IFRS 7 Complete Maturity analysis disclosure

IFRS 7 Complete Maturity analysis 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.

Certain other disclosures are required by class of financial instrument. 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:

Management should disclose a maturity analysis for all non-derivative financial liabilities (including issued financial guarantee contracts) that shows the remaining contractual maturities [IFRS 7 39(a)]. The maturity analysis required for derivative financial liabilities should 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 [IFRS 7 39(b), IFRS 7 B11].

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

Sensitivity of equity financial instruments to equity index benchmark prices (also known as Beta)

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

Case: Should the following financial instruments be shown in one maturity bucket1, or split across the maturity buckets in which the cash flows occur: IFRS 7 Complete Maturity analysis disclosure

  1. A derivative for which contractual maturities are essential to an understanding of the timing of the cash flows and that has multiple cash flows?
  2. A 10-year loan that has annual contractual interest payments? IFRS 7 Complete Maturity analysis disclosure
  3. A five-year loan that has annual contractual interest and principal repayments? IFRS 7 Complete Maturity analysis disclosure

All the financial instruments should be split across the maturity buckets in which the cash flows occur. The requirement is to disclose each of the cFinancial instruments Basic risksontractual payments in the period when it is due (including principal and interest payments). The objective of this particular disclosure is to show the liquidity risk of the entity. IFRS 7 Complete Maturity analysis disclosure

Case: Is a maturity analysis for financial assets required? IFRS 7 Complete Maturity analysis disclosure

IFRS 7 B11E requires an entity to disclose a maturity analysis of financial assets it holds for managing liquidity risk (for example, financial assets that are readily saleable or expected to generate cash inflows to meet cash outflows on financial liabilities), if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk. IFRS 7 Complete Maturity analysis disclosure

Investment funds may use financial assets to manage their liquidity risk (for example, real estate funds that hold some highly liquid investments to meet the daily redemption requests). In these circumstances, the information is likely to be necessary to enable users of financial statements to evaluate the nature and extent of liquidity risk; in which case, we would expect them to present a maturity analysis of financial assets. IFRS 7 Complete Maturity analysis disclosure

Case: Can an investment fund present one maturity table for all of its non-derivative and derivative financial liabilities?

Yes, provided it is clear to the users of the financial statements whether the disclosure is based on contractual maturities or expected maturities and whether the financial liabilities are derivatives or non-derivatives. IFRS 7 Complete Maturity analysis disclosure

Case: When is quantitative information based on how management manages liquidity required [IFRS 7 B10A]?

Additional quantitative information based on how management manages liquidity risk is required if the outflow of cash could occur significantly earlier than indicated in the data (for example, a bond that is callable by the issuer in two years but has a remaining contractual maturity of 12 years).

In addition, if the cash outflow could be for a significantly different amount than that indicated in the maturity table, this should also be disclosed.

Case: An investment fund has issued participating shares redeemable at the discretion of the holders and classified them as liabilities. In which time band in the maturity analysis should the shares be included, given it is unknown when exactly the holders will put the shares back to the entity?

A maturity analysis is always required based on the remaining contractual maturity for non-derivative financial liabilities and derivative financial liabilities for which contractual maturities are essential for an understanding of the timing of the cash flows. Shares that are classified as liabilities and can be put back to the issuer at anytime without restriction should be classified in the earliest time band for the purpose of the maturity analysis based on the contractual maturity [IFRS 7 B11C(a)].

However, including such shares in the earliest time band may not reveal the expected maturities of such liabilities – that is, the redemption expected in normal circumstances.

In addition to the maturity analysis based on the remaining contractual maturity, an entity might disclose a maturity analysis for (financial assets and) financial liabilities showing expected maturity, if this is the information provided to key management personnel to manage the business. As a minimum, if management’s monitoring of liquidity risks is substantially different from the analysis of contractual maturity of liabilities, the entity should provide qualitative disclosures about the way management is monitoring liquidity risk [IFRS 7 39(c)].

