IFRS 7 IFRS 9 Best Disclosure financial instruments

Disclosure financial instruments  tries to address a large part of the significant disclosure requirements included in IFRS 7 Financial Instruments: Disclosure.

IFRS 7 requires certain disclosures to be presented by category of an instrument based on the IFRS 9 recognition and measurement categories of financial instruments (previously the IAS 39 measurement categories). Certain other disclosures are required by class of financial instrument.Disclosure financial instruments For those disclosures an entity must group its financial instruments into classes of similar instruments as appropriate to the nature of the information presented. [IFRS 7 6]

The two main categories of disclosures required by IFRS 7 are:

  1. information about the significance of financial instruments [IFRS 7 7 – 30]
  2. information about the nature and extent of risks arising from financial instruments [IFRS 7 31 – 42]

So IFRS 7 bets on two disclosure options for these two main categories of disclosures:

Why? IFRS 7 IFRS 9 Disclosure financial instruments IFRS 7 IFRS 9 Disclosure financial instruments

Financial instruments are complex, come in a great variety of contracts, risks, and products, just to name a few………..

Table – Overview exposure to financial risks, possible disclosures and management of risk

Financial risk

Exposure arising from

Possible disclosure

Management of risk

Market riskCurrency risk

Future commercial transactions

Recognised financial assets and liabilities not denominated in LC

Cash flow forecasting

Sensitivity analysis

Foreign currency forwards and foreign currency options

Market riskInterest rate risk

Long-term borrowings at variable rates

Sensitivity analysis

Interest rate swaps

Market risk – Other price risks

Investments in equity securities

Sensitivity analysis

Portfolio diversification

Credit risk

Cash and cash equivalents, trade receivables, derivative financial instruments, debt investments and contract assets

Ageing analysis

Credit ratings

Diversification of bank deposits, credit limits and letters of credit

Investment guidelines for debt investments

Liquidity risk

Borrowings and other liabilities

Rolling cash flow forecasts

Maturity analysis

Availability of committed credit lines and borrowing facilities

The financial instruments

All financial instruments are initially measured at fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs. [IFRS 9 5.1.1]

The defined set of (measurement) categories of financial instruments is included in IFRS 9 (and revised accordingly in IFRS 7 8):

Classes of financial instruments are potentially determined at a lower level than the measurement categories and need to be reconciled back to the balance sheet. [IFRS 7 6]

The level of detail for classes of financial instruments should be determined on an entity specific basis and may be defined for each individual disclosure in a different way. In determining the specific classes of financial instruments, an entity should, at a minimum:

  • distinguish financial instruments at amortised cost from financial assets at fair value,
  • classify financial contracts outside the scope of IFRS 7 as a separate class or classes to which the disclosure requirements of IFRS 7 do not apply to this class or classes. Off course guidance can be obtained from IFRS 7 and other IFRSs in such a case. [IFRS 7 B2]

In addition, IFRS 7 requires certain disclosures to be provided by class of financial instrument, including the following:Context Fair value

  • the financial assets not qualifying for derecognition,
  • the reconciliation of an allowance account,
  • the amount of impairment loss for financial assets,
  • fair values, Disclosure financial instruments
  • specific disclosures relating to credit risks.

Loans and receivables

For example, a bank’s category ‘loans and receivables‘ may comprise more than one type (or class) of loans and receivables, unless the loans and receivables have similar characteristics. So unless the loans and receivables have similar characteristics, a bank can classify loans and receivables as follows: Disclosure financial instruments

  • by type of customer – commercial loans (loans to businesses), loans to individuals and/or loans to families, or
  • by type of loans (product) – mortgages, credit card debt, unsecured loans and/or bank overdrafts. Disclosure financial instruments

Available-for-sale financial assets

Similar to loans and receivables, ‘available-for-sale financial assets’ may be classified into bond investments and equity investments. The equity investments may be further detailed into listed and unlisted equity investments, similar to the situation that listed loans to enterprises are bonds and separated from commercial loans (see above loans and receivables).

Disclosures fair value of instruments carried at amortised costs

IFRS 7 25 requires the disclosure of the fair value of financial assets and financial liabilities by class in a way that permits it to be compared with its carrying amount for each class of financial asset and financial liability.

