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 entityDisclosure financial assets and liabilitiesand 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

­

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.

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Reform of interest rate benchmarks

Reform of interest rate benchmarks

Certain interest rate benchmarks including LIBOR, EURIBOR and EONIA are being or have recently been reformed.

What are interest rate benchmarks?

Interest rate benchmark are used to determine

  1. the amount of interest payable for a wide range of financial products such as derivatives, bonds, loans, structured products and mortgages, and
  2. the valuation of financial products.

The most common examples of interest rate benchmarks used in financial contracts across the world are the London Interbank Offered Rate (LIBOR) and for the Euro, the Euro Interbank Offered Rate (EURIBOR) and Euro Overnight Index Average (EONIA).

Why are these benchmarks being reformed?

As benchmark rates are fundamental to so many financial contracts, they need to be robust, reliable and fit for purpose. Each of these interest rate benchmarks subject to reform were based on the rates at which banks lend to each other in the interbank market.

Financial regulatory authorities have expressed their concern that because interbank lending transactions have significantly decreased in recent years, the Reform of interest rate benchmarksbenchmark rates may no longer be representative or reliable.

This concern has resulted in recommendations made by the Financial Stability Board towards the global financial industry to reform the major interest rate benchmarks and to develop a set of alternative rates that are more representative of the current financial environment.

IFRS Reporting disclosure amendments

The amendments made to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures provide certain reliefs in relation to interest rate benchmark reform. The reliefs relate to hedge accounting and have the effect that the reforms should not generally cause hedge accounting to terminate. However, any hedge ineffectiveness should continue to be recorded in the income statement. Given the pervasive nature of hedges involving interbank offered rates (IBOR)-based contracts, the reliefs will affect companies in all industries.

Entities relying on the relief must disclose:

  1. the significant interest rate benchmarks to which the entity’s hedging relationships are exposed
  2. the extent of the risk exposure that the entity manages that is directly affected by the interest rate benchmark reform
  3. how the entity is managing the process of transition to alternative benchmark rates
  4. a description of significant assumptions or judgements that the entity made in applying the reliefs, and
  5. the nominal amount of the hedging instruments in those hedging relationships. [IFRS 7.24H]

Information about how the entity is managing the transition process will provide users with an indication of the extent to which management is prepared for the transition. For example, this could include explanations about differences in fallback provisions between the hedged item and the hedging instruments.

The amendments are not clear whether the disclosure of the extent of the risk exposure that the entity manages could be provided on a qualitative rather than quantitative basis. However, numerical disclosures may be more useful for users.

Accounting policies relating to hedge accounting will need to be updated to reflect the reliefs. Fair value disclosures may also be impacted due to transfers between levels in the fair value hierarchy as markets become more / less liquid.

Entities should consider whether further disclosure of the impending replacement of IBOR should be provided in other parts of the annual report, for example in management’s discussion and analysis.

This Example Disclosure Related party transactions shows the disclosures an entity would have to add if it has a loan with an interest rate based on 3-month GPB LIBOR and a cash flow hedge in the form of a floating-to-fixed rate interest rate swap that is referenced to LIBOR. The disclosures assume that the entity has adopted the hedge accounting requirements of IFRS 9.

While primarily illustrating the disclosures required by the amendments made to IFRS 7 and other hedge accounting disclosures affected by IBOR reform, extractsReform of interest rate benchmarks of other disclosures from the main body of the publication have been included, to provide some context for the additional disclosures.

New or revised disclosures are highlighted with shading. This appendix does not illustrate disclosures that may be required if the terms of the loan and the swap have moved to new benchmark rates.

