Financial Instruments Disclosures Ifrs 7


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Financial Instruments Disclosures Ifrs 7

  1. 1. Financial Instruments Disclosures- IFRS 7<br />Main features of the standard<br />
  2. 2. 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.
  3. 3. 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:
  4. 4. A) Subsidiaries (IAS 27), associates (IAS28) or joint ventures (IAS31). Anyway, all derivatives are applicable except where they are equity instruments (IAS32).
  5. 5. B) Employees’ benefits (IAS19)
  6. 6. C) deleted
  7. 7. D) Insurance contracts under IFRS 4
  8. 8. E) FIs, contracts and obligations under share based payments (IFRS 2)
  9. 9. F) Instruments classified as equity instruments (IAS32)
  10. 10. 4. This IFRS applies to recognized FIs (IAS 39) and unrecognized ones such as loan commitments.
  11. 11. 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.
  12. 12. Significance of FIs for financial position and performance
  13. 13. 7. An entity will disclose information about its F I s to enable users to evaluate their significance.
  14. 14. Statement of financial position , categories of financial assets and financial liabilities
  15. 15. 8. The carrying amounts of the following will be disclosed:
  16. 16. A) financial assets at fair values through profit and loss showing separately i) upon initial recognition, ii) HFTs as per IAS 39
  17. 17. B) HTM investments
  18. 18. C) loans and receivables
  19. 19. D) AFS assets
  20. 20. E) Financial liabilities same as a) above for assets
  21. 21. 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:
  22. 22. A) maximum exposure to credit risks
  23. 23. B) the amount by which any related credit derivative will mitigate the credit risk
  24. 24. 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.
  25. 25. 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:
  26. 26. A) information as per 9 © above. Changes in market conditions occasion changes in bench mark interest rate, price of another FI, a commodity price, price index etc.
  27. 27. B) difference between carrying amount and the amount payable at maturity.
  28. 28. 11. A) disclose methods used under 9© above and 10 (a) above.
  29. 29. 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:
  30. 30. A) the amount reclassified into and out of FV/cost
  31. 31. B) for each reporting period until de-recognition, disclose carrying amounts and fair values of all assets for current and previous periods.
  32. 32. C) if reclassified as per then disclose the facts and circumstances
  33. 33. 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
  34. 34. 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:
  35. 35. A) nature of the asset
  36. 36. B) risks and rewards of ownership
  37. 37. C) carrying amounts and associated liabilities of such assets
  38. 38. 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:
  39. 39. A) carrying amounts of pledged assets as collaterals
  40. 40. B) terms and conditions of pledge
  41. 41. 15. when an entity holds collaterals and is permitted to sell or pledge even if there is no default by the owner, then disclose the following:
  42. 42. A) fair value of collateral held
  43. 43. B) fair value of collateral sold or pledged and whether there is liability to return it
  44. 44. C) terms and conditions of the collaterals
  45. 45. Allowance account for credit losses
  46. 46. 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.
  47. 47. Defaults and breaches
  48. 48. 18. for loans payable at the end of the reporting period; the entity should disclose :
  49. 49. A) details of any defaults
  50. 50. B) carrying amount of the loan payable in default
  51. 51. C) whether the default was remedied or the terms were renegotiated before issue of the financial statements
  52. 52. 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
  53. 53. 20. an entity shall disclose the following either in the comprehensive income or in the notes:
  54. 54. A) i)net gains or losses of F I s at fair values through profit and loss (initial recognition as well as HFTs)
  55. 55. A) ii) for AFS assets showing gain / loss in other comprehensive income and the amount reclassified from equity to profit and loss
  56. 56. A) iii) HTM investments
  57. 57. A) iv) loans and receivables
  58. 58. 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
  59. 59. C) fee income and expense from instruments not at fair value and also trusts where investments are held for others.
  60. 60. D) interest income on impaired assets accrued
  61. 61. E) amount of any impairment loss on any asset
  62. 62. Other disclosures – accounting policies
  63. 63. 21. as per IAS 1, disclose significant accounting policies such as measurement basis etc. </li></li></ul><li>Hedge accounting<br /><ul><li>22 a) describe the nature of each hedge
  64. 64. B) describe the financial instruments designated as hedging instruments and their fair values
  65. 65. C) the nature of the risks hedged
  66. 66. Cash flow hedges
  67. 67. 23 a) disclose periods for which cash flows are expected
  68. 68. B) describe any forecast transaction for which hedge accounting was used but it no longer exists
  69. 69. C) amounts recognized in the other comprehensive income
  70. 70. D) amount reclassified from equity to profit and loss
  71. 71. 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.
  72. 72. Fair value
  73. 73. 25. except as per para 29, for assets and liabilities, disclose fair values in a way comparable with the carrying amounts.
  74. 74. 26. not relevant</li></li></ul><li>Further disclosures<br /><ul><li>27. a) give assumptions in arriving at fair values
  75. 75. B) how fair values are determined (active market or a technique used)
  76. 76. C) state whether values are recognized based on market transactions. State whether charging one element will alter the fair value significantly.
  77. 77. D) if c) above is applied then state the amount of change in fair value
  78. 78. 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:
  79. 79. A) when carrying amount is approximately the fair value (short term trade receivables and payables).
  80. 80. B) for an equity investment that does not have an active market and is measured at cost as per IAS 39 or
  81. 81. 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:
  82. 82. A) the fact that fair values have not been disclosed as they cannot be measured reliably
  83. 83. B) explain as to why fair value cannot be measured
  84. 84. C) information about market for the instrument under review
  85. 85. D) how the entity intends to sell the instrument
  86. 86. 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.
  87. 87. 32. not relevant
  88. 88. Qualitative disclosures
  89. 89. 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:
  90. 90. A) summarize the exposure to a specific risk as you would report to the top management.
  91. 91. B) disclosures required by paras 36-42 below.
  92. 92. C) describe concentration in any risk area.
  93. 93. 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.
  94. 94. Disclose credit risks by class of financial instruments as follows:
  95. 95. A) the amount that best represents maximum exposure to credit risk
  96. 96. B) in respect of a) above a description of collateral
  97. 97. C) information about credit quality of financial assets
  98. 98. 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
  99. 99. A) age analysis of assets that are past due
  100. 100. B) analysis of impaired assets and why they are impaired
  101. 101. C) for the above a) and b) disclose if any collaterals are held for them.
  102. 102. Collaterals and other credit enhancements obtained
  103. 103. 38. when an asset is acquired along with collaterals or guarantees and such an asset is recognized in other standards , then disclose the following:
  104. 104. A) nature and carrying amount of the asset
  105. 105. 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.
  106. 106. 39. for liquidity risks disclose the following:
  107. 107. A) a maturity analysis for liabilities showing remaining contractual maturities
  108. 108. 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:
  109. 109. A) a sensitivity analysis for each type of exposed market risk showing how profit and loss would be affected
  110. 110. B) how the sensitivity analysis is prepared
  111. 111. 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:
  112. 112. A) explain the method of preparing the sensitivity analysis
  113. 113. B) explain the objective of the method and any limitations
  114. 114. Other market risk disclosures
  115. 115. 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.
  116. 116. 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.
  117. 117. 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>