Presentation of financial instruments

Publication date: 08 Dec 2017


6.9A.1 This chapter deals with two aspects of presentation of financial instruments: presentation of items as current or non-current (IAS 1), and the principles relating to offsetting (IAS 32). It also deals in detail with the disclosure of financial instruments (IFRS 7). Consideration of the IAS 32 requirements to present items as either financial liabilities or equity is included in chapter 43.

6.9A.2 The principles for presenting financial and other assets and liabilities, and any related income and expense, are set out in IAS 1. This standard’s requirements are considered in chapter 4. The paragraphs that follow consider only the presentation of financial assets and liabilities as current or non-current.

Presentation of financial instruments - Presentation as current or non-current

Publication date: 08 Dec 2017


6.9A.3 IAS 1 states that an entity should present current and non-current assets, and current and non-current liabilities, as separate classifications on the face of the balance sheet, except when a presentation based on liquidity provides information that is reliable and is more relevant. When that exception applies, all assets and liabilities should be presented broadly in order of liquidity. [IAS 1 para 60].

Presentation of financial instruments - Presentation as current or non-current - Current and non-current assets

Publication date: 08 Dec 2017


6.9A.4 Where an entity presents assets and liabilities as either current or non-current, it should classify an asset as current when:

it expects to realise the asset, or intends to sell or consume it in its normal operating cycle;
it holds the asset primarily for the purpose of trading;
it expects to realise the asset within 12 months after the reporting period; or
the asset is cash or a cash equivalent (as defined in IAS 7), unless the asset is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period.
[IAS 1 para 66].

6.9A.5 Applying the above definition, it could be argued that financial assets classified as held for trading in accordance with IAS 39 should be presented as current assets. Similarly, trading derivative assets should also be presented as current assets.

6.9A.6 However, paragraph 68 of IAS 1 clarifies that some rather than all financial assets and liabilities classified as held for trading are current assets and liabilities respectively. Non-hedging derivatives (that is, derivatives that are not held primarily for the purpose of trading) are not required to be classified as current simply because they fall within the ‘held for trading’ category in IAS 39. Rather, the requirements of IAS 1 referred to above should be applied in determining classification. This means that financial assets, including portions of financial assets expected to be realised within 12 months of the balance sheet date, should only be presented as current assets if realisation within 12 months is expected. Otherwise they should be classified as non-current. Financial liabilities should be presented as current if they meet the criteria in paragraph 69 of IAS 1, see also paragraph 6.9A.8 below.

6.9A.7 The treatment of hedging derivatives will be similar. Where a portion of a financial asset is expected to be realised within 12 months of the balance sheet date, that portion should be presented as a current asset; the remainder of the financial asset should be shown as a non-current asset. This suggests that hedging derivatives which are assets should be split into current and non-current portions. However, as an alternative, the full fair value of hedging derivatives could be classified as current if the hedge relationships are for less than 12 months and as non-current if those relationships are for more than 12 months.

Presentation of financial instruments - Presentation as current or non-current - Current and non-current liabilities

Publication date: 08 Dec 2017


6.9A.8 Where an entity presents assets and liabilities as either current or non-current, the entity should classify a liability as current when:

it expects to settle the liability in its normal operating cycle;
it holds the liability primarily for the purpose of trading;
the liability is due to be settled within 12 months after the reporting period; or
it does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.
[IAS 1 para 69].

6.9A.9 Under IAS 32, the equity and liability components of financial instruments must be classified separately as financial liabilities, financial assets or equity instruments. [IAS 32 para 28]. The liability component of financial instruments should be classified as current or non-current, depending on the terms of the contract. Similar to financial assets, where a portion of a financial liability (including a hedging derivative) is expected to be settled within 12 months of the balance sheet date, or settlement cannot be deferred for at least 12 months of the balance sheet date, that portion should be presented as a current liability; the remainder should be presented as a non-current liability. However, as an alternative, the full fair value of hedging derivatives could be classified as current if the hedge relationships are for less than 12 months, and as non-current if those relationships are for more than 12 months.

6.9A.10 In particular a question arises whether the liability component of a convertible financial instrument should be presented as current or non-current, when the instrument is convertible to equity at any time within the next 12 months, but if not converted, is repayable in cash only beyond 12 months. Such instruments would have an equity component, being the holders’ right to convert the instrument into a fixed number of equity instruments of the issuer any time before the maturity date; and a liability component, being the entity’s obligation to deliver cash to holders at the maturity date, which is more than one year after the balance sheet date.

6.9A.11 The 2009 annual improvements clarified that conversion features that are at the holder’s discretion do not impact the classification of the liability component of a convertible instrument. [IAS 1 para 69(d)]. The liability component of the convertible debt should be classified as non-current when repayable in more than 12 months and the components of an instrument that are classified as equity should be ignored. In the case of a convertible instrument, ignoring the conversion option leaves a debt component that is not re-payable within 12 months. Ignoring any equity components when classifying the liability component reflects that the equity components are not part of the liability for accounting purposes. Any equity components are accounted for in the same way as if they had been issued as separate instruments. It follows that the presentation should be the same as if they had been issued as separate instruments.

6.9A.12 In contrast, consider puttable debt that is puttable by the holder within the next 12 months but, if not put, is repayable only beyond 12 months. In this case, the puttable debt should be classified in its entirety as current, irrespective of whether IAS 39 requires the put option to be accounted for as a separated embedded derivative and, if it does, of whether the host debt contract is reported in a separate balance sheet line item from the embedded derivative. This reflects that the put option could cause the entire instrument to be settled in a manner that is regarded as a liability under IAS 32.

6.9A.13 The presentation of financial liabilities as current or non-current would take account of similar considerations to financial assets (see para 6.9A.5 above). However, IAS 1 provides additional guidance for financial liabilities that have been renegotiated or refinanced. Specifically, the standard requires that a financial liability should be presented as current when it is due to be settled within 12 months after the balance sheet date, even if:

the original term was for a period longer than 12 months; and
an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the balance sheet date and before the financial statements are authorised for issue.
[IAS 1 para 72].

6.9A.14 The current or non-current classification of financial liabilities is governed by the condition of those liabilities at the balance sheet date. Where rescheduling or refinancing is at the lender’s discretion, and it occurs after the balance sheet date, it does not alter the liability’s condition at that date. Accordingly, it is regarded as a non-adjusting post balance sheet event and it is not taken into account in determining the current/non-current classification of the debt. On the other hand where the refinancing or rescheduling is at the entity’s discretion and the entity can elect to roll over an obligation for at least one year after the balance sheet date, the obligation is classified as non-current, even if it would otherwise be due within a shorter period. [IAS 1 para 73]. However, if the entity expects to settle the obligation within 12 months, despite having the discretion to refinance for a longer period, then the debt should be classified as current.

Example – Rolling over bank facilities
 
A company has entered into a facility arrangement with a bank. It has a committed facility that the bank cannot cancel unilaterally and the scheduled maturity of this facility is 3 years from the balance sheet date. The company has drawn down funds on this facility and these funds are due to be repaid 6 months after the balance sheet date. The company intends to roll over this debt through the three year facility arrangement. How should this borrowing be shown in the company’s balance sheet?
 
The borrowing should be shown as non-current. Although the loan is due for repayment within six months of the balance sheet date, the company is entitled to ‘rollover’ this borrowing into a ‘new loan’. The substance is, therefore, that the debt is not repayable until 3 years after the balance sheet date when the committed facility expires. In addition, the entity expects to rollover the debt, so does not expect to repay it within 12 months.
 
Would the answer be different if the facility and existing drawn-down loan were with different banks?
 
The position would be different if the facility was with a different bank or if the loan was in the form of commercial paper. In the first case, the company would have a loan repayable in six months, but would be entitled to take out a new loan to settle its existing debt. These two loans are separate and the new loan is not, either in substance or in fact, an extension of the existing. Similarly if the loan was in the form of commercial paper, which typically has a maturity of 90 to 180 days, it would be classified as a current liability as it is likely that the backup facility would be provided by a different bank.

6.9A.15 It is common practice for financial institutions to include borrowing covenants in the terms of loans. Under these borrowing covenants a loan which would otherwise be long-term in nature becomes immediately repayable if certain items related to the borrower’s financial condition are breached. Typically, these items are measures of liquidity or solvency based on ratios derived from the entity’s financial statements. Where the borrower has breached the borrowing covenant by the balance sheet date and the lender agrees after the balance sheet date but before authorisation of the financial statements not to require immediate repayment of the loan, the agreement of the lender is regarded as a non-adjusting post balance sheet event. Since, at the year end, the agreement of the lender had not been obtained, the condition of the borrowing at the balance sheet date was that it was immediately repayable and should, therefore, be shown as a current liability. [IAS 1 para 74].

6.9A.16 However, following a breach of a borrowing covenant, lenders often agree to a period of grace during which the borrower agrees to rectify the breach. The lender agrees not to demand repayment during this time but, if the breach is not rectified, the debt would become immediately repayable at the end of the period of grace. If, before the balance sheet date, the lender has agreed to such a period of grace and that period ends at least 12 months after the balance sheet date, then the liability should be shown as non-current. [IAS 1 para 75]. If the breach of the borrowing covenant occurs after the balance date, then the liability would still be shown as non-current, unless the breach was so serious that the financial statements could no longer be prepared on a going concern basis. However, if the breach occurred before the balance sheet date, but the period of grace was not granted until after the balance sheet date, then the liability would be classified as current. The key to this approach is that the loan’s presentation is dictated by the loan’s condition as at the balance sheet date. Events after the balance sheet date may give evidence of that condition but they do not change it. This is consistent with IAS 10.

6.9A.17 The standard’s approach to breaches of borrowing covenants focuses on the legal rights of the entity rather than on the intentions of either of the parties to the loan. In dealing with situations where the entity has the discretion to roll over or refinance loans, the entity’s expectations on the timing of settlement play a part in deciding the liability’s classification. The liability’s classification is, however, unaffected by the entity’s intentions in the case of a breach of a loan agreement. If the entity breaches the loan agreement before the balance sheet date and the lender grants a period of grace of more than 12 months from the balance sheet date, then the loan is classified as non-current. In many cases, however, the period of grace will be a matter of negotiation between the borrower and the lender. In addition, breaches of loan agreements occur most often in entities that are experiencing financial difficulties and these entities are unlikely to wish to repay the loan earlier than required by the lender.

6.9A.18 Although post balance sheet events may not alter the liability’s classification, they may require disclosure as a non-adjusting event. Paragraph 76 of IAS 1 states that, in respect of loans classified as current liabilities, the following events must be disclosed as non-adjusting events in accordance with IAS 10, if they occur between the balance sheet date and the date of authorisation of the financial statements:

Refinancing on a long-term basis.
Rectification of a breach of a long-term loan agreement.
The granting by the lender of a period of grace to rectify a breach of a long-term loan agreement ending at least 12 months after the balance sheet date.

6.9A.19 IAS 1 does not specify any disclosures for non-adjusting post balance sheet events in respect of loans classified as non-current liabilities. However, IAS 10 requires that an entity should disclose the following for each material category of non-adjusting event after the balance sheet date:

The nature of the event.
An estimate of its financial effect or a statement that such an estimate cannot be made.
[IAS 10 para 21].

6.9A.20 Further disclosure of defaults and breaches of loan agreements is required by IFRS 7 (see para 6.9A.104 onwards).

Presentation of financial instruments - Offsetting a financial asset and a financial liability - General principle

Publication date: 08 Dec 2017


6.9A.21 A financial asset and a financial liability should be offset when, and only when, both of the following conditions are satisfied:

The entity currently has a legally enforceable right to set off the recognised amounts.
The entity intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
[IAS 32 para 42].

6.9A.22 Where the above offset conditions are satisfied, the entity has the right to receive or pay a single net amount and intends to do so, it has, in effect, only a single financial asset or financial liability. In that situation, the financial asset and the financial liability are presented on the balance sheet on a net basis. Where the offset conditions are not satisfied, the financial asset and the financial liability are presented separately from each other, consistently with their characteristics as the entity’s resources or obligations. [IAS 32 para 43].

6.9A.23 There can be situations where there are transfers of financial assets that do not qualify for de-recognition and in such case the entity has to recognise an associated liability (see chapter 44). Such assets and liabilities cannot be offset because offsetting a recognised financial asset and a recognised financial liability and presenting the net amount is different from de-recognising that financial asset or financial liability. De-recognising a financial instrument not only results in the removal of the previously recognised item from the balance sheet, but also may result in recognition of a gain or loss. Offsetting does not give rise to recognition of a gain or loss. [IAS 32 paras 42, 44]. In other words, when considering presentation of particular items, recognition, de-recognition and measurement need to be considered first.

6.9A.24 In December 2011, the IASB issued an amendment to the application guidance in IAS 32 to clarify some of the requirements for offsetting financial assets and financial liabilities in the statement of financial position. These clarifications are to be retrospectively applied, with an effective date for annual periods beginning on or after 1 January 2014 and are incorporated into the relevant sections below. Also in this regard the IASB has published an amendment to IFRS 7 to enhance current offsetting disclosures. These additional disclosures, whose effective date is for annual periods beginning on or after 1 January 2013, are discussed from paragraph 6.9A.86.

