IFRS 7, “Financial Instruments: Disclosures”, requires an entity to provide disclosures in their financial statements that enable users to evaluate (a) the significance of financial instruments for the entity’s financial position and performance; and (b) the nature and extent of risks arising from financial instruments, and how the entity manages those risks.
To be compliance with the standard, an entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments.
An entity shall also provide sufficient information to facilitate reconciliation of line items presented in the statement of financial position. IFRS 7 also reminds its user about IAS 1 requires that an entity discloses, in the summary of significant accounting policies, the measurement basis (or bases) used in preparing the financial statements and the other accounting policies relevant to an understanding of the financial statements.
Disclosures of Financial Instruments by Categories
The carrying amount of various financial instruments is disclosed by category, either in the statement of financial position or notes, as follows:
- Financial assets at ‘fair value through profit or loss’—showing separately (1) those designated as such upon initial recognition and (2) those classified as held for trading in accordance with IAS 39 (“Financial Instruments: Recognition and Measurement”)
- Held-to-maturity investments
- Loans and receivables
- Available-for-sale financial assets
- Financial liabilities at ‘fair value through profit or loss’—showing separately (1) those designated as such upon initial recognition and (2) those classified as held for trading in accordance with IAS 39, Financial Instruments: Recognition and Measurement; and
- Financial liabilities measured at amortized cost.
In relation to financial assets or liabilities, which are designated as at fair value through profit or loss, an entity shall disclose:
- Maximum credit risk exposure;
- Extent of risk mitigated, if any, using credit derivatives or similar instruments;
- Changes in fair value attributable to credit risk during the year and cumulatively (as distinguished from the market risk which arises out of changes in benchmark interest rate, commodity price, foreign exchange rate, or index of prices or rates). The method applied to determine the credit risk component shall be disclosed;
- Changes in fair value of credit derivatives or similar instruments during the year and cumulatively.
When an entity re-designates a financial asset or liability at ‘fair value through profit or loss’, it shall segregate the credit risk component from market as a result of change in fair value and disclose the credit risk component arising during the year and cumulatively. It shall also disclose the method applied for the segregation. In addition, it shall disclose differences between the carrying amount of the financial liability and the contractual payment obligation at maturity including the method applied to determine the difference.
If an entity reaches a conclusion that the method applied to separate the credit risk factor of financial asset/liability does not faithfully represent changes attributable to credit risk factors, it shall disclose the reasons thereof.
When an entity reclassifies financial assets from fair value categories (i.e., ‘fair value through profit or loss’ or ‘available for sale’) to amortized cost-based categories (i.e., held to maturity or loans and receivables), it has to disclose the amount of reclassifications in and out of a category.
An entity shall also disclose the following in regard to any reclassification in or out of ‘available for sale’ category/ ‘fair value through profit or loss’ category (allowed only in rare circumstances) to amortized cost based categories:
- Amount reclassified in and out of each category;
- Fair value of reclassified financial asset for each reporting period till the asset is derecognized;
- Fair value gain/loss of reclassified financial asset recognized in the profit or loss/other comprehensive income in the year of reclassification;
- Amount of fair value gain or loss that would have been recognized in the profit or loss/other comprehensive income in each of the reporting periods after reclassification of a financial asset until de-recognition;
- Effective interest rate and estimated cash flows that an entity estimates to recover from the financial asset on the date of reclassification.
- The description of rare circumstances that resulted in reclassification out of FVTPL category to amortized cost-based categories in accordance with IAS 39.50B.
Disclosures For Derecognition Of Financial Assets
Certain transfer of financial assets does not meet the conditions of derecognition. In those cases, disclosures cover (1) the nature of the assets, (2) the nature of the risks and rewards of ownership to which the entity remains exposed, (3) the carrying amounts of the assets and of the associated liabilities if the financial asset continued to be recognized in its entirety, and (4) in the case of an entity having continuing involvement in assets transferred, the total carrying amount of the original assets, the amount of the assets that the entity continues to recognize, and the carrying amount of the associated liabilities.
Disclosures for collateral issued and collateral held are as follows:
1. Carrying amount of financial assets it has pledged as collateral for liabilities or contingent liabilities. It includes amounts that have been reclassified in accordance with paragraph 37(a) of IAS 39.
2. Terms and conditions of the pledge.
1. Disclosures under IFRS 7.15 are required if an entity holds collateral (of financial or non-financial assets) and is permitted to sell or repledge the collateral in the absence of default by the owner of the collateral:
- Fair value of the collateral;
- Fair value of any such collateral sold or repledged;
- Obligation of the entity to return the collateral;
- Associated terms and conditions regarding use of the collateral.
2. Disclosures under IFRS 7.38 when financial/nonfinancial assets held as collateral/other credit enhancements (like guarantees):
- the nature and carrying amount of the assets obtained; and
- when the assets are not readily convertible into cash, its policies for disposing of such assets or for using them in its operations.
On the coming post “Financial Instruments Disclosures Part 2” I will discuss disclosures for impairment allowance, disclosures in the statement of comprehensive income, hedge accounting disclosures, fair value disclosures, disclosures in lieu of fair value disclosures, necessary notes to the fair value hierarchy-based disclosures and the rest.