IFRS 7 - Financial Instrument Disclosures (detailed review)

Wednesday, May 7, 2014 Print Email

Objective

Users of financial statements frequently needs information about the impact of financial instruments on the financial aspects of the entity, including entity’s exposure to any risks relating to those financial instruments and how entity manages associated risks.

This standard prescribes the disclosure requirements relating to financial instruments, which are to be provided by the entity in its financial statements to enable the users of financial statements, to analyze the

  • The impact of financial instruments on the financial performance and position of the entity and
  • The entity’s exposure to the risks relating to its financial instruments, the nature and extent of risks arising from such financial instruments during the year and at the end of accounting period, along with the strategies of the entity to manage those risks

Scope

The requirements of this standard are applicable to deal with the accounting treatment of all types of financial instruments except for the following:

  • Investment in subsidiary, associate or joint venture which are measured at cost in the separate financial statements of the acquirer. However, the requirements of this standard will be applicable to such investments if the holder chooses to the measure such investments as per the requirements of this standard, in its separate financial statements as permitted by IAS 27 Separate Financial Statements
  • The rights and obligations under share based payment arrangements, to which IFRS 2 Share Based Payment is applicable
  • The rights and obligations relating to employee benefit plans, to which IAS 19 employees Benefits is applicable
  • The rights and obligations relating to insurance contracts, to which IFRS 4 Insurance Contracts is applicable

General Requirement

The primary requirement is the disclosure of impact of financial instrument on the financial performance and position of the entity and the disclosure about the entity’s exposure to the risk relating to financial instruments and the nature of risk involved
 

  • This standard requires that the entity should categorize the financial instruments in to different classes according to the attributes of financial instrument, and to provide disclosure for each class of financial instruments separately
  • This standard requires both the quantitative and qualitative disclosures

Statement of Financial Position

The entity is required to disclose the carrying values of the following either in the statement of financial position or accounting notes:

  • Financial assets measured at fair value through profit or loss, including the separate disclosure for the financial assets which are designated as at fair value through profit or loss
  • Financial assets measured at amortized cost
  • Financial assets measured at fair value through other comprehensive income
  • Financial liabilities measured at fair value through profit or loss, including the separate disclosure for the financial liabilities which are designated as at fair value through profit or loss
  • Financial liabilities measured at amortized cost
  • The details of financial assets, for which entity has neither transferred nor retained the risk and rewards

Financial Assets or Liabilities designated as at fair Value through Profit or Loss

  • The entity is required to disclose the following in respect of financial asset which is designated as at fair value through profit or loss that would otherwise have been measured at amortized cost:

a) Exposure to the credit risk of financial asset at reporting date, to the maximum extent

b) The amount of the credit risk which is expected to be offset by another relating derivative instrument

c) The cumulative amount of change in its fair value at the end of reporting period which is due to the credit risk of the entity

d) The amount of change in fair value of the relating derivative instrument, which arises during the accounting period

  • The entity is required to disclose the following in respect of financial liability which is designated as at fair value through profit or loss and for which change in fair value due to credit risk will be reported to other comprehensive income as per the requirement of IFRS 9:

a) The amount of change in fair value due to credit risk reported to other comprehensive income during the accounting period

b) The difference between the carrying value of financial liability and its expected settlement value at the maturity date

c) Any amount of gain or loss transferred to equity during the current accounting period including the reason for the transfer

  • However, if the entity is required to recognize all changes in fair value to statement of profit or loss in order to avoid an accounting mismatch, in respect of financial liability which is designated as at fair value through profit or loss, it will disclose:

a) The amount of change in fair value due to credit risk during the accounting period

b) The difference between the carrying value of financial liability and its expected settlement value at the maturity date

Financial Asset measured at Fair Value through Other Comprehensive Income

For financial asset measured at fair value through other comprehensive income, the entity will disclose:

  • The details about investments which are measured at fair value through other comprehensive income
  • Reason for selection of this presentation alternative
  • Carrying value of such investment at the end of accounting period
  • Any amount of dividend recognized during the current period and dividend relating to investment which were disposed off during the year will be shown separately
  • Any amount of gain or loss transferred to equity during the current accounting period including the reason for the transfer
  • In respect of investments disposed in the current year:

i) The reason for the disposal

ii) Any disposal gain or loss

iii) Carrying value of investment at the date of disposal

Reclassification

The entity is required to disclose the following when a financial asset is reclassified from one category to another, as per the requirements of the IFRS 9:

