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

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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.

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1 Best Application of Hedge of forecast FX purchases

Hedge of forecast FX purchases

presents a complete descriptive case of a hedge, from start to finish. Step-by-step build a file to document a hedge and appropriately account for it under IFRS.

This narrative can also be used as a sort of starting point to the hedge documentation required for each hedging relationship at inception

The Case – Type of hedge: Cash flow hedge

Hedged risk: FX risk – spot component only

Key features: Spot rate designated, required for inventory, Cost of hedging approach elected – Forward points taken to OCI, Inclusion of time value of money in measuring hedge ineffectivenessRead more

Hedged items General requirements

Hedged items General requirements discusses the eligible hedged item and risk components in non-financial items. The general requirements of what qualifies as an eligible hedged item are unchanged compared to IAS 39. A hedged item can be: Hedged items General requirementsHedged items General requirements

  • A recognised asset or liability Hedged items General requirements
  • An unrecognised firm commitment Hedged items General requirements
  • A highly probable forecast transaction Hedged items General requirements

Or  Hedged items General requirements

All of above can either be a single item or a group of items, provided the specific requirements for a group of items are met.

Only assets, liabilities, firm Read more

Hedge Risk components General requirements

Risk components General requirements is about hedging risk components be it financial or non-financial risks (new in IFRS 9).

Instead of hedging the total changes in fair values or cash flows, risk managers often enter into derivatives to only hedge specific risk components. Managing a specific risk component reflects that hedging all risks is often not economical and hence not desirable, or not possible (because of a lack of suitable hedging instruments). Risk components – General requirements

However, under IAS 39, a non-financial item can only be designated as the hedged item for its foreign currency risk or all its risks in their entirety. There is no such restriction for financial items, Risk components General requirementstherefore creating an inconsistency in hedge accounting Read more

Contractually specified risk components

– Contractually specified risk components –

Under IFRS 9, risk components can be designated for non-financial hedged items, provided the component is separately identifiable and the changes in fair value or cash flows of the item attributable to the risk component are reliably measurable. There are two types of risk components:

  1. Contractually specified risk components – those that are explicitly specified in a contract.
  2. Non-contractually specified risk components – those that are implied in the fair value or cash flows of an item and can relate to items that are not a contract (e.g. forecast transactions) or contracts that do not explicitly specify the risk component (e.g. firm commitment with only one single price vs. a pricing formula that
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IFRS 9 Inflation as a risk component

Inflation as a risk component – Under IAS 39, inflation cannot be designated as a hedged risk component for financial instruments, unless the inflation risk component is contractually specified. For non-financial instruments, inflation risk cannot be designated under IAS 39 as a risk component at all. Inflation as a risk component

Highlight – For financial instruments, IFRS 9 opens the door for designating a non-contractually specified inflation component as a hedged risk component – but only in limited circumstances. For non-financial instruments, the inflation component will be eligible for designation as the hedged item in a hedging relationship provided that it is separately identifiable and reliably measurable. Inflation as a risk component

For financial instruments, IFRS 9 introduces a rebuttable Read more

Credit risk exposures

Many financial institutions hedge the credit risk (i.e. insure credit risk exposures) arising from loans or loan commitments using credit default swaps (CDS). This would often result in an , as loans and loan are typically not accounted for . The simplest accounting would be to designate the credit risk as a risk component in a hedging relationship. However, the IASB noted that due to the Read more

Hedging instruments

IAS 39 placed several restrictions on the types of instruments that can qualify as hedging instruments for hedge accounting purposes. This is to reflect that hedge accounting was mainly intended to address that resulted from requiring derivatives to be accounted for . IFRS 9 takes a different approach that focuses on which instruments are used for hedging. As a result, entities are also now permitted to designate, as hedging instruments, non-derivative financial assets or non-derivative financial liabilities that are Read more

Qualifying criteria Designation

Qualifying criteria designation are that a hedging relationship has to consist of eligible hedging instruments, eligible hedged items, formal designation and documentation.

Unchanged from IAS 39, to qualify for hedge accounting, a hedging relationship has to consist of eligible hedging instruments and eligible hedged items. Also, at inception of the hedging relationship, there still has to be a formal designation and documentation. This would include the entity’s risk management objective underlying the hedging relationship and how that fits within the overall risk management strategy.

The documentation has to include an identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the entity will assess whether the hedging relationship meets the Read more

Impact of credit risk

IFRS 9 requires that, to achieve hedge accounting, the impact of changes in credit risk (in short Impact of credit risk) should not be of a magnitude such that it dominates the value changes, even if there is an economic relationship between the hedged item and hedging instrument. Credit risk can arise on both the hedging instrument and the hedged item in the form of counterparty’s credit risk or the entity’s own credit risk.

Judgement has to be used in determining when the impact of credit risk is ‘dominating’ the value changes. But clearly, to ‘dominate’ would mean that there would have to be a very significant effect on the fair value of the hedged item or the hedging instrument. Read more