Presentation of financial instruments - Offsetting a financial asset and a financial liability - Legal right of set-off

Publication date: 08 Dec 2017


6.9A.25 IAS 32 defines a right of offset as “a debtor’s legal right, by contract or otherwise, to settle or otherwise eliminate all or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor”. Because the right of offset is essentially a legal right, the conditions supporting the right may vary from one legal jurisdiction to another and, therefore, the laws applicable to the relationships between the parties would need to be considered carefully. [IAS 32 para 45]. It follows that instruments such as receivables and payables with the same counterparty would be offset if a legal right of offset is agreed between the parties and the entity intends to settle net or simultaneously.

6.9A.25.1 For offsetting to be applied by a reporting entity, the legal right of set-off does not have to be held by all parties to the contract, only by the reporting entity.

6.9A.26 In unusual circumstances, a debtor may have a legal right to apply an amount due from a third party against the amount due to a creditor provided that there is an agreement between the three parties that clearly establishes the debtor’s right of set-off. [IAS 32 para 45].

6.9A.26.1 The amendments referred to in paragraph 6.9A.24 do not change the offsetting model in IAS 32 (see para 6.9A.21), but the application guidance (in paras AG38A-AG38F of IAS 32) is now more detailed. This could result in changes for individual entities depending on how they had interpreted the previous guidance. As regards the legal right of set-off, the amendments in paragraph AG38B of IAS 32 clarify that the entity’s right of set-off:
 
must be currently available (that is, it is not contingent on a future event); and
must be legally enforceable in all of the normal course of business, in the event of default, and in the event of insolvency or bankruptcy of the entity and all of the counterparties.

6.9A.26.2 The application guidance in paragraph AG38C of IAS 32 explains that the nature and extent of the right of set-off, including any conditions attached to its exercise and whether it would remain in the event of default, insolvency or bankruptcy, might vary from one legal jurisdiction to another. It cannot therefore be assumed that the right of set-off is automatically available outside the normal course of business. For example, the bankruptcy or insolvency laws of a jurisdiction might prohibit or restrict the right of set-off in the event of bankruptcy or insolvency. Entities will therefore need to consider the laws that apply to the relationships between the parties (including the laws that govern the contract, defaults or bankruptcies) to ascertain whether the right of set-off is enforceable in the normal course of business, in the event of default, and in the event of insolvency or bankruptcy of any of the parties (including the entity itself).

Presentation of financial instruments - Offsetting a financial asset and a financial liability - Intention to settle on a net basis

Publication date: 08 Dec 2017


6.9A.27 It is clear from the general principle in paragraph 42 of IAS 32 (see also para 6.9A.21) that, in order to achieve offset, an entity must have both the right to set off and the intention to do so. It is not sufficient to have one and not the other. Although the existence of an enforceable legal right of offset affects the entity’s rights and obligations associated with a financial asset and a financial liability and may affect its exposure to credit and liquidity risk, it is, by itself, not a sufficient basis for offsetting. This is because, in the absence of an intention to exercise the right or to settle simultaneously, the amount and timing of the entity’s future cash flows are not affected. However, if, in addition to the legal right, the entity clearly intends to exercise the right or to settle simultaneously, it is, in effect, exposed to a net amount, which reflects the timing of the expected future cash flows and the risks to which those cash flows are exposed. Similarly, an intention by one or both parties to settle on a net basis without the legal right to do so is not sufficient to justify offsetting because the rights and obligations associated with the individual financial asset and financial liability remain unaltered. [IAS 32 para 46].

6.9A.28 An entity’s intentions with respect to settlement of particular assets and liabilities may be influenced by its normal business practices, the requirements of financial markets and other circumstances that may limit the ability to settle net or to settle simultaneously. When an entity has a right of offset, but does not intend to settle net or to realise the asset and settle the liability simultaneously, the effect of the right on the entity’s credit risk exposure is disclosed in accordance with paragraph 6.9A.141.

Presentation of financial instruments - Offsetting a financial asset and a financial liability - Simultaneous settlement

Publication date: 08 Dec 2017


6.9A.29 IAS 32 states that realisation of a financial asset and settlement of a financial liability are treated as simultaneous only when the transactions occur at the same moment. For example, the operation of a clearing house in an organised financial market or a face-to-face exchange will facilitate simultaneous settlement of two financial instruments. In these circumstances the cash flows are, in effect, equivalent to a single net amount and there is no exposure to credit or liquidity risk. In other circumstances, an entity may settle two instruments by receiving and paying separate amounts, becoming exposed to credit risk for the full amount of the asset or liquidity risk for the full amount of the liability. Such risk exposures, though brief, may be significant and therefore, net presentation is not appropriate. [IAS 32 para 48].

6.9A.29.1 In respect of the amendments referred to in paragraph 6.9A.24, paragraph AG38E of IAS 32 clarifies the second condition for offset (that the entity “intends to either settle on a net basis or to realise the asset and settle the liability simultaneously”) − for example, where balances are cleared through clearing houses or similar settlement systems. The entity might have a right to settle net, but it might still realise the asset and settle the liability separately. If the entity can settle amounts in such a way that the outcome is in effect equivalent to net settlement, the entity will meet the second criterion. Paragraph AG38F of IAS 32 states that this will occur only if the gross settlement mechanism has features that eliminate or result in insignificant credit and liquidity risk, and that will process receivables and payables in a single settlement process or cycle. This would then be effectively equivalent to net settlement and would satisfy the IAS 32 criterion. The standard gives an example of characteristics that a gross settlement system could have to meet a net settlement equivalent in paragraph 42(b) of IAS 32. [IAS 32 para AG38F].

Presentation of financial instruments - Offsetting a financial asset and a financial liability - Situations where offset is usually inappropriate

Publication date: 08 Dec 2017


6.9A.30 IAS 32 sets out the following specific situations where the offset criteria in paragraph 6.9A.21 are not met.

Several different financial instruments are used to emulate the features of a single financial instrument (a ‘synthetic instrument’). For example, a floating rate long-term debt combined with an interest rate swap that involves receiving floating payments and making fixed payments synthesises a fixed rate long-term debt. Each of the individual financial instruments that together constitute a ‘synthetic instrument’:
  represents a contractual right or obligation with its own terms and conditions;
  may be transferred or settled separately;
  is exposed to risks that may differ from the risks to which other financial instruments are exposed.
  Accordingly, when one financial instrument in a ‘synthetic instrument’ is an asset and another is a liability, they are not offset and presented on an entity’s balance sheet on a net basis unless they meet the criteria for offsetting in paragraph 6.9A.21 above.
Financial assets and financial liabilities arise from financial instruments having the same primary risk exposure (for example, assets and liabilities within a portfolio of forward contracts or other derivative instruments), but involve different counterparties.
Financial or other assets are pledged as collateral for non-recourse financial liabilities.
Financial assets are set aside in trust by a debtor for the purpose of discharging an obligation without those assets having been accepted by the creditor in settlement of the obligation (for example, a sinking fund arrangement).
Obligations incurred as a result of events giving rise to losses are expected to be recovered from a third party by virtue of a claim made under an insurance contract.
[IAS 32 para 49].

6.9A.30.1 In addition, non-cash collateral received (rather than posted) by an entity, such as securities, will not be recognised on-balance sheet as it will fail de-recognition in the transferor and so provide the entity with no accounting entry against which to offset on-balance sheet derivative positions. As an example, consider a simple scenario where an entity has one derivative that is an asset of 50 and another derivative that is a liability of 50, both with the same counterparty. If the liability matures first, cash of 50 will be paid by the entity to settle the liability, and securities of 50 will be received as non-cash collateral for the remaining derivative asset of 50. As a result, the entity does not have the legally enforceable right to offset the recognised amounts (that is, the derivative asset of 50 and the derivative liability of 50), and so the requirements for offsetting are not met.

Presentation of financial instruments - Offsetting a financial asset and a financial liability - Master netting agreements

Publication date: 08 Dec 2017


6.9A.31 An entity that undertakes a number of financial instrument transactions with a single counterparty may enter into a ‘master netting arrangement’ with that counterparty. Such an arrangement creates a right of set-off that becomes enforceable and affects the realisation or settlement of individual financial assets and financial liabilities only following a specified event of default or in other circumstances not expected to arise in the normal course of business. These arrangements are commonly used by financial institutions to provide protection against loss in the event of bankruptcy or other circumstances that result in a counterparty being unable to meet its obligations. In the event of default on, or termination of, any one contract, the agreement provides for a single net settlement of all financial instruments covered by the agreement. [IAS 32 para 50].

6.9A.32 Where an entity has entered into such an agreement, the agreement does not provide a basis for offsetting unless both of the criteria in paragraph 6.9A.21 above are satisfied. This is because the entity’s right of set off under such an agreement is conditional and enforceable only on the occurrence of some future event, usually a default of the counterparty. To offset a financial asset and a financial liability, an entity must have a currently legally enforceable right to set off the recognised amounts. Thus, such an arrangement does not meet the conditions for offsetting. [IAS 32 para 50].

Example – Various arrangements in a group for cash management purposes
 
Group X comprises various subsidiaries, each of which has a separate bank account with bank B. At any time, some of these accounts have a positive cash balance and others a negative (overdraft) balance. Group X operates the following arrangements for cash management purposes:
 
Zero balancing (sometimes referred to as a cash sweep), under which the balances on a number of designated accounts are transferred to a single netting account on a regular basis, including at the balance sheet date. In some cases, the amounts transferred are repaid to the relevant subsidiaries shortly afterwards. This may be agreed contractually or at the choice of group management.
Notional pooling, under which bank B calculates the net balance on a number of designated accounts with interest being earned or paid on the net amount. There may be a transfer of balances into a netting account, but this is not always at the balance sheet date.
   
Is group X able to offset cash and overdraft balances and hence present net balances in its consolidated balance sheet?
   
If balances are to be presented net, both of the criteria set out in paragraph 6.9A.21 should be satisfied. Group X should have a currently legally enforceable right to set-off, which means that it is enforceable at any time and not just in stipulated circumstances, such as an event of default or bankruptcy. Also, group X should demonstrate a clear prospect that there will be future settlement of cash flows with the same counterparty. A notional pooling for the purpose of calculating interest that does not involve settlement of the associated balances will not meet the requirements described in paragraph 6.9A.27 above.
 
Assuming the agreement with bank B gives group X the necessary legally enforceable right to set off, its position will be as follows:
 
Where there is zero balancing at the balance sheet date and no repayment of funding (reversal of cash flows) takes place, either on the following day or any day thereafter, group X has a single cash balance or overdraft at the balance sheet date and it is presented as such. The IAS 32 offsetting requirements are not relevant in this case.
Where there is zero balancing at the balance sheet date, but the amounts transferred are repaid to the relevant subsidiaries shortly afterwards as a practice of group X, there would often be a single cash balance or overdraft at the balance sheet date that should be presented as such. Again, the IAS 32 offsetting requirements are not relevant in this case. However, there may be circumstances where group X has separate cash and overdraft balances, for example this might sometimes be the case where it has a contractual obligation to return the balances to the respective subsidiaries the following day. In such circumstances the cash and overdraft balances would generally be considered separate assets and liabilities under IFRS and the offsetting requirements of IAS 32 would be relevant. In this case, group X would not be able to demonstrate ‘the intention to settle net’ and, therefore, would not be able to present net balances in its consolidated balance sheet.
Where there is notional pooling, but no physical transfer of balances to one account, group X will not be able to demonstrate ‘the intention to settle net’, as the arrangement does not actually involve net cash settlement. Accordingly, the balances should be presented gross.
Where there is notional pooling and there is regular net cash settlement of the accounts, net presentation is appropriate. This will not be affected by the fact that actual settlement of the net position may not coincide with the balance sheet date, as long as group X can clearly demonstrate the intention to settle net through a regular practice of net cash settlement throughout the year.
 
Note that arrangements such as those described above can be complex; each arrangement should be viewed in light of its specific facts and circumstances. Further disclosure of gross balances may be necessary if the amount at the balance sheet date does not reflect normal cash balances throughout the year.

6.9A.33 When financial assets and financial liabilities subject to a master netting arrangement are not offset, the effect of the arrangement on an entity’s exposure to credit risk is disclosed in accordance with paragraph 6.9A.141 below.

6.9A.34 A question might arise whether cash collateral posted (for example, on a derivative) should be netted with a balance sheet position. For example, an entity may have entered into a derivative with a bank or clearing house. To reduce credit risk, the two entities may have agreed to post cash collateral periodically with each other equal to the fair value of the derivative. The posting of the collateral does not result in legal settlement of the outstanding balance. However, the terms of the collateral agreement are that the collateral will be used to settle the derivative as and when payments are due (as well as on a default or bankruptcy of either party) and both entities intend to settle this way. If this is the case, the entity will have a legally enforceable right to set off the derivative and the collateral, and will intend to settle net. If market prices do not change, no further cash flows will arise. Any changes in the collateral balance post balance sheet date arise as a result of future events and are not relevant to the balance sheet date assessment. The offsetting requirements in IAS 32 are therefore met, and the collateral should be offset. If, on the other hand, cash collateral is not used to settle the derivative, the offsetting requirements in IAS 32 are not met.

Presentation of financial instruments - Offsetting a financial asset and a financial liability - Amendments to offsetting financial assets and financial liabilities

Publication date: 08 Dec 2017


6.9A.35 As discussed in paragraph 6.9A.24 the IASB has amended the application guidance of IAS 32 to clarify its requirements for offsetting financial instruments. The clarification guidance as discussed below applies to accounting periods beginning on or after 1 January 2014 with retrospective application. 

