IFRS 7 FINANCIAL INSTRUMENTS: DISCLOSURES1

1 INTRODUCTION

IFRS 7 requires disclosures in the notes about financial instruments that fall within the scope of this standard. Some of these disclosures may be made in the notes or alternatively in the statement of financial position or in the statement of comprehensive income.

2 SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR FINANCIAL POSITION AND PERFORMANCE

The disclosures specified in the section “significance of financial instruments for financial position and performance” of IFRS 7 can be roughly categorized and described as follows:

• The carrying amounts of each of the following categories of financial assets or financial liabilities, as specified in IFRS 9, have to be disclosed either in the statement of financial position or in the notes (IFRS 7.8). In the latter case, it is necessary to provide sufficient information to permit reconciliation to the line items presented in the statement of financial position (IFRS 7.6).

• Financial assets measured at amortized cost.
• Financial assets measured at fair value through other comprehensive income.
• Financial assets measured at fair value through profit or loss, showing separately:
  • those designated as such upon initial recognition, and
  • those mandatorily measured at fair value according to IFRS 9.
• Financial liabilities measured at amortized cost.
• Financial liabilities at fair value through profit or loss, showing separately:
  • those designated as such upon initial recognition, and
  • those that meet the definition of held for trading in IFRS 9.
• Similar rules are set out with regard to the net gains or net losses of the categories of financial instruments as specified in IFRS 9 (IFRS 7.20a).
• Exercising of an option to designate financial assets or financial liabilities as at fair value through profit or loss (IFRS 7.9–7.11).
• Investments in equity instruments measured at fair value through other comprehensive income (e.g. which investments in equity instruments have been designated to be measured at fair value through other comprehensive income and the fair value of each such investment at the end of the reporting period) (IFRS 7.11A–7.11B).
• Reclassification of financial assets between the amortized cost category and the fair value category of IFRS 9 (IFRS 7.12B–7.12D and IFRS 9.4.4.1).
• Offsetting financial assets and financial liabilities (IFRS 7.13A–7.13F).
• Financial assets that the entity has pledged as collateral for liabilities or contingent liabilities (e.g. the carrying amount of these assets) (IFRS 7.14).
• Allowance account for credit losses: A reconciliation of changes in that account during the period for each class of financial assets has to be disclosed (IFRS 7.16).
• Defaults and breaches of loans payable (IFRS 7.18–7.19).
• Accounting policies (IFRS 7.21).
• Hedge accounting (e.g. description of each type of hedge, nature of the risks being hedged, etc.) (IFRS 7.22–7.24).
• Fair values: Among others, the fair value of each class of financial assets and financial liabilities has to be disclosed in a way that permits it to be compared with its carrying amount and the methods used in determining fair values have to be disclosed (IFRS 7.25–7.30).

3 NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS

The entity has to disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period. These risks typically include, but are not limited to, credit risk, liquidity risk, and market risk (IFRS 7.31–7.32). These risks are defined in the standard as follows (IFRS 7.Appendix A):

• Credit risk is the risk that one contracting party of a financial instrument will cause a financial loss for the other contracting party by failing to discharge an obligation.
• Liquidity risk is the risk that the reporting entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.
• Market risk is the risk that the fair value or the future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises currency risk, interest rate risk, and other price risk.

With regard to credit risk, it is, among others, necessary to disclose the following information by class of financial asset (IFRS 7.37 and 7.Appendix A):

• An analysis of the age of financial assets that are past due as at the end of the reporting period but not impaired. A financial asset is past due when a counterparty has failed to make a payment when contractually due.
• An analysis of financial assets that are individually determined to be impaired as at the end of the reporting period, including the factors that were considered in determining that they are impaired.

With regard to liquidity risk, among others, a maturity analysis for non-derivative financial liabilities (including issued financial guarantee contracts) has to be disclosed. This maturity analysis shows how the contractual undiscounted future cash flows are divided up according to their remaining contractual maturities. When a counterparty has a choice of when an amount is paid it is allocated to the earliest period in which the entity can be required to pay. Therefore, demand deposits are included in the earliest time band (IFRS 7.39a, 7.B11C, and 7.B11D).

With regard to market risk, it is necessary to make the following disclosures (among others) (IFRS 7.40):

• A sensitivity analysis for each type of market risk to which the entity is exposed at the end of the reporting period. This sensitivity analysis has to show how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at the end of the reporting period.
• The methods and assumptions used in preparing the sensitivity analysis.

