Financial Instruments: Disclosures – IFRS 7

Overview of IFRS 7

• adds certain new disclosures about financial instruments to those previously required by IAS 32 Financial Instruments: Disclosure and Presentation (as it was then cited)
• replaces the disclosures previously required by IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions
• puts all of those financial instruments disclosures together in a new standard on Financial Instruments: Disclosures. The remaining parts of IAS 32 deal only with financial instruments presentation matters.

Disclosure requirements of IFRS 7

IFRS requires certain disclosures to be presented by category of instrument based on the IAS 39 measurement categories. Certain other disclosures are required by class of financial instrument. For those disclosures an entity must group its financial instruments into classes of similar instruments as appropriate to the nature of the information presented. [IFRS 7.6]

The two main categories of disclosures required by IFRS 7 are:

• information about the significance of financial instruments.
• information about the nature and extent of risks arising from financial instruments

Information about the significance of financial instruments

Statement of financial position

Disclose the significance of financial instruments for an entity’s financial position and performance. [IFRS 7.7] This includes disclosures for each of the following categories: [IFRS 7.8]

• financial assets measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition
• held-to-maturity investments
• loans and receivables
• available-for-sale assets
• financial liabilities at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition
• financial liabilities measured at amortised cost

Other balance sheet-related disclosures:

• special disclosures about financial assets and financial liabilities designated to be measured at fair value through profit and loss, including disclosures about credit risk and market risk, changes in fair values attributable to these risks and the methods of measurement.[IFRS 7.9-11]
• reclassifications of financial instruments from one category to another (e.g. from fair value to amortised cost or vice versa) [IFRS 7.12-12A]
• information about financial assets pledged as collateral and about financial or non-financial assets held as collateral [IFRS 7.14-15]
• reconciliation of the allowance account for credit losses (bad debts) by class of financial assets[IFRS 7.16]
• information about compound financial instruments with multiple embedded derivatives [IFRS 7.17]
• breaches of terms of loan agreements [IFRS 7.18-19]

Statement of comprehensive income

Items of income, expense, gains, and losses, with separate disclosure of gains and losses from: [IFRS 7.20(a)]

• financial assets measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition.
• held-to-maturity investments.
• loans and receivables.
• available-for-sale assets.
• financial liabilities measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition.
• financial liabilities measured at amortised cost.

Other income statement-related disclosures

• total interest income and total interest expense for those financial instruments that are not measured at fair value through profit and loss [IFRS 7.20(b)]
• fee income and expense [IFRS 7.20(c)]
• amount of impairment losses by class of financial assets [IFRS 7.20(e)]
• interest income on impaired financial assets [IFRS 7.20(d)]

Other disclosures

Accounting policies for financial instruments [IFRS 7.21]

Information about hedge accounting, including: [IFRS 7.22]

• description of each hedge, hedging instrument, and fair values of those instruments, and nature of risks being hedged
• for cash flow hedges, the periods in which the cash flows are expected to occur, when they are expected to enter into the determination of profit or loss, and a description of any forecast transaction for which hedge accounting had previously been used but which is no longer expected to occur
• if a gain or loss on a hedging instrument in a cash flow hedge has been recognised in other comprehensive income, an entity should disclose the following: [IAS 7.23]
• the amount that was so recognised in other comprehensive income during the period
• the amount that was removed from equity and included in profit or loss for the period
• the amount that was removed from equity during the period and included in the initial measurement of the acquisition cost or other carrying amount of a non-financial asset or non- financial liability in a hedged highly probable forecast transaction

Note: Where IFRS 9 Financial Instruments (2013) is applied, revised disclosure requirements apply. The required hedge accounting disclosures apply where the entity elects to adopt hedge accounting and require information to be provided in three broad categories: (1) the entity’s risk management strategy and how it is applied to manage risk (2) how the entity’s hedging activities may affect the amount, timing and uncertainty of its future cash flows, and (3) the effect that hedge accounting has had on the entity’s statement of financial position, statement of comprehensive income and statement of changes in equity. The disclosures are required to be presented in a single note or separate section in its financial statements, although some information can be incorporated by reference.

