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IFRS 7 is one of three IFRSs that apply to financial instruments: IAS 32, IAS 39, and IFRS 7. IAS 39 is being revised in stages; a portion of the rewritten IAS 39 may be found in IFRS 9. IFRS 7 is primarily concerned with the qualitative and quantitative disclosures required for financial instruments. IAS 30 is superseded by IFRS 7. Specifically, whereas IAS 30 exclusively applied to banks and financial intermediaries, IFRS 7 applies to all companies, even if financial instruments represent a little portion of the entity’s entire operations.
IFRS 7 is primarily intended for disclosures regarding the risks inherent in financial instruments held or issued by a business. This article categorizes and discusses the different disclosures required by IFRS 7 for financial instruments.
In terms of the impact of financial instruments on the entity’s financial situation and the entity’s statement of financial position (i.e., balance sheet), the entity must provide a number of critical disclosures. Paragraph 7 of IFRS 7 necessitates disclosure of the importance of financial instruments to the entity’s financial state and performance.
The carrying values of each of the following kinds of financial instruments must be reported, either in the body of the statement of financial position or in notes:
When financial assets are transferred, such as when they are sold or securitized, de-recognition normally occurs. The following information must be given for all such de-recognized assets:
There are provisions that impose disclosure requirements for both collateral given and collateral kept. The organization must declare the carrying value of financial assets used as collateral for liabilities or contingent obligations. The company must declare the fair value and other information concerning financial and non-financial collateral held by it that it is authorized to sell in the absence of default by the collateral’s owner. It is important to note that in the case of secured lending, most security interests possessed by a lender may not be subject to this provision since the right to sell the collateral often arises only in the event of obligor failure.
Another requirement under IFRS 7 is disclosures concerning credit losses where the firm does not make impairment provisions against individual assets but instead debits impairment losses to a credit losses allowance.
The entity is required under the standard to give information about defaults. It should be noted that these are information about defaults committed by the entity, not defaults committed against it. Some of the defaults are as follows:
In terms of the incomes, costs, gains, and losses relating to financial instruments, the following disclosures are needed in either the statement of comprehensive income (profit and loss statement) or in notes:
Significant accounting policies relating to financial instruments must be disclosed. In addition, hedging derivatives are accounted for in accordance with IAS 39. Cash flow hedges, fair value hedges, and net investment hedges in non-integral international operations are the three forms of hedges. Each type of hedge, the risk hedged, and the hedging instruments will be shown in the financial statements. Furthermore, the following information is necessary for each type of hedge:
Another important disclosure required by the Standard (IFRS 7) is the fair value disclosure. It requires the company to disclose the fair value of all financial assets it holds. It should be noted that some asset classifications – available-for-sale assets and trading assets – are carried in books at fair value. The Standard, however, mandates disclosure of fair values even for classes such as loans and receivables and held-to-maturity securities. Short-term receivables, equity instruments where fair value cannot be consistently evaluated, and discretionary participation contracts (such as insurance contracts with profit participation characteristics or equity-linked instruments) are the exclusions where fair valuation is not necessary.
Following fair value disclosures are required:
Moreover, the standard (IFRS 7) requires extensive disclosures on financial instrument risks. Credit risk, liquidity risk, and market risk are the three major risk categories where disclosures are necessary. For each of them, both qualitative and quantitative disclosures are required. For example, the entity should report the maturity analysis of assets/liabilities and outline how it manages liquidity risk.
A sensitivity analysis for every form of market risk to which the enterprise is exposed, demonstrating how variations in the relevant risk variable would have affected profit or loss and equity, as well as the methodologies and presumptions used in trying to prepare the sensitivity analysis and changes from the prior period in the methodologies and presumptions used, will be disclosed. Entities must disclose interest rate risk, currency risk, and other pricing risks as part of their market risk disclosures.
IFRS 7 mandates qualitative and quantitative disclosure of information on the relevance of financial instruments to a company, as well as the type and degree of risks emerging from such financial instruments. Specific disclosures are necessary for transferred financial assets and a variety of other issues. IFRS 7 was first announced in August 2005 and applies to fiscal years starting on or after January 1, 2007.
Read our Article:Implementation of IFRS 6 for Exploration of Mineral Resources
A CA together with MBA (Fin) and M Com, she relishes taking interest in insightful writing in the domain of taxation and finance. She has gained experience as a full-time author and has also served an accounting role in industry.
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