12 Financial risk management (extracts)

12(a) Derivatives (extracts)

(iv) Hedge effectiveness (extracts)

Hedge ineffectiveness for interest rate swaps is assessed using the same principles as for hedges of foreign currency purchases. It may occur due to:

  • the credit value/debit value adjustment on the interest rate swaps which is not matched by the loan
  • differences in critical terms between the interest rate swaps and loans, and
  • the effects of the forthcoming reforms to GBP LIBOR, because these might take effect at a different time and have a different impact on the hedged item (the floating-rate debt) and the hedging instrument (the interest rate swap used to hedge the debt). Further details of these reforms are set out below. [IFRS 7.22B(c), IFRS 7.23D]

Ineffectiveness of CUXX,XXX has been recognised in relation to the interest rate swaps in other gains or losses in profit or loss for 2020 (2019 CUXX,XXX). The significant increase in ineffectiveness in the current year was caused by the expectation that the interest rate swap and the hedged debt will move from GBP LIBOR to SONIA at different dates. [IFRS 7.24C(b)(ii)]

12(b) Market riskReform of interest rate benchmarks

[IFRS 7.33]

(ii) Cash flow and fair value interest rate risk

[IFRS 7.21C]

The group’s main interest rate risk arises from long-term borrowings with variable rates, which expose the group to cash flow interest rate risk. Group policy is to maintain at least 50% of its borrowings at fixed rate, using floating-to-fixed interest rate swaps to achieve this when necessary.

Generally, the group enters into long-term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the group borrowed at fixed rates directly. During 2020 and 2019, the group’s borrowings at variable rate were mainly denominated in Oneland currency units and US dollars. Except for the GBP LIBOR floating rate debt noted below, other variable interest rates were not referenced to interbank offered rates (IBORs) that will be affected by the IBOR reforms. [IFRS7.22A(a),(b), IFRS7.33(a),(b)]

Included in the variable rate borrowings is a 10-year floating-rate debt of CU10,000,000 (2019 CU10,000,000) whose interest rate is based on 3 month GBP LIBOR. To hedge the variability of in cash flows of this loan, the group has entered into a 10-year interest rate swap with key terms (principal amount, payment dates, repricing dates, currency) that match those of the debt on which it pays a fixed rate and receives a variable rate. [IFRS 7.24H(a)]

The group’s borrowings and receivables are carried at amortised cost. The borrowings are periodically contractually repriced (see below) and to that extent are also exposed to the risk of future changes in market interest rates.

The exposure of the group’s borrowings to interest rate changes and the contractual re-pricing dates of the borrowings at the end of the reporting period are as follows: [IFRS 7.22A(c), IFRS 7.34(a), IFRS 7.24H(b)]

Amounts in CU’000

2020

%of total

2019

% of total

Variable rate borrowings – GBP LIBOR

10,000

10%

10,000

12%

Variable rate borrowings – non-IBOR

43,669

46%

40,150

47%

Fixed rate borrowings – repricing or maturity dates:

– Less than one year

4,735

5%

3,895

5%

– 1 – 5 years

26,626

27%

19,550

23%

– Over 5 years

11,465

12%

11,000

13%

Total

97,515

100%

84,595

100%

An analysis by maturities is provided in note 12(d) below. The percentage of total loans shows the proportion of loans that are currently at variable rates in relation to the total amount of borrowings.

Instruments used by the group

Swaps currently in place cover approximately 37% (2019 – 37%) of the variable loan principal outstanding. The fixed interest rates of the swaps range between 7.8% and 8.3% (2019 – 9.0% and 9.6%), and the variable rates of the loans are between 0.5% and 1.0% above the 90 day bank bill rate or LIBOR which, at the end of the reporting period, were 8.2% and x.x% respectively (2019 – 9.4% and x.x%). [IFRS 7.22B(a), IFRS 7.23B]

The swap contracts require settlement of net interest receivable or payable every 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt. [IFRS 7.22B(a)]

Effects of hedge accounting on the financial position and performance

The effects of the interest rate swaps on the group’s financial position and performance are as follows:

Amounts in CU’000

2020

2019

Interest rate swaps

Carrying amount (current and non-current asset)

[IFRS 7.24A(a)(b)]

453

809

Notional amount – LIBOR based swaps [IFRS 7.24H(b),(e)]

10,000

10,000

Maturity date [IFRS 7.23B(a)]

2030

2030

Hedge ratio [IFRS 7.22B(c)]