If significant, the difference between the contractual and expected liquidity profile of the entity should be explained.

Case: An investment fund has issued participating shares redeemable at the discretion of the holders and classified them as liabilities. In which time band in the maturity analysis should the shares be included if there are restrictions on the redemptions (for example, no more than 50% of the entity shares can be put back in any month)?

If there were restrictions on the number of shares that can be redeemed at any time, the maturity analysis should reflect such restrictions. IFRS 7 allows judgement in determining the appropriate number of time bands used in the maturity analysis [IFRS 7 B11].

However, in the instance when only 50% of the shares can be put back in any given month, due to the significance of the item, a time band of not later than one month should be disclosed.

Case: An investment fund, which is to a significant extent invested in illiquid investments, has issued participating shares redeemable at the discretion of the holders and classified them as liabilities. Management of the fund received significant redemption requests, so it decided to close the fund for redemptions for the next six months and announced that to the investors.

In which time band in the maturity analysis should the shares be included if there are restrictions on the redemptions?

The investment contract provides the investment manager with the option to temporarily dispense the redemption of the fund units. The contractual maturity of the units has changed as a result of the fund closure. The investment fund discloses the amounts attributable to unit holders in the due-after-six-months time band [IFRS 7 B11C].

Case: Investment manager A’s own holding in mutual fund B, which he controls, is 45%. The remaining 55% is held by retail clients. Fund B issues only puttable shares, which can be put back at any time without any notice period. Based on historic data, the average investment period of a retail client is four years.

In investment manager A’s consolidated financial statements, fund B is included as subsidiary according to IFRS 10 ‘Consolidated financial statements’. The minority interest of the retail clients is classified as a financial liability.

Can investment manager A present the third-party interest in consolidated funds, which is classified as financial liability in the liquidity analysis using the expected maturity date – that is, the historic average maturity of four years?

Investment manager A should present as a minimum a maturity analysis based on contractual maturities [IFRS 7 39(a)]. In this case, this is the earliest time band the entity can be required to pay because the counterparty has a choice of when an amount is paid [IFRS 7 B11C(a)]. As the minority interest is puttable on demand, the liability should be shown within the earliest time bucket2.

In addition to the disclosure requirements in IFRS 7 39(a), the entity should provide summary quantitative data about its exposure to liquidity risk based on information provided internally to key management personnel of the entity as required in IFRS 7 34(a) and IFRS 7 B10A.

Case: Private equity fund ABC LP has a contractual maturity of 12 years. The fund presents the paid-in capital as a financial liability. The partnership agreement requires ABC LP to make liquidity distributions within 90 days of a private equity investment being sold. The liquidity distributions include the redemption of a proportionate share of the invested capital. How should ABC LP present the maturity analysis?

The private equity fund ABC LP should disclose the drawn amount in the time band that reflects when the repayment is contractually due (for example, when the fund is liquidated). However, if the fund’s management expects to repay the drawn amount significantly earlier, this fact should be disclosed. Such earlier repayment is usually required because of contractually required liquidity distributions that arise when the fund liquidates some of its investments. IFRS 7 Complete Maturity analysis disclosure

When the fund disposes of an investment, the contract might require a liquidity distribution within, for example, 90 days. In this case, the contractual maturity (rather than the expected maturity) of the amount to be distributed is 90 days. IFRInputs to valuation techniquesS 7 Complete Maturity analysis disclosure

Note: The undrawn amount does not represent future cash outflow and is therefore not included in the maturity analysis.

Case: During the commitment period, investors commit themselves to invest in a private equity fund. What amounts should be included in the maturity analysis in respect of this facility?