6.9A.35.1 The amendments do not change the current offsetting model in IAS 32, which requires an entity to offset a financial asset and financial liability in the statement of financial position only when two conditions are met: first, the entity currently has a legally enforceable right of set-off; and secondly, it intends either to settle the asset and liability on a net basis or to realise the asset and settle the liability simultaneously.

6.9A.35.2 While the current offsetting model does not change, the application guidance is now more detailed. This may result in changes for individual entities depending on how they had interpreted the previous guidance. As regards the first condition, the amendments in paragraph AG38B of IAS 32 clarify that the entity’s right of set-off:
 
must be currently available – that is, it is not contingent on a future event; and
must be legally enforceable in all of the normal course of business, in the event of default, and in the event of insolvency or bankruptcy of the entity and all of the counterparties.

6.9A.35.3 The application guidance in paragraph AG38C of IAS 32 explains that the nature and extent of the right of set-off, including any conditions attached to its exercise and whether it would remain in the event of default or bankruptcy, may vary from one legal jurisdiction to another. It cannot therefore be assumed that the right of set-off is automatically available outside of the normal course of business. For example, the bankruptcy or insolvency laws of a jurisdiction might prohibit or restrict the right of set-off in the event of bankruptcy or insolvency. Entities will therefore need to consider the laws that apply to the relationships between the parties (including the laws that govern the contract, defaults or bankruptcies) to ascertain whether the right of set-off is enforceable in the normal course of business, the event of default and the insolvency or bankruptcy of any of the parties (including the entity itself).

6.9A.35.4 Paragraph AG38E of IAS 32 clarifies the second condition for offset (that the entity intends to either settle on a net basis or to realise the asset and settle the liability simultaneously) − for example, when balances are cleared through clearing houses or similar settlement systems. The entity might have a right to settle net, but it might still realise the asset and settle the liability separately. If the entity can settle amounts in such a way that the outcome is in effect equivalent to net settlement, the entity will meet the second criterion. Paragraph AG38F of IAS 32 states that this will occur only if the gross settlement mechanism has features that eliminate or result in insignificant credit and liquidity risk, and that will process receivables and payables in a single settlement process or cycle. This would then be effectively equivalent to net settlement and would satisfy the IAS 32 criterion. The standard gives an example of characteristics that a gross settlement system could have to meet a net settlement equivalent in paragraph 42(b) of IAS 32. [IAS 32 para AG 38F].

6.9A.35.5 Master netting agreements (as discussed in para 6.9A.31) where the legal right of offset is only enforceable on the occurrence of some future event, such as default of the counterparty, continue not to meet the offsetting requirements.
[The next paragraph is 6.9A.39.]

Disclosure of financial instruments

Publication date: 08 Dec 2017


6.9A.39 Financial statement users and other investors need information in respect of an entity’s exposures arising from financial instruments to make more informed judgements about the risk that entities run from the use of financial instruments and their associated returns. IFRS 7 and IFRS 13 set out the disclosure requirements for financial instruments. This chapter only considers the disclosure requirements of IFRS 7. For discussion of the disclosure requirements of IFRS 13, see chapter 5.

Scope of IFRS 7

Publication date: 08 Dec 2017


6.9A.40 IFRS 7 applies to all types of financial instruments, except those that are specifically covered by another standard such as interests in subsidiaries, associates and joint ventures, employers’ rights and obligations arising from employee benefit plans, share-based payments, insurance contracts certain instruments required to be classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D of IAS 32. IFRS 7’s scope is similar to IAS 39. Chapter 40 discusses in detail which instruments are in the scope of IAS 39 and therefore also in IFRS 7’s scope. However, although finance leases are mostly outside the scope of IAS 39, they remain within the scope of IFRS 7. Operating leases are not regarded as financial instruments and are not therefore in the scope of either IAS 39 or IFRS 7, except for those individual payments that are currently due and payable. [IAS 32 para AG9]. 

6.9A.41 Applying IFRS 7 can be challenging for entities that enter into contracts for the purchase, sale or usage of commodities. Commodity contracts that are settled net in cash or through other financial instruments are in IFRS 7’s scope; those contracts that meet the ‘own use exemption’ would be outside IFRS 7’s scope, because they are not financial instruments. [IAS 39 para 6]. These terms are discussed in detail in chapter 40. It is likely for internal reporting purposes that management may exclude ‘own use’ contracts when assessing the company’s exposure to financial risks, such as liquidity risk, credit risk and market risk, or they may treat all commodity contracts in the same way. The onus therefore falls on management to determine how to provide disclosures that capture the complete exposure of the risks faced by the reporting entity in connection with its commodity contracts. IFRS 7 does not preclude management from providing additional explanations or details to assist users of the financial statements in interpreting the disclosures or in providing a complete picture.

6.9A.42 The credit risk disclosure requirements in IFRS 7 apply to contract assets and receivables recognised in accordance with IFRS 15.

6.9A.43 In a similar manner, accruals representing a right to receive cash or an obligation to deliver cash are in IFRS 7’s scope. For example, an accrual for goods received but not yet invoiced is within the IFRS 7’s scope. On the other hand, a pre-paid expense, which is settled by the future delivery of goods or services, is not a financial instrument and is outside IFRS 7’s scope.

6.9A.44 Provisions as defined in IAS 37 are scoped out of IFRS 7 because they are not financial instruments. [IAS 37 para 2; IFRS 7 paras 3-4; IAS 39 para 2(j)]. Financial guarantee contracts may be measured in accordance with IAS 37’s principles if the provision is higher than the unamortised premium amount, but they are financial instruments within IAS 39’s scope and so are within IFRS 7’s scope. Financial guarantee contracts that are considered insurance contracts and measured in accordance with IFRS 4 are outside the scope of IFRS 7. [IFRS 4 para 4(d)].

6.9A.45 IFRS 7 applies to both recognised and unrecognised financial instruments. [IFRS 7 para 4, 5]. For example, some loan commitments are outside IAS 39’s scope and may not be recognised, but are within IFRS 7’s scope because they expose an entity to financial risks, such as credit and liquidity risk. However, the same is not necessarily true for a firm commitment that is designated as a hedged item in a fair value hedge. The subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability under IAS 39’s hedge accounting rules. [IAS 39 para 93]. However, this ‘firm commitment’ asset or liability does not expose the entity to credit or liquidity risk until it becomes a financial asset or liability. The fact that hedge accounting is applied does not mean that the ‘firm commitment’ asset or liability is a financial instrument or that IFRS 7’s disclosure requirements would apply. 

6.9A.46 There is no scope exemption in IFRS 7 for financial assets and liabilities within the scope of IFRS 5. However, IFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale and discontinued operations. Paragraph 2 of the standard states that the classification and presentation requirements of IFRS 5 apply to all recognised non-current assets and to all disposal groups of an entity and paragraph 5(c) specifies that the measurement provisions do not apply to financial assets within IAS 39’s scope. A question arises as to whether IFRS 7 disclosures are also required for financial assets and financial liabilities classified as held-for-sale or part of disposal groups. This question was addressed by the IASB in an amendment to IFRS 5 issued in April 2009. The amendment clarifies that disclosures required by other standards do not apply to non-current assets or disposal groups held for sale unless they are outside the scope of IFRS 5’s measurement requirements. [IFRS 5 para 5B(b)]. As financial instruments measured in accordance with IAS 39 are outside the scope of IFRS 5’s measurement requirements, the IFRS 7 and IFRS 13 disclosures (where applicable) should be given. See chapter 30.

6.9A.47 Consistent with IAS 32 and IAS 39, the standard applies to all entities, not just those in the financial services sector. This means that it applies to a manufacturing entity whose only financial instruments may be cash, bank loans and overdrafts, trade debtors and creditors as well as to a bank with many and complex financial instruments. It also applies to the financial statements of subsidiaries of a consolidated group, even though in most large groups risks are managed at the consolidated level.

6.9A.48 There is no scope exemption for the financial statements of subsidiaries or, as yet, for small and medium-sized companies. The application of IFRS 7 to subsidiaries may present a challenge, as financial risk is often managed at a consolidated or group level.

Objectives of IFRS 7

Publication date: 08 Dec 2017


6.9A.49 IFRS 7’s objective is to provide information to users of financial statements about an entity’s exposure to risks and how the entity manages those risks. To this end, the standard requires an entity to provide disclosures in its financial statements that enable users to evaluate:

the significance of financial instruments for the entity’s financial position and performance; and
the nature and extent of risks arising from financial instruments to which the entity is exposed (quantitative disclosure) and how the entity manages those risks (qualitative disclosures).
[IFRS 7 paras 1, 7, 31].

6.9A.50 The first bullet point above covers disclosures about the figures in the balance sheet and the income statement. IFRS 7 requires disclosures of categories of financial instruments and hedging activities. In addition, it requires various disclosures by ‘class’ of financial instruments (see para 6.9A.54).

6.9A.51 The second bullet point covers disclosure of qualitative and quantitative information about an entity’s exposure to risks arising from financial instruments. IFRS 7 expands the qualitative disclosure to include information on the process that an entity uses to manage and measure risk. IFRS 7 requires quantitative risk disclosures that should be given ‘through the eyes of management’, that is, based on information provided internally to key management personnel. Certain minimum disclosures are also required to the extent they are not already covered by the ‘through the eyes of management’ information. Entities are required to communicate to the market how they perceive, manage and measure risk.

6.9A.52 The ‘through the eyes of management’ approach brings financial reporting more closely into line with the way management run their businesses.

6.9A.53 IFRS 7 includes mandatory application guidance that explains how to apply the standard’s requirements. It is also accompanied by non-mandatory implementation guidance that describes how an entity might provide the necessary disclosures.

General matters - Classes of financial instruments

Publication date: 08 Dec 2017


6.9A.54 IFRS 7 requires certain disclosures to be given by class of financial instruments, including the following:
 
■  Financial assets not qualifying for de-recognition (see para 6.9A.71);
■  The reconciliation of an allowance account (see para 6.9A.102)
■  The amount of impairment loss for financial assets (see para 6.9A.108);
■  Fair values (see para 6.9A.115); and
■  Specific disclosures relating to credit risk (see para 6.9A.149)
   
The standard itself does not provide a prescriptive list of classes of financial instruments. However, IFRS 7 states that an entity should take into account the characteristics of financial instruments and that the classes selected should be appropriate to the nature of information disclosed. [IFRS 7 para 6].

6.9A.55 A ‘class’ of financial instruments is not the same as a ‘category’ of financial instruments. Categories are defined in paragraph 9 of IAS 39 as financial assets at fair value through profit or loss (held for trading or designated at initial recognition), held-to-maturity investments, loans and receivables, available-for-sale financial assets, financial liabilities at fair value through profit or loss (held for trading or designated at initial recognition) and financial liabilities measured at amortised cost. [IFRS 7 para 8]. Classes are potentially determined at a lower level than the measurement categories and need to be reconciled back to the balance sheet. [IFRS 7 para 6]. The level of detail for a class should be determined on an entity specific basis and may be defined for each individual disclosure in a different way. In determining classes of financial instrument, an entity should, at a minimum:

Distinguish instruments measured at amortised cost from those measured at fair value.
Treat as a separate class or classes those financial instruments outside IFRS 7’s scope. IFRS 7’s disclosure requirements would not apply to this class.
[IFRS 7 App B para 2].

6.9A.56 For example, in the case of banks, the category ‘loans and receivables’ comprises more than one class, unless the loans have similar characteristics. In this situation, it may be appropriate to group financial instruments into the following classes:

types of customers – for example, commercial loans and loans to individuals; or
types of loans – for example, mortgages, credit cards, unsecured loans and overdrafts.
 
However, in some cases, ‘loans to clients’ can be one class if all the loans have similar characteristics (for example, a savings bank providing only one type of loan to individuals).

6.9A.57 ‘Available-for-sale’ assets could be split into bond and equity investment classes. The equity investments could be further subdivided into those that are listed and those that are unlisted.

General matters - Location, level of disclosure and aggregation

Publication date: 08 Dec 2017


6.9A.58 An entity is permitted to disclose some of the information required by the standard either in the notes or on the face of the balance sheet or of the income statement. [IFRS 7 paras 8, 20]. Some entities might present some of the information required by IFRS 7, such as the nature and extent of risks arising from financial instruments and the entity’s approach to managing those risks, alongside the financial statements in a separate management commentary or business review. This is only permissible for disclosures required by paragraphs 32 to 41 (that is, nature and risk arising from financial instruments) where the information is incorporated by cross-reference from the financial statements and is made available to users of the financial statements on the same terms as the financial statements and at the same time. [IFRS 7 App B para 6].

6.9A.59 An entity should decide, in the light of its own circumstances, how much detail it should provide, how much emphasis it should place on different aspects of the disclosure requirements and how much aggregation it should undertake to satisfy the standard’s requirements. Obviously, a significant amount of judgement is required to display the overall picture without combining information with different characteristics. A balance should be maintained between providing excessive detail that may not assist users of financial statements and obscuring important information as a result of too much aggregation. For example, an entity should not obscure important information by including it amongst a large amount of insignificant detail. Similarly, an entity should not disclose information that is so aggregated that it obscures important differences between individual transactions or associated risks. [IFRS 7 App B para 3].