1 : 1

1 : 1

Change in fair value of outstanding hedging instruments since 1 January [IFRS 7.24A(c)]

xx

xx

Change in value of hedged item used to determine hedge effectiveness [IFRS 7.24B(b)(i)]

xx

xx

Weighted average hedged rate for the year [IFRS 7.23B(b)]

x.x%

x.x%

Notional amount – non-LIBOR based swaps [IFRS 7.24H(b),(e)]

10,010

8,440

Maturity date [IFRS 7.23B(a)]

2020

2019

Hedge ratio [IFRS 7.22B(c)]

1 : 1

1 : 1

Change in fair value of outstanding hedging instruments since 1 January [IFRS 7.24A(c)]

-202

1,005

Change in value of hedged item used to determine hedge effectiveness [IFRS 7.24B(b)(i)]

202

1,005

Weighted average hedged rate for the year [IFRS 7.23B(b)]

8.1%

9.

xx) Significant judgements

Interest rate benchmark reform

Following the financial crisis, the reform and replacement of benchmark interest rates such as GBP LIBOR and other interbank offered rates (‘IBORs’) has become a priority for global regulators. There is currently uncertainty around the timing and precise nature of these changes. [IFRS 7.24H(b)]

To transition existing contracts and agreements that reference GBP LIBOR to SONIA, adjustments for term differences and credit differences might need to be applied to SONIA, to enable the two benchmark rates to be economically equivalent on transition.

Group treasury is managing the group’s GBP LIBOR transition plan. The greatest change will be amendments to the contractual terms of the GBP LIBOR-referenced floating-rate debt and the associated swap and the corresponding update of the hedge designation. However, the changed reference rate may also affect other systems, processes, risk and valuation models, as well as having tax and accounting implications. [IFRS 7.24H(c)]

Relief applied

The group has applied the following reliefs that were introduced by the amendments made to IFRS 9 Financial Instruments in September 2019:

  • When considering the ‘highly probable’ requirement, the group has assumed that the GBP LIBOR interest rate on which the group’s hedged debt is based does not change as a result of IBOR reform.
  • In assessing whether the hedge is expected to be highly effective on a forward-looking basis the group has assumed that the GBP LIBOR interest rate on which the cash flows of the hedged debt and the interest rate swap that hedges it are based is not altered by LIBOR reform.
  • The group has not recycled the cash flow hedge reserve relating to the period after the reforms are expected to take effect.
Assumptions made

In calculating the change in fair value attributable to the hedged risk of floating-rate debt, the group has made the following assumptions that reflect its current expectations:

  • The floating-rate debt will move to SONIA during 2022 and the spread will be similar to the spread included in the interest rate swap used as the hedging instrument.
  • No other changes to the terms of the floating-rate debt are anticipated.
  • The group has incorporated the uncertainty over when the floating-rate debt will move to SONIA, the resulting adjustment to the spread, and the other aspects of the reform that have not yet been finalised by adding an additional spread to the discount rate used in the calculation. [IFRS 7.24H(d)]

Reform of interest rate benchmarks

Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

Reform of interest rate benchmarks

Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks Reform of interest rate benchmarks

Low credit risk operational simplification

Low credit risk operational simplification

IFRS 9 contains an important simplification that, if a financial instrument has low credit risk, then an entity is allowed to assume at the reporting date that no significant increases in credit risk have occurred. The low credit risk concept was intended, by the IASB, to provide relief for entities from tracking changes in the credit risk of high quality financial instruments. Therefore, this simplification is only optional and the low credit risk simplification can be elected on an instrument-by-instrument basis.

This is a change from the 2013 ED, in which a low risk exposure was deemed not to have suffered significant deterioration in credit risk. The amendment to make the simplification optional was made in response to requests from constituents, including regulators. It is expected that the Basel Committee SCRAVL consultation document will propose that sophisticated banks should only use this simplification rarely for their loan portfolios.

For low risk instruments, the entity would recognise an allowance based on 12-month ECLs. However, if a financial instrument is not considered to have low credit risk at the reporting date, it does not follow that the entity is required to recognise lifetime ECLs. In such instances, the entity has to assess whether there has been a significant increase in credit risk since initial recognition that requires the recognition of lifetime ECLs.