The investor should include the undrawn amount of the capital commitment in the earliest period in which the private equity fund may be able to draw it [IFRS 7 B11C(b)]. Such disclosures can be made either in a separate table including the off-balance sheet items, or together with the recognised financial liabilities. IFRS 7 B11D is not relevant, as the amount the investor is required to pay in cash is fixed. IFRS 7 Complete Maturity analysis disclosure

Case: What liquidity risk disclosures are required for derivative financial liabilities? IFRS 7 Complete Maturity analysis disclosure

Referring to IFRS 7 39(b), please see the table below: IFRS 7 Complete Maturity analysis disclosure

Gross settled derivatives

Net settled derivatives

Contractual maturity is essential to understanding

Disclose pay leg based on contractual maturity

Disclosure of receive leg

Disclose net cash flows based on contractual maturity

Contractual maturity is not essential to understanding

Disclose pay leg either based on contractual maturity or how the risk is managed – for example, expected maturity

Disclosure of receive leg optional

Disclose net cash flows either based on contractual maturity or how the risk is managed – for example, fair value

Case: Should derivatives with a positive fair value be included in the maturity analysis? IFRS 7 Complete Maturity analysis disclosure

Generally, only derivatives in a liability position at the balance sheet date (that is, having a negative fair value) are required to be included in the maturity analysis.

However, entities should also include derivative financial assets where such information is necessary to understand the nature and extent of liquidity risk [IFRS 7 B11E]. For example, this might be the case where there are significant offsetting derivative positions. IFRS 7 Complete Maturity analysis disclosure

Case: If gross cash flows are exchanged under a derivative contract, does IFRS 7 require disclosure of the gross cash flows, even if the exchange occurs simultaneously?

Yes. For derivative financial liabilities, IFRS 7 B11D(d) is clear that contractual amounts exchanged in a derivative financial instrument (for example, a currency swap) should be disclosed on a gross basis if gross cash flows are exchanged. This is the case even if the cash flows are exchanged simultaneously. IFRS 7 Complete Maturity analysis disclosure

Case: How is a written put option for which contractual cash flows are essential to an understanding of liquidity treated in the maturity analysis?

It depends on whether the option is settled net or gross and whether the option is in or out of the money at the balance sheet date.Financial instruments

If the option is out of the money and net settled, no liability is required to be disclosed in the maturity table, because there is no obligation to make a payment based on the conditions existing at the balance sheet date [IFRS 7 B11D]. IFRS 7 Complete Maturity analysis disclosure

For gross-settled derivatives where the counterparty can force the issuer to make a payment, the pay leg is disclosed in the maturity analysis irrespective of whether the instrument is in or out of the money. IFRS 7 Complete Maturity analysis disclosure

An American-style option should be disclosed in the earliest time band; a European-style option is disclosed in the time bank in which the exercise date falls.

Case: If the counterparty to a derivative contract has the ability to settle early on demand, in which time band in the contractual maturity analysis should undiscounted cash flows be presented when analysing liquidity risk? IFRS 7 Complete Maturity analysis disclosure

When the counterparty to the derivative instrument has a choice of when an amount is paid, the liability is included on the basis of the earliest date on which the entity can be required to pay. Therefore, if the counterparty to the derivative has the ability to settle early on demand, the derivative cash flows should be included in the earliest maturity band.

Case: An investment entity is party to a derivative instrument that it (but not the counterparty) has the ability to settle early on demand. In which time band in the contractual maturity analysis should undiscounted cash flows be presented when analysing liquidity risk? IFRS 7 Complete Maturity analysis disclosure

The maturity analysis should reflect the contractual obligations of the entity at the time it is prepared. The ability of the investment entity to settle early on demand does not change its contractual obligations. The cash flows arising from the respective derivatives instruments should therefore be included in the relevant time bands based on the contractual cash flows.

Case: A private equity fund invests in unlisted securities. These securities are highly illiquid, and the private equity fund finds it difficult to find a buyer. Is the fund required to provide additional disclosures because of the lack of liquidity of the investment? IFRS 7 Complete Maturity analysis disclosure

In addition to the disclosure requirements in IFRS 7 25 – 27B (fair value measurement disclosures), the entity should provide summary quantitative data about its exposure to liquidity risk based on information provided internally to key management personnel of the entity as required in IFRS 7 34(a).