General matters - Risks arising from financial instruments

Publication date: 08 Dec 2017


6.9A.60 IFRS 7 requires a significant amount of qualitative and quantitative disclosure about risks associated with financial instruments. In the context of financial instruments, risk arises from the uncertainty in cash flows, which in turn affects the future cash flows and fair values of financial assets and liabilities. The following are the types of financial risk that are related to financial instruments:

Market risk – the risk that the fair value or cash flows of a financial instrument will fluctuate, because of changes in market prices. Market risk embodies not only the potential for loss, but also the potential for gain. It comprises three types of risk as follows:
  Interest rate risk – the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
  Currency risk – the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
  Other price risk – the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or by factors affecting all similar financial instruments traded in the market.
Credit risk – the risk that the counterparty to a financial instrument will cause a financial loss for the entity by failing to discharge an obligation.
Liquidity risk – the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.
[IFRS 7 App A].

6.9A.61 Operational risk disclosures, on the other hand, are not within IFRS 7’s scope.

Balance sheet disclosures

Publication date: 08 Dec 2017


6.9A.62 Paragraph 8 of IFRS 7 requires disclosure of carrying amounts of categories of financial instrument, either on the face of the balance sheet or in the notes.

[The next paragraph is 6.9A.64.]

Balance sheet disclosures - Financial assets or liabilities at fair value through profit or loss

Publication date: 08 Dec 2017


6.9A.64 If the entity has designated a loan or receivable (or group of loans or receivables) as at fair value through profit or loss, it should disclose:

The maximum exposure to credit risk of the loan or receivable (or group of loans or receivables) at the reporting date (see para 6.9A.146 below).
The amount by which any related credit derivatives or similar instruments mitigate that maximum exposure to credit risk, for example financial guarantees and credit insurance.
The amount of change, during the period and cumulatively, in the fair value of the loan or receivable (or group of loans or receivables) that is attributable to changes in the financial asset’s credit risk, determined either
  as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk; or
  using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the asset’s credit risk.
  Changes in market conditions that give rise to market risk include changes in an observed (benchmark) interest rate, commodity price, foreign exchange rate or index of prices or rates (see para 6.9A.66 below).
The amount of the change in the fair value of any related credit derivatives or similar instruments that has occurred during the period and cumulatively since the loan or receivable was designated as at fair value through profit or loss.
[IFRS 7 para 9].

6.9A.65 The disclosures described above apply only to those loans and receivables (or groups of loans and receivables) that have been designated at fair value through profit and loss (‘FVTPL’). They do not apply to all loans and receivables or to all assets designated as FVTPL assets. For example, a quoted financial asset can never be classified as ‘loans and receivables’. Therefore, in this case the above disclosures are not required.

6.9A.66 Where an entity discloses the information required by the third bullet point in paragraph 6.9A.64, it should also disclose the methods used to comply with the disclosure requirements. However, where the entity believes that this disclosure does not faithfully represent the change in the financial asset’s fair value attributable to changes in its credit risk, it should disclose the reasons and the factors it believes are relevant in reaching that conclusion. [IFRS 7 para 11].

6.9A.67 If the entity has designated a financial liability as at fair value through profit or loss, it should disclose:

The amount of change, during the period and cumulatively, in the financial liability’s fair value that is attributable to changes in the credit risk of that liability determined either:
  as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk; or
  using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the asset’s credit risk.
  Changes in market conditions that give rise to market risk include changes in an observed (benchmark) interest rate, the price of another entity’s financial instrument, a commodity price, a foreign exchange rate or an index of prices or rates. For contracts that include a unit-linking feature, changes in market conditions include changes in the performance of the related internal or external investment fund.
The difference between the financial liability’s carrying amount and the amount the entity would be contractually required to pay at maturity to the holder of the obligation.
[IFRS 7 para 10].

6.9A.68 As stated in the first bullet point in paragraph 6.9A.67 above, an entity is required to disclose the amount of change in a liability’s fair value that is attributable to changes in the liability’s credit risk. Although quantifying such changes might be difficult in practice, the IASB concluded that disclosure of such information would be useful to users and would help alleviate concerns that users may misinterpret the profit or loss changes in credit risk, especially in the absence of disclosures. Consequently, the standard provides a relatively easy method of computing the amount to be disclosed, as illustrated in the example below. The method assumes that the only relevant change in market condition for the liability is a change in the observed benchmark interest rate. Changes in fair value arising from factors other than changes in the instrument’s credit risk or changes in interest rates are assumed not to be significant.

Example – Fair value change attributable to changes in a liability’s credit risk
 
On 1 January 20X1, an entity issues a 10 year bond with a par value of C150,000 and an annual fixed coupon rate of 8%, which is consistent with market rates for bonds with similar characteristics. The entity uses LIBOR as its observable (benchmark) interest rate.
 
The entity assumes a flat yield curve, all changes in interest rates result from a parallel shift in the yield curve, and the changes in LIBOR are the only relevant changes in market conditions. It is also assumed that changes in the fair value arising from factors other than changes in the bond’s credit risk or changes in interest rate are not significant.
 
At the date of inception of the bond, LIBOR was 5%. At the end of the first year, LIBOR has decreased to 4.75%. The bond’s fair value is C153,811, consistent with a market interest rate of 7.6% for the bond. The market rate reflects the bond’s credit rating at the end of the first year (see below).
 
The entity estimates the amount of change in the bond’s fair value that is not attributable to changes in market conditions that give rise to market risk as follows:
 
Calculate the instrument-specific component of the bond’s internal rate of return:
  At inception, the internal rate of return for the 10 year bond is 8%. Since LIBOR at inception was 5%, the instrument-specific component of the internal rate of return is 3% (8% − 5%).
Determine the discount rate to be used to calculate the present value of the bond at the end of year 1 using the bond’s contractual cash flows:
  Since the only relevant change in the market conditions is that LIBOR has decreased to 4.75% at the end of the year, the discount rate for the present value calculation is 7.75% (4.75% + 3%).
Calculate the present value at the end of year 1 using the above discount rate and the bond’s contractual cash flows as follows:

   
C
  PV of C12,000 interest payable for 9 years (year 2 −10) = 12,000 × [1 – (1 + 0.0775) -9] 75,748

    0.0775  
  PV of C150,000 payable in year 10 = 150,000 × (1+0.0775) -9 76,619

  Total PV 152,367

Calculate the present value at the end of year 1 using the market rate and the bonds contractual cash flows as follows. (Note that this second calculation uses the same cash flows and the same benchmark interest rates as the first calculation – the main difference is that credit spread is adjusted to reflect the current market price.)  
     
    C
  PV of C12,000 interest payable for 9 years (year 2 -10) = 12,000 × [1 – (1 + 0.076) -9] 76,226

    0.076  
  PV of C150,000 payable in year 10 = 150,000 × (1 + 0.076) -9 77,585

  Observed market value of liability 153,811

     
Calculate change in fair value that is not attributable to the change in the benchmark interest rate C
     
  Observed market value of bond 153,811
  PV of bond as calculated above 152,367

  Change in fair value not attributable to changes in the observed benchmark rate 1,444

     
The change in fair value not attributable to changes in the observed benchmark rate is a reasonably proxy for the change in fair value that is attributable to changes in the liability’s credit risk, since the difference in present values calculated at 7.75% and 7.6% is assumed to reflect changes in the instrument’s credit risk. Thus, the amount to be disclosed is C1,444. [IFRS 7 para IG 11].

6.9A.69 Where an entity discloses the information required by the first bullet point in paragraph 6.9A.67 above, it should also disclose the methods used to comply with the disclosure requirements. However, where the entity believes that the disclosure it has given to comply with the requirements does not faithfully represent the change in the fair value of the financial asset attributable to changes in its credit risk, it should disclose the reasons and the factors it believes are relevant in reaching that conclusion. [IFRS 7 para 11].

Balance sheet disclosures - Other sundry balance sheet disclosure - Reclassification

Publication date: 08 Dec 2017


6.9A.70 If the entity has reclassified a financial asset (in accordance with IAS 39), the disclosures included in paragraphs 12 and 12A (depending on the nature of the reclassification) of IFRS 7 are required.

Balance sheet disclosures - Other sundry balance sheet disclosure - De-recognition

Publication date: 08 Dec 2017


6.9A.71 An entity may have transferred financial assets in such a way that part or all of the financial assets do not qualify for de-recognition (see chapter 44).

[The next paragraph is 6.9A.75.]

6.9A.75 Transferred assets are defined in paragraph 42A of IFRS 7 as those where the entity either (a) transfers the contractual rights to receive the cash flows or (b) retains the contractual rights to receive the cash flows but assumes a contractual obligation to pay the cash flows to another party. The standard has different requirements for the following two categories of transferred asset. The disclosure requirements are included in paragraphs 42B to 42H of IFRS 7.

6.9A.76 The first category relates to transferred assets that are not de-recognised in their entirety, that is where:

the entity assumes an obligation to pay the cash flows from the financial asset, but the ‘pass through’ requirements of paragraph 19 of IAS 39 are not met (see paras 6.9A.83 and 6.9A.84); or
the entity retains substantially all the risks and rewards of ownership of the financial asset [IAS 39 para 20(b)]; or
the entity neither transfers nor retains substantially all the risks and rewards of ownership, but retains control, in which case it continues to recognise the asset to the extent of its continuing involvement. [IAS 39 para 20(c)(ii)].

6.9A.77 Control of the transferred asset depends upon the transferee’s ability to sell the asset. The transferor entity has not retained control if the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer. Otherwise the transferor entity has retained control. [IAS 39 para 23].

6.9A.78 Paragraph 42A of IFRS 7 defines transferred assets as those where either (a) the entity transfers the contractual rights to receive the cash flows or (b) the entity retains the contractual rights to receive the cash flows and assumes a contractual obligation to pay the cash flows to another party. However, unlike the IAS 39 requirements, there is no requirement for the ‘pass through’ tests in paragraph 19 of IAS 39 to be met in case (b). Therefore the IFRS 7 disclosures in paragraph 42D (including the existing IFRS requirements) are extended to those transferred assets that are not de-recognised because they fail the ‘pass through’ tests in paragraph 19 of IAS 39.

6.9A.79 For those transferred assets that are not de-recognised because they fail the ‘pass through’ tests in paragraph 19 of IAS 39, the extent and substance of the linkage between the assets and the associated liability (the obligation to pay the cash flows to another party) should be considered on a case-by-case basis. For example, if the liability is contractually linked to the assets such that cash flows from the asset must be used to settle the liability, or the assets and associated liabilities are ring fenced (for example, in an SPV), we believe they would be in the scope of the IFRS 7 disclosures.

6.9A.80 The second category relates to transferred assets that are de-recognised in their entirety, where the entity has a ‘continuing involvement’ in them. Transferred assets that are de-recognised in their entirety are those where the entity (a) transfers the contractual rights to receive the cash flows or (b) retains the contractual rights to receive the cash flows and assumes a contractual obligation to pay the cash flows to another party and the ‘pass through’ requirements in paragraph 19 of IAS 39 are met; and (in the case of either (a) or (b)):

the entity transfers substantially all the risks and rewards of ownership of the financial asset [IAS 39 para 20(a)]; or
the entity neither transfers nor retains substantially all the risks and rewards of ownership, but does not retain control, in which case any rights and obligations created by the transfer are recognised separately as assets or liabilities. [IAS 39 para 20(c)(i)].

6.9A.81 For this second category of transferred assets, the new disclosure requirements are extensive. However, they only apply to de-recognised transferred assets where the entity has a ‘continuing involvement’. For this purpose paragraph 42C of IFRS 7 states that “an entity has continuing involvement in a transferred financial asset if, as part of the transfer, the entity retains any of the contractual rights or obligations inherent in the transferred financial asset or obtains any new contractual rights or obligations relating to the transferred financial asset”. This is not the same as the IAS 39 definition of continuing involvement where the extent of continuing involvement is “the extent to which the entity is exposed to changes in the value of the transferred asset”. [IAS 39 para 30]. The new disclosures are mostly in respect of the continuing involvement (as defined in IFRS 7).

6.9A.81.1 Paragraph 42C of IFRS 7 provides three exemptions which do not constitute continuing involvement:
 
normal representations and warranties relating to fraudulent transfer and concepts of reasonableness, good faith and fair dealings that could invalidate a transfer as a result of legal action;
forward, option and other contracts to reacquire the transferred financial asset for which the contract price (or exercise price) is the fair value of the transferred financial asset; or
an arrangement whereby an entity retains the contractual rights to receive the cash flows of a financial asset but assumes a contractual obligation to pay the cash flows to one or more entities and the conditions in paragraph 19(a)-(c) of IAS 39 are met.

6.9A.81.2 In other cases, the extent and substance of the linkage between the assets and any other rights or obligations should be considered on a case-by-case basis to determine if the IFRS 7 definition of continuing involvement is met. For example, if the liability is contractually linked to the assets such that cash flows from the asset must be used to settle the liability, or the assets and associated liabilities are ring fenced (for example, in an SPV), we believe they would be in the scope of the IFRS 7 disclosures. Ongoing involvement, such as contingent price adjustments to the transfer price in respect of a transferred financial asset (for example, due to change in tax or law that affects the asset), which do not fall within the above exemptions, would be considered continuing involvement for the purposes of the IFRS 7 disclosures. However, an interest rate swap or other derivative that is not linked to the transferred asset would not be a continuing involvement.

6.9A.82 Whilst it will depend upon the particular facts and circumstances in each case, it would appear that in practice the majority of common transactions fall into the first category of disclosures discussed in paragraph 6.9A.76.