An entity should disclose for each class of financial instrument the methods and, when valuation techniques are used, the assumptions applied in determining fair values of each class of financial asset or financial liability.

Financial instruments at amortised cost

IFRS 7 25 requires the disclosure of the fair value irrespective of the fact that a financial instrument is measured at amortised cost in the statement of financial position.

The disclosure is presented in a way that allows a comparison of the amounts disclosed and the carrying amounts. However, if the amounts disclosed in the statement of financial position are assumed to be the fair values (or approximately the fair values), the fund discloses that fact but is not required to disclose a separate table.

The following examples illustrate when the amounts disclosed in the statement of financial position approximately equal the fair values to be disclosed under IFRS 7  25:

  • An investment fund designates all its investments at fair value through profit or loss: the amounts attributable to unitholders would be assumed to approximate the fair value.
  • The carrying amount of trade receivables due within one year (for example, receivables from tenants) less impairment approximates the fair value of the amounts receivable.
  • The fair value of the variable interest bank borrowings is estimated to be the discounted contractual future cash flows.

Uncalled capital commitments

Uncalled capital commitments are investment obligations committed by investors in a private equity fund during the commitment period. Uncalled capital commitments are accounted for in the same way as loan commitments. As loan commitments are specifically referred to as an example of unrecognised financial instruments for which disclosures are required by IFRS 7, the same principle applies to capital commitments in private equity funds.

Example:

The investors of a private equity fund committed themselves to invest C150 million into the fund over the next 10 years. The fund already called C50 million over the past two years. The remaining uncalled capital commitments amount to C100 million at the balance sheet date.

Is a private equity fund required to disclose the total amount of outstanding uncalled capital commitments (C100 million)?

No. IFRS 7 applies to both recognised and unrecognised capital commitments. However, the disclosure requirements in IFRS 7 25 only requires the disclosure of the fair value of such commitments, which should be assessed by applying an option price model. The fair value of such capital commitments in private equity funds is usually nil, as the new fund units are issued at fair value. However, disclosure of the total amount may not be required under IFRS 7 25 but is required under IAS 37. IAS 37 89 requires the disclosure of an estimate of the financial effects, measured using the principles set out for provisions in IAS 37 36 – 52.

Where to disclose financial instruments?

This part s about the location, level of disclosure and aggregation of financial instruments. Disclosure financial instruments

An entity is permitted to disclose some of the information required by the financial instruments standards (IAS 32, IAS 39, IFRS 7 and IFRS 9). [IFRS 7 8, IFRS 7 20]

Some entities may want to present some of the information required by IFRS 7, such as the nature and extent of risks arising from financial instruments and the entity’s approach to managing those risks, alongside the financial statements in a separate management commentary or business review.

This is only permissible for disclosures requires by IFRS 7 32 – 41 (that is, nature and risk arising from financial instruments) where the information is incorporated by cross-reference from the financial statements and is made available to users of the financial statements on the same terms as the financial statements and at the same time. [IFRS 7 B6]

An entity has to carefully decide, in light of its own circumstances, how much detail it wants to provide, how much emphasis it wants to place on different aspects of the disclosure requirements and how much aggregation it wants to undertake to satisfy IFRSs’ requirements.

Obviously, a significant amount of judgement is required to display the overall picture without combining information with different characteristics. A balance has to be maintained between providing excessive detail that may not assist user of financial statements by including it amongst a large amount of insignificant detail. Similarly, an entity should not disclose information that is so aggregated that it obscures important differences between individual transaction or associated risk. [IFRS 7 B3]

The disclosures are qualitative and quantitative in nature. So explanations of risks, risk management, risk appetite and such disclosures and table with the levels of input (input 1 level, input 2 level, input 3 level), types of financial instruments and their measurement base. Reconciliations are required to the statement of financial position and/or statement of profit or loss and other comprehensive income. Disclosure financial instruments

Further explanations are contained in: Disclosure financial instruments

IFRS 7 Comprehensive Risk disclosures – the General requirements Disclosure financial instruments

IFRS 7 Market risksMarket risk management process – Sensitivity analysis Disclosure financial instruments

IFRS 7 Credit risks disclosuresCredit risk – credit quality Disclosure financial instruments

IFRS 7 IFRS 7 Complete Maturity analysis disclosureLiquidity risk – maturity analysis Disclosure financial instruments

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Disclosure financial instruments

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