IFRS 7 39(c) requires the entity to describe how it manages the liquidity risk inherent in the maturity analysis of financial liabilities required in IFRS 7 39(a) and (b). An entity should disclose a maturity analysis of financial assets that it holds for managing liquidity risk if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk [IFRS 7 B11E]. IFRS 7 Complete Maturity analysis disclosure

Given the nature of most private equity funds investments (significant investments in unquoted, often illiquid, investments), management would rarely consider the liquidity of its investments when managing its ability to settle financial liabilities as they come due. As a result, unless there are liabilities that are expected to be settled via asset realisations, a private equity fund would not be expected to make further disclosures about the illiquidity of its investments.

While many limited partnerships are funded by partnership contributions that are classified as debt instruments, this would not ordinarily present a liquidity risk. This is because the ultimate settlement of these financial liabilities is often based on the predetermined, contractual termination date of the partnership once the investments had been realised, providing cash to return to investors. IFRS 7 Complete Maturity analysis disclosure

Case: What rate should be used to determine the amounts to be disclosed for floating rate financial instruments and instruments denominated in a foreign currency, where amounts are required to be disclosed in the maturity table based on contractual undiscounted cash flows [IFRS 7 B11D]? Should this be the current rate or the forward rate?

An entity has a policy choice that needs to be applied consistently. IFRS 7 B11D states that amounts not yet fixed at the reporting date are determined by reference to the conditions existing at the reporting date. This could either be viewed as the current spot rate or the forward rate.

Case: Should exposure to collateral calls be disclosed? IFRS 7 Complete Maturity analysis disclosure

Collateral requirements on financial instruments can pose a significant liquidity risk. For example, an entity with a derivative liability may be required to post cash collateral on the derivative should the liability exceed certain limits. As a result, if collateral calls do pose significant liquidity risk, such entities should provide quantitative disclosures of their collateral arrangements, as those cash flows could occur earlier than the contractual maturity [IFRS 7 B10A].

Whenever an entity is subject to collateral calls, it is recommended that additional qualitative disclosures are provided and include a description of whether the entity is exposed to collateral calls on financial instruments and how this risk is managed [IFRS 7 33].

Case: How should an entity disclose a perpetual debt instrument with mandatory interest payments in the analysis of contractual maturities (undiscounted cash flows) per IFRS 7 39(a)?

Interest payments should be shown in each time band based on when they are contractually due. With regards to the repayment of the nominal amount, entities may present this in a number of ways − for example, using a ‘thereafter’ column or presenting it in a column labelled ‘no contractual maturity’. Whichever method is used, this should be complemented by a narrative description of the terms of the instrument. IFRS 7 Complete Maturity analysis disclosure

Case: What comparative information is required in the first year of application of the IFRS 7 amendment on fair value and liquidity risk?

IFRS 7 44G states that an entity need not provide comparative information in the first year of application for the disclosures required by the amendments. The entity can either keep its previous disclosures (but disclose if this is the case) or adapt the comparative information to be consistent with that required by the amendment.

Disclosure example

Note x: Maturities of financial liabilities

IFRS 7 39(a) and (b), IFRS 7 B11, IFRS 7 B11D  IFRS 7 Complete Maturity analysis disclosure

The tables below analyse the group’s financial liabilities into relevant maturity groupings based on their contractual maturities for:

  • all non-derivative financial liabilities, and IFRS 7 Complete Maturity analysis disclosure
  • net and gross settled derivative financial instruments for which the contractual maturities are essential for an understanding of the timing of the cash flows.

The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. For interest rate swaps, the cash flows have been estimated using forward interest rates applicable at the end of the reporting period.