6.9A.83 The IAS 39 de-recognition requirements apply to a group of similar financial assets and so the new disclosure requirements also apply to a transferred group of similar assets. Similarly, in certain circumstances the IAS 39 de-recognition requirements apply to a part of a financial asset (or group of financial assets). Consistent with paragraph 42A of IFRS 7, if the conditions in paragraph 16 of IAS 39 apply, then the IFRS 7 disclosure requirements apply only to those parts of the financial asset that are transferred. For example for an interest strip of a debt instrument that results in part of the debt instrument being de-recognised (that is, the interest strip only), under paragraph 16 of IAS 39 the de-recognised ‘asset’ only relates to the interest cash flows and so, if that part is de-recognised in its entirety without a continuing involvement, the above disclosures do not apply.

6.9A.84 Some entities (such as investment funds and insurance companies) may have a portfolio of similar financial assets that generate cash flows that are used to pay obligations to other instrument holders (for example, to redeem units in an investment fund or to pay out on life insurance policies in a life fund). In most cases the entity (for example, the investment funds or insurance company) will be able to reinvest proceeds from the assets (either interest, dividend or principal contractual cash flows or arising from sale) rather than having an obligation to pay those cash flows to a third party (for example, the unit or policy holders). Hence, such assets are not ‘transferred’ and the IFRS 7 disclosure requirements are not required. However, there could be some situations where the IFRS 7 disclosure requirements are needed, for example certain side pocket arrangements in the hedge fund industry, although this will depend upon the particular terms of the related instruments.

6.9A.85 For those transferred assets that are de-recognised in their entirety (for example, non-recourse factoring), the transferor may continue to service the assets for a fee, which could be based on a percentage of the asset value. The issue arises of whether the servicing contract is a continuing involvement in the transferred assets that falls within the scope of IFRS 7’s disclosure requirements.

6.9A.85.1 This issue has been discussed by the IFRS IC, which decided that the scope of IFRS 7 is not clear. The IFRS IC, at its May 2014 meeting, recommended to the IASB that it finalise proposed amendments to IFRS 7 (through an annual improvement) to clarify the requirements in paragraph 42C:
 
that the term ‘payment’ in paragraph B30 of IFRS 7 does not include cash flows of the transferred financial asset that an entity collects and is required to remit to the transferee, and
that an entity must assess a servicing contract to determine if it meets the definition of ‘continuing involvement’ in the context of paragraph 42C of IFRS 7. For example, where the servicing fee is dependent on the performance of the transferred asset or on the timing of cash flows from the transferred asset, this will constitute a continuing involvement for the purposes of paragraph 42C.

Balance sheet disclosures - Other sundry balance sheet disclosure - Offsetting

Publication date: 08 Dec 2017


6.9A.86 As discussed in paragraph 6.9A.24, the IASB amended IAS 32 in December 2011 to clarify some of the requirements for offsetting financial assets and financial liabilities in the statement of financial position. At the same time, the IASB amended IFRS 7 to enhance the current offsetting disclosures. The new disclosure requirements are retrospectively applied, with an effective date of annual periods beginning on or after 1 January 2013. At its March 2013 meeting, the IFRS IC discussed a request for guidance on the applicability of these new disclosure requirements to condensed interim financial statements. This is discussed further in the Manual of Accounting – Interim financial reporting.

6.9A.86.1 The US Financial Accounting Standards Board (‘FASB’) has recently amended the scope of the equivalent offsetting disclosure requirements under US GAAP to derivatives, repurchase agreements and securities lending transactions. However, the IASB has not made an equivalent scope amendment under IFRS. This has drawn attention to the broad scope of the disclosures required under IFRS which will include all financial instruments that are subject to a master netting arrangement or similar agreement, including trade receivables and payables. The IFRS requirements also apply to all kinds of entity, including corporate entities as well as financial institutions.

6.9A.87 The disclosures require quantitative information about recognised financial instruments that are offset in the statement of financial position, as well as those recognised financial instruments that are subject to master netting or similar arrangements irrespective of whether they are offset. [IFRS 7 para 13A]. Similar arrangements include derivative clearing agreements, global master repurchase agreements, global master securities lending agreements and any related rights to financial collateral. Examples of financial instruments that are not within the scope of the new disclosures are loans and customer deposits at the same institution (unless they are set off in the statement of financial position) and financial instruments that are subject only to a collateral agreement. [IFRS 7 para B41].

6.9A.88 Paragraph 13B of IFRS 7 sets out the objective for the offsetting disclosures: it requires an entity to disclose information that enables users of its financial statements to evaluate the effect or potential effect of netting arrangements on its financial position.

6.9A.89 To meet this objective, paragraph 13C of IFRS 7 requires an entity to disclose at the end of each reporting period the following quantitative information separately for recognised financial assets and recognised financial liabilities that are within the scope:

(a) the gross amounts of those recognised financial assets and recognised financial liabilities;
(b) the amounts that are set off in accordance with the criteria in paragraph 42 of IAS 32 when determining the net amounts presented in the statement of financial position;
(c) the net amounts presented in the statement of financial position;
(d) the amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in paragraph 13C(b) of IFRS 7, including:
  (i) amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria in paragraph 42 of IAS 32; and
  (ii) amounts related to financial collateral (including cash collateral); and
(e) the net amount after deducting the amounts in (d) from the amounts in (c) above.
[IFRS 7 para 13C].
 
The information set out above should be presented in a tabular format, separately for financial assets and financial liabilities, unless another format is more appropriate. [IFRS 7 para 13C]. 

6.9A.90 It is possible that financial instruments disclosed under the above requirements are measured differently − for example, a payable related to a repurchase agreement may be measured at amortised cost, while a derivative will be at fair value. Entities include financial instruments at recognised amounts and describe resulting measurement differences in the related disclosures.

6.9A.91 The ‘gross amounts’ required by paragraph 13C(a) relate to both:
 
recognised financial instruments that are set off in accordance with paragraph 42 of IAS 32; and
recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement irrespective of whether they meet the offsetting criteria. 
   
However, the ’gross amounts’ required by paragraph 13(a) do not relate to any amounts recognised as a result of collateral agreements that do not meet the offsetting criteria in para 42 of IAS 32. Instead, such amounts are disclosed in accordance with paragraph 13C(d). [IFRS 7 para B43].

6.9A.92 With regards to the ‘amounts that are set off’ when determining the ‘net amounts’ as required by paragraph 13C(b), the amounts of both the recognised financial assets and the recognised financial liabilities that are subject to set-off under the same arrangement are disclosed in both the financial asset and financial liability disclosures. However, the amounts disclosed (in, for example, a table) are limited to the amounts that are subject to set-off. For example, an entity may have a recognised derivative asset and a recognised derivative liability that meet the offsetting criteria in paragraph 42 of IAS 32. If the gross amount of the derivative asset is larger than the gross amount of the derivative liability, the financial asset disclosure table will include the entire amount of the derivative asset (in accordance with para 13C(a)) and the entire amount of the derivative liability (in accordance with para 13C(b)). However, while the financial liability disclosure table will include the entire amount of the derivative liability (in accordance with para 13C(a)), it will only include the amount of the derivative asset (in accordance with para 13C(b)) that is equal to the amount of the derivative liability. [IFRS 7 para B44].

6.9A.93 With regards to the disclosure of ‘net amounts’ in the statement of financial position as required by paragraph 13C(c), paragraph B45 of IFRS 7 clarifies the following: If an entity has instruments that meet the scope of these disclosures (as specified in para 13A) but that do not meet the offsetting criteria in paragraph 42 of IAS 32, the amounts required to be disclosed by paragraph 13C(c) would equal the amounts required to be disclosed by paragraph 13C(a). Furthermore, the ‘net amounts’ required to be disclosed by paragraph 13C(c) must be reconciled to the individual line item amounts presented in the statement of financial position. For example, if an entity determines that the aggregation or disaggregation of individual financial statement line item amounts provides more relevant information, it must reconcile the aggregated or disaggregated amounts disclosed in paragraph 13C(c) back to the individual line item amounts presented in the statement of financial position. [IFRS 7 para B45 and B46].

6.9A.94 With regards to the disclosure of “amounts subject to an enforceable master netting arrangement or similar arrangement, paragraph 13C(d)(i) refers to amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria in paragraph 42 of IAS 32 (for example, current rights of set-off that do not meet the criterion in paragraph 42(b) of IAS 32, or conditional rights of set-off that are enforceable and exercisable only in the event of default, or only in the event of insolvency or bankruptcy of any of the counterparties). Paragraph 13C(d)(ii) refers to amounts related to financial collateral, including cash collateral, both received and pledged. An entity discloses the fair value of those financial instruments that have been pledged or received as collateral. The amounts disclosed in accordance with paragraph 13C(d)(ii) should relate to the actual collateral received or pledged and not to any resulting payables or receivables recognised to return or receive back such collateral.

6.9A.95 Paragraph 13D of IFRS 7 imposes a limit on the total amount disclosed in accordance with paragraph 13C(d) for an instrument to the net amount recognised in the balance sheet for that instrument. When disclosing amounts in accordance with paragraph 13C(d), an entity must take into account the effects of over-collateralisation by financial instruments. To do so, the entity must first deduct the amounts disclosed in accordance with paragraph 13C(d)(i) from the amount disclosed in accordance with paragraph 13C(c). The entity should then limit the amounts disclosed in accordance with paragraph 13C(d)(ii) to the remaining amount in paragraph 13C(c) for the related financial instrument. However, if rights to collateral can be enforced across financial instruments, these rights can be included in the disclosure provided in accordance with paragraph 13D. [IFRS 7 para B49].

6.9A.96 Paragraph 13E of IFRS 7 requires an entity to include a description in the disclosures of the rights of set-off associated with its recognised financial assets and recognised financial liabilities subject to enforceable master netting arrangements and similar agreements that are disclosed in accordance with paragraph 13C(d), including the nature of those rights. For example, an entity should describe its conditional rights. For instruments subject to rights of set-off that are not contingent on a future event but do not meet the remaining criteria in paragraph 42 of IAS 32, the entity should describe the reason why the criteria are not met. Also, for any collateral received or pledged, the entity should describe the terms of the collateral agreement − for example, when the collateral is restricted. Finally, paragraph 13F of IFRS 7 requires an entity that discloses the information required by paragraph 13B-E in more than one note to the financial statements to cross-refer between those notes.

6.9A.97 With regards to the quantitative offsetting disclosures in paragraph 13C(a)-(c) of IFRS 7, paragraph B51 of IFRS 7 allows grouping by type of financial instrument or by type of transaction − for example, derivatives, repurchase and reverse repurchase agreements or securities borrowing and securities lending agreements. Alternatively, grouping by type of financial instrument for the quantitative disclosures in paragraph 13C(a)-(c) is also allowed with the disclosures required by paragraph 13C(c)(e) by counterparty. In that case, counterparties do not need to be identified by name, but their designation (counterparty A, counterparty B, etc.) should remain consistent from year to year. Individually significant counterparties should be separately disclosed, and remaining ones may be aggregated into one line. Additional qualitative disclosures should be considered about the types of counterparty.

6.9A.98 Paragraph B53 of IFRS 7 notes that the disclosures in paragraph 13C-E are minimum requirements to meet the objective stated in paragraph 13B. Depending on facts and circumstances, there may need to be additional disclosures to meet the objective.

Balance sheet disclosures - Other sundry balance sheet disclosure - Collateral

Publication date: 08 Dec 2017


6.9A.99 An entity is required to provide certain disclosures relating to collateral. [IFRS 7 paras 14, 15].

[The next paragraph is 6.9A.102.]

Balance sheet disclosures - Other sundry balance sheet disclosure - Allowance amount for credit losses

Publication date: 08 Dec 2017


6.9A.102 When financial assets are impaired by credit losses and the entity records the impairment in a separate account (for example, an allowance account used to record individual impairments or a similar account used to record a collective impairment of assets) rather than directly reducing the asset’s carrying amount, it should disclose a reconciliation of changes in that account during the period for each class of financial assets. [IFRS 7 para 16]. The standard prescribes no specific format for this reconciliation.

Balance sheet disclosures - Other sundry balance sheet disclosure - Compound financial instruments with multiple embedded derivatives

Publication date: 08 Dec 2017


6.9A.103 If an entity has issued an instrument that contains both a liability and an equity component (see chapter 42) and the instrument has multiple embedded derivatives whose values are interdependent (such as a callable convertible debt instrument), it should disclose the existence of those features. [IFRS 7 para 17].

Balance sheet disclosures - Other sundry balance sheet disclosure - Defaults and breaches

Publication date: 08 Dec 2017


6.9A.104 An entity is required to disclose information on defaults and breaches of loans payable (that is, financial liabilities other than short-term trade payables on normal credit terms) and other loan agreements. Such disclosures provide relevant information about the entity’s creditworthiness and its prospects for obtaining future loans. Any defaults or breaches may affect the liability’s classification as current or non-current in accordance with IAS 1 (see para 6.9A.15 above) and may also require disclosure if the liability is considered as capital by the entity’s management. [IAS 1 para 135(e)].

6.9A.105 For loans payable recognised at the reporting date, an entity should disclose:

Details of any defaults during the period of principal, interest, sinking fund, or redemption terms of those loans payable.
The carrying amount of the loans payable in default at the reporting date.
Whether the default was remedied, or the terms of the loans payable were renegotiated, before the financial statements were authorised for issue.
[IFRS 7 para 18].

