRS 7.21, IFRS 9.4.3.5, IFRS 9.5.7.7]

The group has convertible debentures which are classified entirely as liabilities because they were issued in a currency other than the functional currency of the company. As the instrument contains an embedded derivative, it has been designated as at fair value through profit or loss on initial recognition and as such the embedded conversion feature is not separated. All transaction costs related to financial instruments designated as at fair value through profit or loss are expensed as incurred.

The component of fair value changes relating to the company’s own credit risk is recognised in other comprehensive income. Amounts recorded in OCI related to credit risk are not subject to recycling in profit or loss, but are transferred to retained earnings when realised. Fair value changes relating to market risk are recognised in profit or loss.

Amounts in CU’000	2020	2019
Carrying amount	104,715	88,863
Includes: Cumulative change in fair value of convertible debentures attributable to changes in credit risk, recognised in the FVOCI reserve [IFRS 7.10(a)]	225	210
Amount the company is contractually obligated to pay to holders of the convertible debentures at maturity	102,620	87,086
Difference between carrying amount and the amount the company is contractually obligated to pay to holders of convertible debentures at maturity [IFRS 7.10(b)]	2,095	1,777

The company determines the amount of fair value changes which are attributable to credit risk by first determining the changes due to market conditions which give rise to market risk, and then deducting those changes from the total change in fair value of the convertible debentures. Market conditions which give rise to market risk include changes in the benchmark interest rate. Fair value movements on the conversion option embedded derivative are included in the assessment of market risk fair value changes. [IFRS 7.11(a)]

The company believes that this approach most faithfully represents the amount of change in fair value due to the company’s own credit risk, as the changes in factors contributing to the fair value of the convertible debentures other than changes in the benchmark interest rate are not deemed to be significant. [IFRS 7.11(b)]

Defaults and breaches in relation to financial liabilities

(c) Example disclosures for a default in relation to a borrowing could read as follows:

In the third quarter, the group was overdue paying interest on bank borrowings with a carrying amount of CU2,000,000. The group experienced a temporary shortage of cash, because cash outflows in the second and third quarters were higher than anticipated due to business expansions. As a result, interest of CU75,000 was not paid on the due date of 31 September 2020. [IFRS 7.18]

The company has since paid all outstanding amounts (including additional interest and penalties for late payment) during the fourth quarter.

Management expects that the company will be able to meet all contractual obligations from borrowings on a timely basis going forward.

Continue – Example Disclosure financial instruments

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Disclosure financial assets and liabilities

Disclosure financial assets and liabilities Disclosure financial assets and liabilities  Disclosure financial assets and liabilities  Disclosure financial assets and liabilities  Disclosure financial assets and liabilities  Disclosure financial assets and liabilities  Disclosure financial assets and liabilities  Disclosure financial assets and liabilities  Disclosure financial assets and liabilities  Disclosure financial assets and liabilities  Disclosure financial assets and liabilities

 

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