The group’s trading portfolio of derivative instruments with a negative fair value has been included at their fair value of CU610,000 (2018 – CU621,000) within the ‘less than 6 months’ time bucket. This is because the contractual maturities are not essential for an understanding of the timing of the cash flows. These contracts are managed on a net fair value basis, rather than by maturity date. IFRS 7 Complete Maturity analysis disclosure

IFRS 7 Complete Maturity analysis disclosure

Of the CU46.195m disclosed in the 2019 borrowings time band ‘between 2 and 5 years’, the group is considering early repayment of CU5,000,000 in the first quarter of the 2020 financial year (2018 – nil). IFRS 7 Complete Maturity analysis disclosure

IFRS

Liquidity risk – Maturity analysis IFRS 7 Complete Maturity analysis disclosure

IFRS 17 B11B

IFRS 7 Complete Maturity analysis disclosure

All financial liabilities must be included in the maturity analysis. The analysis should generally be based on contractual maturities. However, for derivative financial liabilities the standard provides entities with a choice to base the maturity grouping on expected rather than contractual maturities, provided the contractual maturities are not essential for an understanding of the timing of the cash flows.

This could be the case for derivative contracts that are held for trading. For contracts such as interest rate swaps in a cash flow hedge of a variable rate financial asset or liability and for all loan commitments, the remaining contractual maturities will be essential for an understanding of the timing of the cash flows. These contracts must therefore be grouped based on their contractual maturities. IFRS 7 Complete Maturity analysis disclosure

IFRS 17 39,

IFRS 17 B11D

The amounts disclosed should be the amounts expected to be paid in future periods, determined by reference to the conditions existing at the end of the reporting period. IFRS 7 Complete Maturity analysis disclosure

However, IFRS 7 does not specify whether current or forward rates should be used. For floating rate financial liabilities and foreign currency-denominated instruments, the use of forward interest rates and forward foreign exchange rates might be conceptually preferable, but the use of a spot rate at the end of the period is also acceptable. Whichever approach is adopted (that is, current/spot rate or forward rate at the reporting date), it should be applied consistently.

IFRS 17 B11C(c)

The specific time buckets presented are not mandated by the standard but are based on what is reported internally to the key management personnel. For financial guarantee contracts, the maximum amount of the guarantee must be allocated to the earliest period in which the guarantee could be called.

As the amounts included in the maturity tables are the contractual undiscounted cash flows, including principal and interest payments, these amounts will not reconcile to the amounts disclosed in the balance sheet. This is in particular as far as borrowings or derivative financial instruments are concerned. Entities can choose to add a column with the carrying amounts which ties into the balance sheet and a reconciling column if they so wish, but this is not mandatory.

Financial guarantee contract

IFRS7 39(a)

IFRS 7 B10(c)

IFRS 7 B11C(c)

IFRS9 Definitions

This must be included in the maturity table in the earliest time bucket (=current) in which it can be called. The existence of such contracts will also need to be discussed in the context of the credit risk disclosures. IFRS 7 Complete Maturity analysis disclosure

IFRS 7 Complete Maturity analysis disclosure IFRS 7 Complete Maturity analysis disclosure IFRS 7 Complete Maturity analysis disclosure

IFRS 7 Complete Maturity analysis disclosure IFRS 7 Complete Maturity analysis disclosure IFRS 7 Complete Maturity analysis disclosure

Financing arrangements IFRS 7 Complete Maturity analysis disclosure

IFRS 17 39(c)

IAS 7 50(a)

Committed borrowing facilities are a major element of liquidity management. Entities should therefore consider providing information about their undrawn facilities. IAS 7 Statement of Cash Flows also recommends disclosure of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities.

Terms and conditions of financial instruments IFRS 7 Complete Maturity analysis disclosure

IFRS 7 7

IFRS 7 31

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 no longer need to disclose the significant terms and conditions for each of their major borrowings. Nevertheless, if an entity has a borrowing or other financial instrument with unusual terms and conditions, some information should be provided to enable users to assess the nature and extent of risks associated with these instruments.

IFRS 7 Complete Maturity analysis disclosure

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