4 TRANSFERS OF FINANCIAL ASSETS

IFRS 7 requires quite a number of disclosures with regard to transfers of financial assets (IFRS 7.42A–7.42H).

5 EXAMPLES WITH SOLUTIONS

Example 1

Disclosure of the carrying amounts of the categories of financial instruments

The following line items of entity E's statement of financial position as at Dec 31, 01 represent financial assets or financial liabilities:2

• Non-current financial assets. This line item consists of the following items:
  • Shares of entity X (carrying amount: CU 900) which are measured at fair value through other comprehensive income (IFRS 9.5.7.1(b) and 9.5.7.5).
  • Shares of entity Y (carrying amount: CU 400) which have to be measured at fair value according to the classification rules of IFRS 9. E did not elect to present the fair value changes in OCI. Thus, they are presented in profit or loss.
  • A loan granted to entity Z (carrying amount: CU 100) which is measured at amortized cost.
  • A loan granted to entity A (carrying amount: CU 150) which has been designated as at fair value through profit or loss in order to eliminate an accounting mismatch (IFRS 9.4.1.5).
  • Derivative assets (carrying amount: CU 60) which have to be measured at fair value through profit or loss (IFRS 9.B4.1.9).
• Trade receivables (carrying amount: CU 800) which are held with the objective to collect contractual cash flows and are therefore measured at amortized cost according to IFRS 9 (IFRS 9.4.1.2).
• Cash and cash equivalents (carrying amount: CU 200).
• Non-current financial liabilities. This line item comprises loan payables (carrying amount: CU 400) which are measured at amortized cost.
• Trade payables (carrying amount: CU 500) which are measured at amortized cost.
• Short-term loan payables, which consist of the following items:
  • Borrowings (carrying amount: CU 170) resulting from hybrid contracts that have been designated as at fair value through profit or loss according to IFRS 9.4.3.5.
  • Borrowings (carrying amount: CU 40) that are measured at amortized cost.
  • Short-term derivative liabilities (carrying amount: CU 200) that meet the definition of “held for trading” and are therefore measured at fair value through profit or loss (IFRS 9.4.2.1(a) and IFRS 9.Appendix A).

Required

Prepare a table for the notes to E's financial statements as at Dec 31, 01 that contains the disclosures required by IFRS 7.8 (carrying amounts of the categories of financial assets or financial liabilities) and IFRS 7.6 (reconciliation of these amounts to the line items presented in the statement of financial position).

Hints for solution

In particular Section 2.

Solution

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Example 2

Liquidity risk

(a) On Jan 01, 01, Bank B issues a debt instrument which is subject to the following terms and conditions and which is measured at amortized cost (i.e. according to the effective interest method):

Issue price	CU 1,000
Date of maturity	Dec 31, 03
Redemption price	CU 1,331
Effective interest rate	10%
Carrying amount as at Dec 31, 01 (determined according to the effective interest method)	1,100

During the maturity of the debt instrument no interest has to be paid because the creditor's consideration is represented by the discount of CU 331. The owner of the debt instrument has no right to demand payment before the date of maturity.

(b) On Dec 31, 01, the demand deposits of B's customers amount to CU 300. B can be required to repay the deposits by its customers on demand.

Required

Describe how the debt instrument and the demand deposits are presented in the maturity analysis for non-derivative financial liabilities (including issued financial guarantee contracts) (IFRS 7.39a) that has to be disclosed in B's financial statements as at Dec 31, 01.

Hints for solution

In particular Section 3.

Solution

The carrying amount of the liabilities is not relevant to the maturity analysis. The maturity analysis shows the contractual undiscounted future cash flows (IFRS 7.B11D). When a counterparty has a choice of when an amount is paid it is allocated to the earliest period in which the entity can be required to pay. Therefore, the demand deposits are included in the earliest time band (IFRS 7.BllCa). The following table shows the maturity analysis. For simplification purposes only two time bands are presented:

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1 This chapter is based on financial instruments accounting according to IFRS 9 (as issued in Oct 2010), in line with the other chapters of the book.

2 See the chapter on IFRS 9/IAS 39 with regard to the classification of financial assets and financial liabilities into the appropriate (measurement) categories.