6.9A.106 If, during the period, there were breaches of loan agreement terms other than those described in the above paragraph, an entity should disclose the same information as above if those breaches permitted the lender to demand accelerated repayment, unless the breaches were remedied, or the loan’s terms were renegotiated, on or before the reporting date. [IFRS 7 para 19].

6.9A.107 The above requirements would apply if the terms were renegotiated after the balance sheet date but before the signing of the financial statements. However, the disclosure need not include short-term trade payables on normal credit terms as these do not meet the definition in the standard of loans payable. [IFRS 7 App A].

Income statement and equity disclosures - Items of income, expense, gains or losses

Publication date: 08 Dec 2017


6.9A.108 An entity should disclose the following items of income, expense, gains or losses, either on the face of the financial statements or in the notes:

Net gains or net losses on:
  Financial assets or financial liabilities at fair value through profit or loss, showing separately those on financial assets or financial liabilities designated as such upon initial recognition and those on financial assets or financial liabilities that are classified as held-for-trading in accordance with IAS 39. Where these financial instruments accrue interest income or expense, the standard allows an accounting policy choice on how to disclose these. The interest income, interest expense and dividend income can be reported as part of net gains or net losses on these financial instruments or can be disclosed separately as part of interest income and expenses. [IFRS 7 App B5(e)]. If the entity reports interest income and interest expense on financial instruments at FVTPL within interest income and interest expense, it uses the effective interest method in accordance with paragraph 9 of IAS 39.
     
    In addition, it is possible to adopt one treatment for interest income and expense and a different treatment for dividend income as no such prohibition exists in IFRS 7. However, different treatments cannot be adopted for interest income and interest expense.
     
  Available-for-sale financial assets, showing separately the amount of gain or loss recognised directly in other comprehensive income during the period and the amount reclassified from equity and recognised in profit or loss for the period.
  Held-to-maturity investments.
  Loans and receivables.
  Financial liabilities measured at amortised cost.
Total interest income and total interest expense (calculated using the effective interest method) for financial assets or financial liabilities that are not at fair value through profit or loss.
Fee income and expense (other than amounts included in determining the effective interest rate) arising from:
  Financial assets or financial liabilities that are not at fair value through profit or loss.
  Trust and other fiduciary activities that result in the holding or investing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions.
Interest income on impaired financial assets accrued in accordance with paragraph AG93 of IAS 39, which requires an entity to continue to recognise interest income using the rate of interest used to discount the future cash flows for the purposes of measuring the impairment loss (see chapter 6.7).
The amount of any impairment loss for each class of financial asset.
[IFRS 7 para 20].

[The next paragraph is 6.9A.110.]

Other disclosures - Accounting policies

Publication date: 08 Dec 2017


6.9A.110 IAS 1 requires an entity to disclose, in the summary of significant accounting policies, the measurement basis (or bases) used in preparing the financial statements and the other accounting policies used that are relevant to an understanding of the financial statements. [IAS 1 para 108; IFRS 7 para 21]. Paragraph 5 of Appendix B to IFRS 7 provides a listing of disclosures which might be given.

6.9A.111 IAS 1 also requires entities to disclose, in the summary of significant accounting policies or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. [IAS 1 para 113].  

Other disclosures - Hedge accounting

Publication date: 08 Dec 2017


6.9A.112 An entity should disclose the following separately for each type of hedge described in IAS 39 (that is, fair value hedges, cash flow hedges and hedges of net investments in foreign operations).

A description of each type of hedge.
A description of the financial instruments designated as hedging instruments and their fair values at the reporting date.
The nature of the risks being hedged.
[IFRS 7 para 22].

6.9A.113 In addition, for cash flow hedges, an entity should disclose:

The periods when the cash flows are expected to occur and when they are expected to affect profit or loss.
A description of any forecast transaction for which hedge accounting had previously been used, but which is no longer expected to occur.
The amount that was recognised in other comprehensive income during the period.
The amount that was reclassified from equity and included in profit or loss for the period, showing the amount included in each line item in the income statement. This would also apply to hedging instruments with a short maturity that have been acquired and have matured within the same accounting period. As a practical expedient it is common for entities to recognise the gains and losses on such instruments directly in the income statement rather than to recognise the gains and losses initially in the hedging reserve and then recycle to the income statement. Although the accounting entries net off in the same accounting period, there should still be disclosure of the amounts that would have been recycled.
The amount that was reclassified from equity during the period and included in the initial cost or other carrying amount of a non-financial asset or non-financial liability whose acquisition or incurrence was a hedged highly probable forecast transaction.
[IFRS 7 para 23].

6.9A.114 An entity should disclose separately:

In fair value hedges, gains or losses on:
  The hedging instrument.
  The hedged item attributable to the hedged risk.
  The requirement here relates to the current reporting period only and not to a disclosure on a cumulative basis (since the inception of the hedge designation).
The ineffectiveness recognised in profit or loss that arises from cash flow hedges.
The ineffectiveness recognised in profit or loss that arises from hedges of net investments in foreign operations.
[IFRS 7 para 24].

Other disclosures - Fair value

Publication date: 08 Dec 2017


6.9A.115 IFRS 13 amended IFRS 7 to relocate most of the disclosures about fair value to IFRS 13 − in particular, the disclosures around the fair value hierarchy. Chapter 5 includes the IFRS 13 fair value disclosures and remaining fair value disclosure requirements of IFRS 7 in respect of day 1 gains and losses, and situations in which fair value disclosures are not required.

[The next paragraph is 6.9A.136.]

Financial instrument risk disclosures

Publication date: 08 Dec 2017


6.9A.136 An entity should 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 reporting date. [IFRS 7 para 31].

6.9A.137 The disclosures described from paragraph 6.9A.141 onwards focus on the risks that arise from financial instruments and how they have been managed. These risks typically include, but are not limited to, credit risk, liquidity risk and market risk as discussed in paragraph 6.9A.60 above. [IFRS 7 para 32].

6.9A.138 As part of the improvements to IFRSs issued in May 2010, the IASB emphasised the intended interaction between the qualitative and quantitative disclosures of the nature and extent of risks arising from financial instruments. IFRS 7 clarifies that providing qualitative disclosures in the context of quantitative disclosures enables users to link related disclosures and hence form an overall picture of the nature and extent of risks arising from financial instruments. The IASB concluded that an explicit emphasis on the interaction between qualitative and quantitative disclosures will contribute to disclosure of information in a way that better enables users to evaluate an entity’s exposure. [IFRS 7 para 32A].

6.9A.139 When an entity uses several methods to manage a risk exposure, it should disclose information using the method or methods that provide the most relevant and reliable information. [IFRS 7 App B para 7].

6.9A.140 The disclosures should be given either in the financial statements or incorporated by cross-reference from the financial statements to some other statement, such as a management commentary or risk report, that is available to users of the financial statements on the same terms as the financial statements and at the same time. Without the information incorporated by cross-reference, the financial statements are incomplete. [IFRS 7 App B para 6].

Financial instrument risk disclosures - Quantitative disclosures

Publication date: 08 Dec 2017


6.9A.143 For each type of risk arising from financial instruments, an entity should disclose:

Summary quantitative data about its exposure to that risk at the reporting date. This disclosure should be based on the information provided internally to the entity’s key management personnel (as defined in IAS 24), for example, the entity’s board of directors or chief executive officer. An entity with two distinct operations (for example, a retail division and a manufacturing division) may be monitored by management separately as two divisions. All disclosures should normally be provided on a consolidated basis. However, those disclosures that are based on management reporting could be presented separately for both the divisions as that is the way management monitors the financial risks, unless there were material transactions between the divisions, in which case separate disclosures could be misleading.
The items described in paragraphs 6.9A.144 to 6.9A.201, to the extent not provided in the previous bullet point. [IFRS 7 para 34(b)]. These are IFRS 7’s minimum disclosure requirements, regardless of whether management uses this information to manage the entity’s risks.
Concentrations of risk if not apparent from the disclosures made in accordance with the previous two bullet points (see para 6.9A.144 below).
[IFRS 7 para 34].

6.9A.144 Concentrations of risk arise from financial instruments that have similar characteristics and are affected similarly by changes in economic or other conditions. The identification of concentrations of risk requires judgement taking into account the entity’s circumstances. Disclosure of concentrations of risk should include:

A description of how management determines concentrations (see para 6.9A.145 below).
A description of the shared characteristic that identifies each concentration (for example, counterparty, geographical area, currency or market).
The amount of the risk exposure associated with all financial instruments sharing that characteristic.
[IFRS 7 App B para 8].

6.9A.145 Concentrations of credit risk may arise from:

Industry sectors.
Thus, if an entity’s counterparties are concentrated in one or more industry sectors (such as retail or wholesale), it would disclose separately exposure to risks arising from each concentration of counterparties.
Credit rating or other measure of credit quality.
Thus, if an entity’s counterparties are concentrated in one or more credit qualities (such as secured loans or unsecured loans) or in one or more credit ratings (such as investment or non-investment grade), it would disclose separately exposure to risks arising from each concentration of counterparties.
Geographical distribution.
Thus, if an entity’s counterparties are concentrated in one or more geographical markets (such as Asia or Europe) it would disclose separately exposure to risks arising from each concentration of counterparties.
A limited number of individual counterparties or groups of closely related counterparties.
[IFRS 7 para IG18].

6.9A.146 Similar principles apply to identifying concentrations of other risks, including liquidity risk and market risk. For example, concentrations of liquidity risk may arise from the repayment terms of financial liabilities, sources of borrowing facilities or reliance on a particular market in which to realise liquid assets. Concentrations of foreign exchange risk may arise if an entity has a significant net open position in a single foreign currency, or aggregate net open positions in several currencies that tend to move together. [IFRS 7 para IG18].

6.9A.147 If the quantitative data disclosed as at the reporting date are unrepresentative of an entity’s exposure to risk during the period, an entity should provide further information that is representative. [IFRS 7 para 35]. To meet this requirement, an entity might disclose the highest, lowest and average amount of risk to which it was exposed during the period. For example, if an entity typically has a large exposure to a particular currency, but at year-end unwinds the position, the entity might disclose a graph showing the exposure at various times during the period, or disclose the highest, lowest and average exposures. [IFRS 7 para IG20]. In addition consider the following examples:
 
Example 1 – Year end credit risk exposure unrepresentative due to seasonal fluctuations
 
Entity Y is producing seeds for the agricultural industry. The main season for planting is the spring. 75% of entity Y’s markets are in the northern hemisphere; 25% are in the southern hemisphere. Entity Y’s account receivables are approximately C400 million in June and C100 million in December. Entity Y has a December year end. Does entity Y have to disclose additional information about its exposure to credit risk on the receivables that is representative of its exposure to risk during the year?
 
In this case, the December year end exposure to credit risk is unrepresentative of the entity’s exposure during the period. Entity Y should provide further information that is representative, such as a description (with amounts) of how the exposures vary during the year, or the average (or highest) exposure to credit risk during the year.
 
Example 2 – Year end credit risk exposure unrepresentative due to a major acquisition
 
On 30 November 20X6, entity A (€ functional currency) acquires a major competitor. Due to the acquisition, the US$ denominated receivables increased from $100 million to $300 million and variable interest rate debt doubled from €200 million to €400 million compared to the balances as at 30 June 20X6. Entity A has a December year end. The balances as of 31 December 20X6 are considered to be representative of the next year(s). Does entity A have to disclose additional information that is representative of its exposure to risk during the year?
 
In this scenario, entity A should disclose additional information because the quantitative data as at 31 December 20X6 is not representative of the financial period 20X6. A mere statement that the data is not representative is not sufficient. To meet IFRS 7’s requirement the entity might disclose the highest, lowest and average amount of risk to which it was exposed during the period. However, a full high/low/average analysis might not be required if the exposure at the year end is representative for future periods and if sufficient explanations of the facts and circumstances are provided.

Financial instrument risk disclosures - Credit risk

Publication date: 08 Dec 2017


6.9A.148 Activities that give rise to credit risk include, but are not limited to:

Granting loans and receivables to customers and placing deposits with other entities. In these cases, the maximum exposure to credit risk is the carrying amount of the related financial assets.
Entering into derivative contracts (for example, foreign exchange contracts, interest rate swaps and credit derivatives). When the resulting asset is measured at fair value, the maximum exposure to credit risk at the reporting date will equal the carrying amount.
Granting financial guarantees. In this case, the maximum exposure to credit risk is the maximum amount the entity could have to pay if the guarantee is called on, which may be significantly greater than the amount recognised as a liability.
Making a loan commitment that is irrevocable over the life of the facility or is revocable only in response to a material adverse change. If the issuer cannot settle the loan commitment net in cash or another financial instrument, the maximum credit exposure is the commitment’s full amount. This is because it is uncertain whether the amount of any undrawn portion may be drawn upon in the future. This may be significantly greater than the amount recognised as a liability.
[IFRS 7 App B para 10].

6.9A.149 IFRS 7 requires an entity to disclose information about its exposure to credit risk by class of financial instrument. Financial instruments in the same class share economic characteristics with respect to the risk being disclosed (in this case, credit risk). For example, an entity might determine that residential mortgages, unsecured consumer loans, and commercial loans each have different economic characteristics. The information an entity should disclose by class of financial instrument is as follows:

The amount that best represents its maximum exposure to credit risk at the reporting date without taking account of any collateral held or other credit enhancements (for example, netting agreements that do not qualify for offset in accordance with IAS 32 – see para 6.9A.33 above). This disclosure is not required for financial instruments whose carrying amount best represents the maximum exposure to credit risk.
A description of collateral held as security and of other credit enhancements (see para 6.9A.152 below). A description is required of the financial effect of collateral held as security and of other credit enhancements (for example, a quantification of the extent to which collateral and other credit enhancements mitigate credit risk) in respect of the amount that best represents the maximum exposure to credit risk (whether disclosed in accordance with the previous bullet point or represented by the carrying amount of a financial instrument).
Information about the credit quality of financial assets that are neither past due nor impaired (see para 6.9A.154 below).
[IFRS 7 para 36].

6.9A.150 The above disclosures do not apply to an entity’s holdings of equity investments. This is because the definition of equity in IAS 32 requires that the issuer has no obligation to pay cash or transfer other assets. Therefore, such equity investments are subject to price risk, not credit risk. The only exception is where such financial assets have been impaired. They will then require the disclosure discussed in second bullet of paragraph 6.9A.155.

6.9A.151 In respect of the first bullet point in paragraph 6.9A.149 above, the amount that best represents the entity’s maximum exposure to credit risk relating to financial assets is typically the gross carrying amount, net of:

any amounts offset in accordance with IAS 32 (see para 6.9A.21 above); and
any impairment losses recognised in accordance with IAS 39.
[IFRS 7 App B para 9].
 
However, the effect of any netting agreements that do not result in offset in accordance with IAS 32 are not taken into account, but should be included in the disclosures set out in paragraph 6.9A.89.

Financial instrument risk disclosures - Credit risk - Collateral and other credit enhancements

Publication date: 08 Dec 2017


6.9A.152 In respect of the second bullet point in paragraph 6.9A.149, an entity’s description about collateral held as security and other credit enhancements might include:

The policies and processes for valuing and managing collateral and other credit enhancements obtained.
A description of the main types of collateral and other credit enhancements (examples of the latter being guarantees, credit derivatives and netting agreements that do not qualify for offset in accordance with IAS 32).
The main types of counterparties to collateral and other credit enhancements and their creditworthiness.
Information about risk concentrations within the collateral or other credit enhancements.
[IFRS 7 para IG22].

6.9A.153 When an entity obtains financial or non-financial assets during the period by taking possession of collateral it holds as security or calling on other credit enhancements, and such assets meet the recognition criteria in other IFRSs, an entity should disclose for such assets held at the reporting date:

The nature and carrying amount of the assets; and
when the assets are not readily convertible into cash, its policies for disposing of such assets or for using them in its operations.
[IFRS 7 para 38].
 
The 2010 annual improvements to IFRS 7 clarified that these disclosures are required only for foreclosed collateral at the balance sheet date. This amendment applies to annual periods beginning on or after 1 January 2011.

Financial instrument risk disclosures - Credit risk - Credit quality of financial assets that are neither past due nor impaired

Publication date: 08 Dec 2017


6.9A.154 In respect of the third bullet point in paragraph 6.9A.149, information about credit quality of financial assets that are neither past due nor impaired, paragraphs IG23 to IG25 of IFRS 7 provide disclosures which might be included.

Financial instrument risk disclosures - Credit risk - Financial assets that are either past due or impaired

Publication date: 08 Dec 2017


6.9A.155 A financial asset is past due when the counterparty has failed to make a payment when contractually due. As an example, an entity enters into a lending agreement that requires interest to be paid every month. On the first day of the next month, if interest has not been paid, the whole loan is past due, not just the interest. Past due does not mean that a counterparty will never pay, but it can trigger various actions such as renegotiation, enforcement of covenants, or legal proceedings. [IFRS 7 para IG26]. An entity should disclose by class of financial asset:

An analysis of the age of financial assets that are past due as at the reporting date but not impaired. The purpose of this disclosure is to provide users of the financial statements with information about those financial assets that are more likely to become impaired and to help users to estimate the level of future impairment losses. Thus, the entire balance which relates to the amount past due should be disclosed, rather than only the amount that is past due, as this is the amount that would be disclosed as the amount of the impaired financial assets if impairment crystallises.

Other associated balances due from the same debtor are not included if the debtor has not yet failed to make a payment on these balances when contractually due. 

In preparing such an age analysis of financial assets, an entity uses its judgement to determine an appropriate number of time bands. For example, an entity might determine that the following time bands are appropriate:
  Not more than three months.
  More than three months and not more than six months.
  More than six months and not more than one year.
  More than one year.
An analysis of financial assets that are individually determined to be impaired as at the reporting date, including the factors the entity considered in determining that they are impaired. These disclosures are not only given in the year of impairment, but also in each subsequent reporting period during which the asset is ‘impaired’. Such an analysis might include:
  The carrying amount, before deducting any impairment loss.
  The amount of any related impairment loss.
  The nature and fair value of collateral available and other credit enhancements obtained.

Example – Assessment of receivables individually determined to be impaired
   
Entity M has C300m of receivables which it has analysed as follows:
   
C120m has been assessed individually for impairment and are considered to be impaired.
■  C40m represents a collection of insignificant receivables that are individually determined to be impaired, but the impairment calculation is performed on the whole C40m amount for efficiency purposes.
C140m represents a portfolio of receivables for which there is observable data indicating that there is a measurable decrease in the estimated future cash flows, although the decrease cannot be identified with individual balances.
   
Of these, only the first two amounts have been individually assessed for impairment and so would require disclosure under IFRS 7. [IFRS 7 para 36(b)]. Disclosure would not be required in respect of the third bullet, as the receivables have been assessed on a portfolio basis rather than individually.
[IFRS 7 paras 37, IG28-IG29].

[The next paragraph is 6.9A.157.]

Financial instrument risk disclosures - Liquidity risk

Publication date: 08 Dec 2017


6.9A.157 Summary quantitative data about an entity’s exposure to liquidity risk should be disclosed on the basis of the information provided internally to key management personnel. An entity should explain how those data are determined. If the outflows of cash (or another financial asset) included in those data could either:

occur significantly earlier than indicated in the data; or
be for significantly different amounts from those indicated in the data (for example, for a derivative that is included in the data on a net settlement basis, but for which the counterparty has the option to require gross settlement),
   
the entity should state that fact and provide quantitative information that enables users of its financial statements to evaluate the extent of liquidity risk, unless that information is included in the maturity analyses described in paragraph 6.9A.160 below. [IFRS 7 App B para 10A]. An example of a cash outflow that could occur significantly earlier than indicated in the data could be a bond that is callable by the issuer in, say, two years but has a remaining contractual maturity of, say, ten years.

6.9A.158 In respect of liquidity risk, an entity should disclose:

A maturity analysis for non-derivative financial liabilities (including issued financial guarantee contracts) that shows the remaining contractual maturities.
A maturity analysis for derivative financial liabilities. The maturity analysis should include the remaining contractual maturities for those derivative financial liabilities for which contractual maturities are essential for an understanding of the timing of the cash flows.
A description of how it manages the liquidity risk inherent in the above.
[IFRS 7 para 39].

6.9A.159 This information can be summarised in one or several maturity analysis tables. It should be clear for the users of the financial statements whether the disclosure is based on contractual maturities or, for derivatives, expected maturities and whether the financial liabilities are derivatives or non-derivatives.

6.9A.160 In preparing the contractual maturity analyses described in paragraph 6.9A.158, an entity uses its judgement to determine an appropriate number of time bands. For example, an entity might determine that the following time bands are appropriate:

Not later than one month.
Later than one month and not later than three months.
Later than three months and not later than one year.
Later than one year and not later than five years.
[IFRS 7 App B para 11].

6.9A.161 For the maturity analyses based on contractual cash flows, when a counterparty has a choice of when an amount is paid, the liability is included on the basis of the earliest date on which the entity can be required to pay. For example, financial liabilities that an entity can be required to repay on demand (for example, demand deposits) are included in the earliest time band. [IFRS 7 App B para 11C(a)].

6.9A.162 When an entity is committed to make amounts available in instalments, each instalment is allocated to the earliest period in which the entity can be required to pay. For example, an undrawn loan commitment is included in the time band containing the earliest date it can be drawn down. [IFRS 7 App B para 11C(b)].

6.9A.163 When an entity has issued a financial guarantee contract, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called. [IFRS 7 App B para 11C(c)].

6.9A.164 The maximum amount of an undrawn loan commitment should also be included in the maturity analysis, allocated to the earliest period in which the commitment could be called. Once a loan is drawn down, it will be included in the maturity analysis as a non-derivative financial liability.

6.9A.165 The amounts disclosed in the maturity analyses on a contractual basis (see para 6.9A.157) are the contractual undiscounted cash flows (including principal and interest payments). For example:

Gross finance lease obligations (before deducting finance charges).
Prices specified in forward agreements to purchase financial assets for cash.
Net amounts for pay-floating receive-fixed interest rate swaps for which net cash flows are exchanged.
Contractual amounts to be exchanged in a derivative financial instrument (for example, a currency swap) for which gross cash flows are exchanged.
Gross loan commitments.
[IFRS 7 App B para 11D].

6.9A.166 The undiscounted cash flows described above differ from the amounts included in the balance sheet, which are based on discounted cash flows. There is no specific requirement to reconcile the amounts disclosed in the maturity analysis to the amounts included in the balance sheet.

6.9A.167 When the amount payable is not fixed, the amount disclosed in the maturity analyses is determined by reference to the conditions existing at the end of the reporting period. For example, when the amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the end of the period. [IFRS 7 App B para 11D]. For floating rate financial liabilities and foreign currency denominated instruments, the use of forward interest rates and forward foreign exchange rates may be conceptually preferable, but the use of a spot rate at the end of the period is also acceptable. Whichever approach is adopted (that is, current/spot rate or forward rate at the reporting date), it should be applied consistently.

6.9A.168 As noted in paragraph 6.9A.158, the contractual cash flows of derivative financial liabilities for which contractual maturities are essential for an understanding of the cash flows should be included in maturity analysis. For example, this would be the case for the following:
 
An interest rate swap with a remaining maturity of five years in a cash flow hedge of a variable rate financial asset or liability.
All loan commitments.
[IFRS 7 App B para 11B].

6.9A.169 Other derivatives are included in a separate maturity analysis on the basis on which they are managed. It may be expected that contractual maturities are essential for an understanding of the timing of cash flows for derivatives, unless the facts and circumstances indicate another basis is appropriate. For example, contractual maturities would not be essential for an understanding of the derivatives in a trading portfolio that are expected to be settled before contractual maturity on a net basis. Disclosure of fair values of such derivatives on an expected maturity basis would, therefore, be appropriate.

6.9A.170 An entity should disclose a maturity analysis of financial assets that it holds for managing liquidity risk (for example, financial assets that are readily saleable or expected to generate cash inflows to meet cash outflows on financial liabilities), if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk. [IFRS 7 App B para 11E].

6.9A.171 IFRS 7 gives as an example of an amount included in the maturity analysis on a contractual undiscounted basis the amounts exchanged in a gross-settled derivative contract. The standard refers only to a maturity analysis for derivative financial liabilities, so it would appear that only disclosure of gross cash outflows (that is, the pay leg) in respect of derivative financial liabilities is required. However, it may be more helpful to also disclose the cash inflows (that is, the receive leg). As explained in paragraph 6.9A.170, IFRS 7 requires disclosure of a maturity analysis for financial assets where that information is necessary to enable users of financial statements to evaluate the nature and extent of liquidity risk. By analogy, we consider that disclosure of the receive leg in a gross-settled derivative financial liability will also often be necessary for an understanding of liquidity risk. A maturity analysis of derivative financial assets may also be required.

6.9A.172 A similar analysis to the previous paragraph applies in the case of gross-settled commodity contracts which fall within IAS 39’s scope. The associated cash outflows should be included in the maturity analysis where the contract is a financial liability at the reporting date (that is, it has a negative fair value) and where it will result in a cash outflow (rather than physical outflows of commodities). It may be helpful to disclose the contractual cash outflows of all commodity contracts, including those with both positive and negative fair values at the balance sheet date. Alternatively, it may be more meaningful to disclose gross-settled commodity contracts in a separate table showing both the cash inflows/outflows and the associated commodity outflows/inflows for all contracts. If this additional disclosure is given, an entity might cross-reference the cash outflows to the maturity analysis. Whichever of these alternative methods of presentation is adopted, the basis of preparation and measurement should be explained.

6.9A.173 The liquidity risk disclosures for derivative financial liabilities can be summarised as follows:

  Gross settled derivatives Net settled derivatives

Contractual maturity is essential to understanding

  • Disclose pay leg based on contractual maturity.
  • Disclose receive leg.
  • Disclose net cash flows based on contractual maturity.

Contractual maturity is not essential to understanding

Disclose how the risk is managed. For example, an entity might disclose:

  • Cash flows based on contractual maturities – pay and receive leg.
  • Fair value in the relevant time band (based on expected maturity (that is, expected settlement date); contractual maturity or in the on demand category).

Disclose how risk is managed. For example, an entity might disclose:

  • Net cash flows based on contractual maturity.
  • Fair value in the relevant time band (based on expected maturity (that is, expected settlement date); contractual maturity or in the on demand category).

6.9A.174 For the purpose of the maturity analysis, embedded derivatives included in hybrid (combined) financial instruments should not be separated. A hybrid instrument should be included in the maturity analysis for non-derivative financial liabilities. [IFRS 7 App B para 11A].