The standard states that a financial instrument is considered to have low credit risk if: [IFRS 9.B5.22]

  • The financial instrument has a low risk of default
  • The borrower has a strong capacity to meet its contractual cash flow obligations in the near term
  • Adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations Low credit risk operational simplification

A financial instrument is not considered to have low credit risk simply because it has a low risk of loss (e.g., for a collateralised loan, if the value of the collateral is more than the amount lent (see collateral) or it has lower risk of default compared with the entity’s other financial instruments or relative to the credit risk of the jurisdiction within which the entity operates.

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IFRS 16 Good Important Read – Lease payments

Lease payments – Lessee perspective

or what does a lessee include in its lease liability?

At the commencement date, a lessee measures the lease liability as the present value of lease payments that have not been paid at that date. In a simple lease that includes only fixed lease payments, this can be a simple calculation (IFRS 16.26).

Lease payments

Worked example – Fixed lease payments are included in lease liabilities
Lessee B enters into a five year lease of a photocopier. The lease payments are 10,000 per annum, paid at the end of each year.

Because the annual lease payments are fixed amounts, B includes the present value of the five annual payments in the initial measurement of the lease liability.

Using a discount rate (determined as B’s incremental borrowing rate) of 5%, the lease liability at the commencement date is calculated as follows:

Year

Lease payments

Discounted

1

10,000

9,524

2

10,000

9,070

3

10,000

8,638

4

10,000

8,227

5

10,000

7,835

Lease liability at commencement date

43,294

 

Categories of lease payment

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Excellent Study IFRS 9 Eligible Hedged items

IFRS 9 Eligible Hedged items

the insured items of business risk exposures

Although the popular definition of hedging is an investment taken out to limit the risk of another investment, insurance is an example of a real-world hedge.

Every entity is exposed to business risks from its daily operations. Many of those risks have an impact on the cash flows or the value of assets and liabilities, and therefore, ultimately affect profit or loss. In order to manage these risk exposures, companies often enter into derivative contracts (or, less commonly, other financial instruments) to hedge them. Hedging can, therefore, be seen as a risk management activity in order to change an entity’s risk profile.

The idea of hedge accounting is to reduce (insure) this mismatch by changing either the measurement or (in the case of certain firm commitments) FRS 9 Eligible Hedged itemsrecognition of the hedged exposure, or the accounting for the hedging instrument.

The definition of a Hedged item

A hedged item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that

  1. exposes the entity to risk of changes in fair value or future cash flows and
  2. is designated as being hedged

The hedge item can be:

Only assets, liabilities, firm commitments and forecast transactions with an external party qualify for hedge accounting. As an exception, a hedge of the foreign currency risk of an intragroup monetary item qualifies for hedge accounting if that foreign currency risk affects consolidated profit or loss. In addition, the foreign currency risk of a highly probable forecast intragroup transaction would also qualify as a hedged item if that transaction affects consolidated profit or loss. These requirements are unchanged from IAS 39.

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Best focus on IFRS 16 Leases

Focus on IFRS 16 Leases

 

Best focus on IFRS 16 LeasesBest focus on IFRS 16 Leases

Focus on IFRS 16 Leases 2

Focus on IFRS 16 Leases 3

(Source https://www.bdo.global/en-gb/services/audit-assurance/ifrs/ifrs-at-a-glance)

Focus on IFRS 16 Leases or in slightly more detail…..

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IFRS 16 Leases Lease liability

IFRS 16 Leases Lease liability – The lease liability will be the present value of the lease payments not paid on the date the contract starts over the lease term. This will be calculated using the interest rate implicit in the lease or, if that is not known, the lessee’s incremental borrowing rate.

Lease payments IFRS 16 Leases – Lease liability

The lease payments included in the present value calculation are: IFRS 16 Leases Lease liability IFRS 16 Leases Lease liability

  • any fixed payments less any lease incentives receivable. This includes any payments which are ‘in-substance’ fixed payments – those payments which may be variable, but which are, in reality, unavoidable. One example is a payment which will only
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IFRS 7 Market risk disclosures

Market risk - The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices.