Financial Instruments Disclosures- IFRS 7<br />Main features of the standard<br />
Objectives <br /><ul><li>1)The objectives are to enable the users of financial statements of an entity to realize the significance of the financial instruments and the nature and extent of risks arising from such instruments and how such risks are managed.
2)The principles in this IFRS complement the IAS 32 & 39.</li></li></ul><li>Scope <br /><ul><li>3. This IFRS is applicable by all entities to all types Financial Instruments (FI) except:
A) Subsidiaries (IAS 27), associates (IAS28) or joint ventures (IAS31). Anyway, all derivatives are applicable except where they are equity instruments (IAS32).
E) FIs, contracts and obligations under share based payments (IFRS 2)
F) Instruments classified as equity instruments (IAS32)
4. This IFRS applies to recognized FIs (IAS 39) and unrecognized ones such as loan commitments.
5. This also applies to non financial items (IAS39)</li></li></ul><li>Classes of financial instruments and level of disclosure<br /><ul><li>6. This IFRS requires similar FIs to be grouped together.
Significance of FIs for financial position and performance
7. An entity will disclose information about its F I s to enable users to evaluate their significance.
Statement of financial position , categories of financial assets and financial liabilities
8. The carrying amounts of the following will be disclosed:
A) financial assets at fair values through profit and loss showing separately i) upon initial recognition, ii) HFTs as per IAS 39
E) Financial liabilities same as a) above for assets
F) financial liabilities at amortized costs. </li></li></ul><li>Financial assets and liabilities at fair values through profit and loss<br /><ul><li>9. if a loan or a receivable is expressed at fair value through profit and loss, then disclose the following:
B) the amount by which any related credit derivative will mitigate the credit risk
C) any change in fair value of a loan or a receivable on account of a change in credit risk that is determined that this change is not due to market risk or using an alternative method that will indicate that the change is due to credit risk. Market conditions will give rise to market risks.
D) the amount of change that has occurred due to change in fair values of credit derivatives. </li></li></ul><li>Financial assets and liabilities at fair values through profit and loss (Contd.)<br /><ul><li>10. if a financial liability is at fair value through profit and loss then disclose:
B) if the above disclosure does not fully explain the change in fair value then state reasons for reaching this conclusion of fair value change.</li></li></ul><li>Reclassification<br /><ul><li>12. if an entity has reclassified assets as per IAS 39 (51-54) either at cost or at amortized cost rather than at FV and vice-e-versa then it shall disclose the reclassified amount in to and out of and the reason for reclassification .</li></li></ul><li>Reclassification (contd.)<br /><ul><li>12 a). if an asset is reclassified (IAS 39 -50B, 50D, 50E) then disclose:
A) the amount reclassified into and out of FV/cost
B) for each reporting period until de-recognition, disclose carrying amounts and fair values of all assets for current and previous periods.
C) if reclassified as per then disclose the facts and circumstances
D) FV gain or loss on reclassification in profit and loss or comprehensive income for the current and previous periods.</li></li></ul><li>Reclassification (contd.)<br /><ul><li>12 a) contd. E) for each reporting period until de-recognition, if an asset is reclassified then then disclose the FV gain/loss that would have been recognized (P/L or CI) if the asset had not been reclassified and the gain / loss, income and expense recognized in profit and loss and
F) the effective interest rate and the estimated cash flows the entity expects to recover at the reclassification date. </li></li></ul><li>De-recognition<br /><ul><li>13. if the asset transferred, does not qualify for de-recognition then disclose:
C) carrying amounts and associated liabilities of such assets
D) due to continuing involvement, disclose total carrying amount of the original asset, amount of asset till recognized and the carrying amount of the associated liability.</li></li></ul><li>Collaterals<br /><ul><li>14. disclose the following:
A) carrying amounts of pledged assets as collaterals
16. when an allowance account is used to record losses of impairment then disclose a reconciliation of any changes to that account during the period of reporting</li></li></ul><li>Compound financial instruments with multiple derivatives<br /><ul><li>17. an instrument may have a liability and an equity content. It may have multiple embedded derivatives that are interdependent. Disclose those features.
B) carrying amount of the loan payable in default
C) whether the default was remedied or the terms were renegotiated before issue of the financial statements
19. the information under 18 above should be disclosed if the default is of another type which requires the lender to demand accelerated repayments</li></li></ul><li>Statement of comprehensive income<br /><ul><li>Items of income, expense, gains or losses
20. an entity shall disclose the following either in the comprehensive income or in the notes:
A) i)net gains or losses of F I s at fair values through profit and loss (initial recognition as well as HFTs)
A) ii) for AFS assets showing gain / loss in other comprehensive income and the amount reclassified from equity to profit and loss
A) v) liabilities at amortized costs</li></li></ul><li>Statement of comprehensive income (contd.)<br /><ul><li>20 b) total interest income and expense using effective interest method for instruments not at fair value
C) fee income and expense from instruments not at fair value and also trusts where investments are held for others.
23 a) disclose periods for which cash flows are expected
B) describe any forecast transaction for which hedge accounting was used but it no longer exists
C) amounts recognized in the other comprehensive income
D) amount reclassified from equity to profit and loss
E) amount removed from equity and included in the initial cost or carrying amount of a non instrument whose inclusion was a highly probable hedged transaction</li></li></ul><li>Fair value hedges<br /><ul><li>24. disclose the hedging instrument, hedged risk, ineffectiveness recognized in the profit and loss due to cash flow hedges and net investments in foreign operations.
25. except as per para 29, for assets and liabilities, disclose fair values in a way comparable with the carrying amounts.
26. not relevant</li></li></ul><li>Further disclosures<br /><ul><li>27. a) give assumptions in arriving at fair values
B) how fair values are determined (active market or a technique used)
C) state whether values are recognized based on market transactions. State whether charging one element will alter the fair value significantly.
D) if c) above is applied then state the amount of change in fair value
28. if there is no active market for the instrument then the value should be established as per technique (see paras AG74-AG79 of IAS 39) </li></li></ul><li>Further disclosures (contd.)<br /><ul><li>29. disclosure of fair value is not required in the following cases:
A) when carrying amount is approximately the fair value (short term trade receivables and payables).
B) for an equity investment that does not have an active market and is measured at cost as per IAS 39 or
C) for contracts containing a discretionary participation feature (IFRS 4) if the fair value cannot be reliably measured.</li></li></ul><li>Further disclosures (contd.)<br /><ul><li>30. an entity shall disclose financial information to help users to arrive at their own judgment about the differences between carrying amounts and fair values including:
A) the fact that fair values have not been disclosed as they cannot be measured reliably
B) explain as to why fair value cannot be measured
C) information about market for the instrument under review
D) how the entity intends to sell the instrument
E) financial instruments that reported de-recognition, should disclose the carrying amounts and the resulting gain/loss whose fair value could not be reliably measured </li></li></ul><li>Nature and extent of risks arising from financial instruments<br /><ul><li>31. an entity shall disclose information so that the nature and extent of risks attached to the financial instruments can be measured.
33. for each type of risk- disclose the entity’s exposure, how it arises, the entity’s objectives, policies and processes for managing the risks and the method used to measure the risk and any changes to risks from the previous period.</li></li></ul><li>Quantitative disclosures<br /><ul><li>34. for each type of risk, disclose as follows:
A) summarize the exposure to a specific risk as you would report to the top management.
35. if the quantitative data does not disclose the full extent of the risk then disclose further information.</li></li></ul><li>Credit risks<br /><ul><li>36. Credit risk arises when one party causes financial loss to another by failing to discharge obligations.
Disclose credit risks by class of financial instruments as follows:
A) the amount that best represents maximum exposure to credit risk
B) in respect of a) above a description of collateral
C) information about credit quality of financial assets
D) carrying amount of the financial assets that would be past due or impaired or renegotiated.</li></li></ul><li>Financial assets that are past due or impaired<br /><ul><li>37. disclose by class of financial asset
B) when the asset is not readily convertible into cash then the policy to dispose it off for using it in operation.</li></li></ul><li>Liquidity risks<br /><ul><li>Liquidity risk arises when an entity experiences difficulty in meeting obligations under liabilities.
39. for liquidity risks disclose the following:
A) a maturity analysis for liabilities showing remaining contractual maturities
B) describe how the inherent liquidity risk is managed </li></li></ul><li>Market risks<br /><ul><li>40. market risks arise when fair values or future cash flows fluctuate due to market prices. For market risks disclosure, a sensitivity analysis needs to be made. The following disclosures are required:
A) a sensitivity analysis for each type of exposed market risk showing how profit and loss would be affected
C) changes in the method under b) above from the previous period</li></li></ul><li>Market risks (contd.)<br /><ul><li>40 (contd.) if a sensitivity analysis is prepared and there is dependency between two variables such as exchange risks and rate of interest. Then disclose also the following:
A) explain the method of preparing the sensitivity analysis
B) explain the objective of the method and any limitations
42. when the sensitivity analysis is unrepresentative of the risk inherent then state that fact.</li></li></ul><li>Effective date of application<br /><ul><li>43. the standard is applicable effective 1st January 2007.
44 to 44F – are not relevant.</li></li></ul><li>Implementation guidance notes<br /><ul><li>Materiality. The subject of materiality has been discussed. While making economic decisions, an entity has to judge whether omissions or misstatements in terms of an item will influence such decisions. It could be individually or collectively.
Level of information. The level of information should be as required under the circumstances and should be neither overburdened nor summarily aggregated so that the purpose of adequately comprehending the matter is lost with either over information or total lack of it. </li>