  • The date of reclassification
  • The details about the change in the business objective model
  • The amount of financial assets which were reclassified into and out of each category

If the financial asset is transferred to the amortized cost category, the entity will disclose:

  • The effective interest rate determined on the date of reclassification
  • Any amount of interest income

If the financial asset is transferred to the at fair value through profit or loss category, the entity will disclose:

  • The fair value of such financial asset at the end of accounting period
  • Any amount of change in fair value recognized in the current period

Off Setting Financial Asset and Financial Liability

If an entity has presented a net amount after having off set a financial asset with relating financial liability as per the requirements of IAS 32 Presentation of Financial Instrument, the entity will disclose:

  • The details about the right of netting off
  • The individual gross carrying value of such financial asset and relating financial liability
  • The net amount of such financial asset and relating financial liability

Collateral

If the entity held some financial assets for which are used as a collateral under an pledging arrangement, the entity will disclose:

  • The details of the pledging arrangement
  • The carrying values of financial assets held by the entity under pledging arrangement, for a liability

Defaults

If during the accounting period the entity has default its long term loan, it will disclose the following:

  • The description about the default in respect of principal amount of loan, installment or interest payment
  • The carrying value of the outstanding loan in default
  • Any change in the loan terms by lender

Statement of Profit or Loss and Other Comprehensive Income

The entity is required to disclose the following relating ti financial asset or financial liability, either in the statement of profit or loss and other comprehensive income or accounting notes:

  • The gain or loss relating to:

i) Financial assets measured at fair value through profit or loss, including the separate disclosure for the financial assets which are designated as at fair value through profit or loss

ii) Financial assets measured at amortized cost

iii) Financial assets measured at fair value through other comprehensive income

iv) Financial liabilities measured at fair value through profit or loss, including the separate disclosure for the financial liabilities which are designated as at fair value through profit or loss

v) Financial liabilities measured at amortized cost

  • The amount of impairment loss for each class of financial asset (if any)
  • Any interest income or expense relating to financial asset or financial liability determined using effective interest rate
  • Any amount of gain or loss arising on de-recognition of financial asset in the current year

 

Other Disclosures

Accounting Policy

The entity should also disclose about the polices and measurement basis used in preparing the financial statement

Hedge Accounting

The entity is required to disclose the following in respect of its each hedging arrangement:

  • The details and type of hedging arrangement
  • Nature of risk involve
  • The details and carrying value of hedging instrument designated under the hedging arrangement, at the end of accounting period
  • The fair value gain or loss relating to the hedged item and hedging instrument during the accounting period
  • For cash flow hedging the amount of amount of effectiveness recognized in other comprehensive income and ineffectiveness in the statement of profit or loss
  • Any amount of gain or loss reclassified to the statement of profit or loss during the accounting period
  • In case of cash flow hedging, the period when cash flows are expected to occur and will affect the profits

Fair Value

The entity is required to disclose the following in respect of fair value of instrument;

  • The fair value of each financial asset or liability at the end of reporting period
  • The basis used by the entity in determination of fair value
  • However, the if the instrument has its carrying value which approximately equate to the fair value, fair value disclosure is not required
  • The instruments, for which fair value is not determinable, the entity should disclose this fact, the details and carrying value of such instrument including the reason why the fair value is not determinable

Qualitative Disclosures

To enable the users of financial statements to evaluate the entity’s exposure to the risks relating to its financial instruments, the nature and extent of risks arising from such financial instruments during the year and at the end of accounting period, along with the strategies of the entity to manage those risks, the entity is required to disclose the following:

  • The details and nature of risk involved such as credit risk, market risk or liquidity risk
  • Details about the entity’s strategies in place to manage those risk
  • Any changes in (a) and (b)

Quantitative Disclosures

This standard requires an entity to disclose quantitative data summary relating to the exposure to risks of each financial instrument at the end of reporting period and such quantitative data summary should be prepared on the basis of information provided internally to key management personnel.

However, if quantitative data summary does not reflect reasonably the entity’s exposure to the risks relating to the financial instruments the entity should disclose: 

a) In case of credit risk:

  • The amount which reflects the entity’s exposure to credit risk to the maximum extent at the end of accounting period
  • Any instrument held by the entity as a collateral under the pledged arrangement

b) In case of liquidity risk:

  • The details about the entity’s strategies to manage such risk
  • The maturity details for the derivative and non-derivative financial liability

c) In case of market risk, the entity is required to prepare a sensitivity analysis which reflects the effects on profit or loss of changes in each market risk

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