For fair value hedges, information about the fair value changes of the hedging instrument and the hedged item [IFRS 7.24(a)]

Hedge ineffectiveness recognised in profit and loss (separately for cash flow hedges and hedges of a net investment in a foreign operation) [IFRS 7.24(b-c)]

Uncertainty arising from the interest rate benchmark reform [IFRS 7.24H]

Information about the fair values of each class of financial asset and financial liability, along with: [IFRS 7.25-30]

• comparable carrying amounts
• description of how fair value was determined
• the level of inputs used in determining fair value
• reconciliations of movements between levels of fair value measurement hierarchy additional disclosures for financial instruments whose fair value is determined using level 3 inputs including impacts on profit and loss, other comprehensive income and sensitivity analysis
• information if fair value cannot be reliably measured

The fair value hierarchy introduces 3 levels of inputs based on the lowest level of input significant to the overall fair value (IFRS 7.27A-27B):

Level 1 – quoted prices for similar instruments Level 2 – directly observable market inputs other than Level 1 inputs Level 3 – inputs not based on observable market data
Note that disclosure of fair values is not required when the carrying amount is a reasonable approximation of fair value, such as short-term trade receivables and payables, or for instruments whose fair value cannot be measured reliably. [IFRS 7.29(a)]

Nature and extent of exposure to risks arising from financial instruments

Qualitative disclosures [IFRS 7.33]
The qualitative disclosures describe:
risk exposures for each type of financial instrument management’s objectives, policies, and processes for managing those risks changes from the prior period
Quantitative disclosures
The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel. These disclosures include: [IFRS 7.34]
summary quantitative data about exposure to each risk at the reporting date disclosures about credit risk, liquidity risk, and market risk and how these risks are managed as further described below concentrations of risk
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation. [IFRS 7. Appendix A] Disclosures about credit risk include: [IFRS 7.36-38]
maximum amount of exposure (before deducting the value of collateral), description of collateral, information about credit quality of financial assets that are neither past due nor impaired, and information about credit quality of financial assets whose terms have been renegotiated [IFRS 7.36] for financial assets that are past due or impaired, analytical disclosures are required [IFRS 7.37] information about collateral or other credit enhancements obtained or called [IFRS 7.38]
Liquidity risk
Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities. [IFRS 7. Appendix A] Disclosures about liquidity risk include: [IFRS 7.39]
a maturity analysis of financial liabilities description of approach to risk management
Market risk [IFRS 7.40-42]
Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks. [IFRS 7. Appendix A] Disclosures about market risk include:
a sensitivity analysis of each type of market risk to which the entity is exposed additional information if the sensitivity analysis is not representative of the entity’s risk exposure (for example because exposures during the year were different to exposures at year-end). IFRS 7 provides that if an entity prepares a sensitivity analysis such as value-at-risk for management purposes that reflects interdependencies of more than one component of market risk (for instance, interest risk and foreign currency risk combined), it may disclose that analysis instead of a separate sensitivity analysis for each type of market risk

Transfers of financial assets [IFRS 7.42A-H]

An entity shall disclose information that enables users of its financial statements:

to understand the relationship between transferred financial assets that are not derecognised in their entirety and the associated liabilities; and to evaluate the nature of, and risks associated with, the entity’s continuing involvement in derecognised financial assets. [IFRS 7 42B]

Transferred financial assets that are not derecognised in their entirety

Required disclosures include description of the nature of the transferred assets, nature of risk and rewards as well as description of the nature and quantitative disclosure depicting relationship between transferred financial assets and the associated liabilities. [IFRS 7.42D]

Transferred financial assets that are derecognised in their entirety

Required disclosures include the carrying amount of the assets and liabilities recognised, fair value of the assets and liabilities that represent continuing involvement, maximum exposure to loss from the continuing involvement as well as maturity analysis of the undiscounted cash flows to repurchase the derecognised financial assets. [IFRS 7.42E] Additional disclosures are required for any gain or loss recognised at the date of transfer of the assets, income or expenses recognise from the entity’s continuing involvement in the derecognised financial assets as well as details of uneven distribution of proceed from transfer activity throughout the reporting period. [IFRS 7.42G]

Application guidance

An appendix of mandatory application guidance (Appendix B) is part of the standard.

There is also an appendix of non-mandatory implementation guidance (Appendix C) that describes how an entity might provide the disclosures required by IFRS 7.