6.9A.175 Contracts settled in own shares that are not equity instruments of the issuer (for example, a contract that requires an entity to issue a fixed number of its own shares for a variable amount of cash upon the holder’s request) are not in the scope of the maturity analysis, as the entity will issue own shares to meet the above obligation and does not, therefore, have an obligation to deliver cash or another financial asset. An obligation to deliver own shares does not give rise to liquidity risk as defined by IFRS 7. [IFRS 7 para BC58A(a)].

6.9A.176 The factors that an entity might consider in providing a description of how it manages liquidity risk include, but are not limited to, whether the entity:

Has committed borrowing facilities (for example, commercial paper facilities) or other lines of credit (for example, stand-by credit facilities) that it can access to meet liquidity needs.
Holds deposits at central banks to meet liquidity needs.
Has very diverse funding sources.
Has significant concentrations of liquidity risk in either its assets or its funding sources.
Has internal control processes and contingency plans for managing liquidity risk.
Has instruments that include accelerated repayment terms (for example, on the downgrade of the entity’s credit rating).
Has instruments that could require the posting of collateral (for example, margin calls for derivatives).
Has instruments that allow the entity to choose whether it settles its financial liabilities by delivering cash (or another financial asset) or by delivering its own shares.
Has instruments that are subject to master netting agreements.
[IFRS 7 App B para 11F].

6.9A.177 Collateral requirements on financial instruments can pose a significant liquidity risk. For example, an entity with a derivative liability may be required to post cash collateral on the derivative should the liability exceed certain limits. As a result, if collateral calls pose significant liquidity risk, entities should provide quantitative disclosures of their collateral arrangements as those cash flows could occur earlier than the contractual maturity (see also para 6.9A.157).

6.9A.178 Financial institutions typically use financial assets to manage their liquidity risk. A maturity analysis of financial assets is likely to be necessary to enable users of financial statements to evaluate the nature and extent of liquidity risk. However, the disclosure requirements are not only relevant for financial institutions. Certain other types of entities with significant trading activities (such as energy companies) may hold financial assets to manage liquidity risk. Where such activities are a significant part of the entity’s business, a maturity analysis of financial assets may be required.

6.9A.179 Where an entity presents a maturity analysis of financial assets, it should be prepared on the basis of information provided internally to key management personnel. It may be based either on contractual or expected maturity dates, depending on how the risk is managed. Alternatively, the analysis could be presented on a net basis (that is, fair value).

6.9A.180 The examples that follow illustrate how a maturity analysis may be prepared on a contractual basis for some typical financial instruments.

Example 1 – Floating rate notes
 
On 1 January 20X6 entity A issued two-year, US$30m floating rate notes that pay interest of 6m LIBOR plus 2%. The notes mature on 31 December 20X8.
 
Principal is redeemable at maturity. The carrying amount at the balance sheet date is US$30m (C21.6m).
 
The functional currency of the entity is C (currency units).
 
The spot rate at the balance sheet date is US$ = C0.72
 
The 6 month LIBOR at the balance sheet date is 5% per annum.
 
Scenario 1 – Contractual cash flows of the notes (using spot rates at the balance sheet date) 
 
  30 Jun 20X7 31 Dec 20X7 30 Jun 20X8 31 Dec 20X8 Total
Principal (US$) 30,000 30,000
Interest payments (LIBOR + 2%) 1,050 1,050 1,050 1,050 4,200

Total (in US$) 1,050 1,050 1,050 31,050 34,200

US/C spot rate as at 31 Dec 20X6 0.72 0.72 0.72 0.72 0.72

Total cash flows (in C) 756 756 756 22,356 24,624

           
Scenario 2 – Contractual cash flows of the notes (using forward rates available at the balance sheet date)
 
6m LIBOR yield curve 5.25% 5.50% 5.75% 5.40%  
6m LIBOR yield curve + 2% per annum 7.25% 7.50% 7.75% 7.40%  
           
  30 Jun 20X7 31 Dec 20X7 30 Jun 20X8 31 Dec 20X8 Total
Principal (US$) 30,000 30,000
Interest payments (LIBOR+2%) 1,088 1,125 1,163 1,110 4,486

Total (in US$) 1,088 1,125 1,163 31,110 34,486

US/C forward rate as at 31 Dec 20X6 0.75 0.78 0.79 0.76  

Total cash flows (in C) 816 878 919 23,644 26,257

           
Liquidity analysis            
             
Analysis (based on spot rates)            
             
Financial liabilities as at 31 Dec 20X6 Less than 1 month Between 1 and 3M Between 3M and 1Y Between 1 and 5Y Over 5Y Balance sheet amounts
Floating rate notes 1,512 23,112 21,600
 
             
Alternative answer based on forward rates            
             
Financial liabilities as at 31 Dec 20X6 Less than 1 month Between
1 and 3 months
Between
3 months and 1 year
Between
1 and 5 years
Over
5 years
Balance sheet amounts
Floating rate notes 1,694 24,563 21,600

             
 
Either the spot rate or the forward rate could be used for the interest rate cash outflow calculation. The forward rate would be based on a yield curve (which will show by how much LIBOR is expected to move each quarter/six months).
 
Both alternatives are acceptable provided they are properly disclosed and applied consistently.
 
The sum of all the amounts in the maturity analysis does not reconcile to the balance sheet amount. This is because the liquidity analysis is based on the undiscounted cash flows.

Example 2 – Interest rate swap
 
Entity A entered into a two-year interest rate swap, notional value C10m, under which fixed interest of 5% per annum is received quarterly and actual 3 month LIBOR is paid. The contract is settled on a net basis. The swap has a negative fair value of C0.171m at the balance sheet date.
 
Estimated cash flows on the swap (C’000)
  31 Mar 20X7 30 Jun 20X7 30 Sept 20X7 31 Dec 20X7 31 Mar 20X8 30 Jun 20X8 30 Sept 20X8 31 Dec 20X8 Total
Fixed leg (receives fixed) 125 125 125 125 125 125 125 125  
                   
Variable leg (pays 3 month LIBOR) -110 -122 -136 -150 -155 -160 -172 -186  

Undiscounted net cash flows 15 3 -11 -25 -30 -35 -47 -61 -191

Discounted cash flows 15 3 -11 -24 -28 -32 -42 -54 -171

                   
 
Only derivatives with a negative fair value (financial liabilities) at the balance sheet date need be included in the liquidity analysis. The cash flows to be included are those undiscounted cash flows that result in an outflow for the entity at each reporting date. While the standard only requires the gross cash outflows (that is, the pay leg) to be included in the maturity analysis, separate disclosure of the corresponding inflows (that is, the receive leg) might make the information more meaningful in the case of gross settled derivatives.
 
Liquidity analysis (based on forward rates)
 
Financial liabilities as of 31 Dec 20X6 Less than 1 month Between 1 and 3 months Between 3 months and 1 year Between 1 and 5 years Over 5 years Balance sheet amounts
             
Interest rate swaps   15 -33 -173   -171


6.9A.181 For some instruments, such as perpetual bonds and written put options, it is difficult to determine how, if at all, to include amounts in the maturity analysis. In the case of perpetual bonds, where the debtor/issuer has a call option to redeem the bond, the debtor/issuer has discretion over the repayment of the principal. Until the option is exercised, the bond’s contractual terms are that it is a non-redeemable perpetual bond. Once the call option is exercised, the bond’s contractual terms are changed and the bond has a maturity date. If the call option was not exercised, then the undiscounted cash flows would be paid in perpetuity. This raises the question of what amount should be shown in the last time band. The standard does not deal explicitly with such a situation so a number of alternative approaches could be applied. One would be to include the principal amount in the last time band. Another option would be not to include any cash flows in the last time band, but disclose the principal amount in time band entitled ‘no maturity’. Whatever form of disclosure is chosen, this is an area where it will be important to provide a clear narrative description of the instrument’s terms.

6.9A.182 The inclusion of an ‘out of the money’ written put option (financial liability) in the maturity analysis will depend on whether the option is settled net or gross. If the option is out of the money and net settled, no liability is required to be disclosed in the maturity table, because there is no obligation to make a payment based on the conditions existing at the balance sheet date. [IFRS 7 App B para 11D]. However, for gross settled derivatives where the counterparty can force the issuer to make a payment, the pay leg is disclosed in the liquidity table in the earliest time bucket irrespective of whether the instrument is in or out of the money. An American style option should be disclosed in the earliest time band, a European style option depending on the exercise date.

6.9A.183 A narrative disclosure should explain that written options have been included based on their intrinsic value and that the amount actually payable in the future may vary if the conditions change. This is supported by paragraph 10A(b) of appendix B to IFRS 7, which states that an explanation is required if the outflows of cash included in the maturity analysis could be significantly different from those disclosed in the contractual maturity table.

[The next paragraph is 6.9A.185.]

Financial instrument risk disclosures - Market risk - Sensitivity analysis

Publication date: 08 Dec 2017


6.9A.185 Unless an entity complies with the requirements discussed in paragraph 6.9A.196 below, it should disclose:

A sensitivity analysis for each type of market risk to which the entity is exposed at the reporting date, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date. The sensitivity analysis should show the effect of changes over the period until the entity next presents these disclosures, which usually is its next annual report. [IFRS 7 App B para 19(b)]. Note that the standard requires this disclosure based on reasonably possible changes and not on a ‘worst case scenario’ or ‘stress test’. Risk variables that are relevant to disclosing market risk include, but are not limited to:
  The yield curve of market interest rates. It may be necessary to consider both parallel and non-parallel shifts in the yield curve.
  Foreign exchange rates.
  Prices of equity instruments.
  Market prices of commodities.
The methods and assumptions used in preparing the sensitivity analysis.
Changes from the previous period in the methods and assumptions used and the reasons for such changes.
[IFRS 7 para 40].

6.9A.186 In providing the sensitivity analysis for each type of market risk, an entity should decide how it aggregates information to display the overall picture without combining information with different characteristics about exposures to risks from significantly different economic environments. Entities are not required to disclose the effect for each change within a range of reasonably possible changes of the relevant risk variable. Disclosure of the effects of the changes at the limits of the reasonably possible range would be sufficient. [IFRS 7 App B paras 18 to 19]. For example, an entity that trades financial instruments might disclose this information separately for financial instruments held for trading and those not held for trading. Similarly, an entity would not aggregate its exposure to market risks from areas of hyperinflation with its exposure to the same market risks from areas of very low inflation. Conversely, if an entity has exposure to only one type of market risk in only one economic environment, it would not show disaggregated information. [IFRS 7 App B para 17].

6.9A.187 In addition, where there are changes in volatility, an entity should not restate the prior year disclosures. For example, where the reasonable possible change in an exchange rate changes from 5% in the prior year to 8% in the current year, the prior year disclosures should not be restated. An entity could, however, present additional sensitivity information for the comparative period.

6.9A.188 For the purposes of disclosing the effect on profit or loss and equity of reasonably possible changes in the relevant risk variable, for example interest rate risk, as required by the first bullet point of paragraph 6.9A.185 above, an entity might show separately the effect of a change in market rates on:

Interest income and expense.
Other line items of profit or loss (such as trading gains and losses).
When applicable, equity.
[IFRS 7 para IG34].

6.9A.189 An entity might disclose a sensitivity analysis for interest rate risk for each currency in which the entity has material exposures to interest rate risk. Similarly, a sensitivity analysis is disclosed for each currency to which an entity has significant exposure. [IFRS 7 paras IG34, App B para 24].

6.9A.190 This disclosure would also be relevant to those instruments where an entity has effectively hedged the interest rate risk, as illustrated in the following example.

Example – A bond hedged for variable interest rate risk

An entity hedges its exposure to variable interest rate risk on an issued bond. The hedge is designated as a cash flow hedge. The bond and the hedging instrument (interest rate swap) have a five-year remaining life. The variable leg of the swap exactly matches the variable interest of the bond (causing no ineffectiveness).

The high effectiveness of the hedge does not necessarily mean that there would be no impact on equity or profit or loss due to changes in interest rate risk. The accounting for a cash flow hedge means that the fair value movement related to the effective part of the hedging instrument is included in other comprehensive income. Amounts deferred in other comprehensive income are recycled in profit or loss when the hedged transaction occurs. Hence, reasonably possible movements in the interest rate risk exposure have an impact on both profit or loss and equity.

At the same time, reasonably possible movements in the interest rate risk exposure on the outstanding bond would have an opposite impact on profit or loss, as the bond pays variable interest.

If the effects of recycling and ineffectiveness are not material, the entity could consider the following disclosure as an approximation for the sensitivity analysis: “The movements related to the bond and the swap’s variable leg are not reflected as they offset each other. The movements related to the remaining fair value exposure on the swap’s fixed leg are shown in the equity part of the analysis”.

6.9A.191 It should be noted that for the purposes of disclosing a sensitivity analysis for foreign currency risk, translation related risk is not taken into account. This is because foreign currency risk can only arise on financial instruments that are denominated in a currency other than the functional currency in which they are measured. [IFRS 7 App B para 23]. Translation exposures arise from financial and non-financial items held by an entity (for example, a subsidiary) with a functional currency different from the group’s presentation currency. Therefore, translation-related risks are not taken into consideration for the purpose of the sensitivity analysis for foreign currency risks. This also includes quasi-equity loans (foreign currency inter-company loans that are part of the net investment in a foreign operation). On the other hand, any loans or derivatives used as hedges of translation risk should be included within the sensitivity analysis. Also, foreign currency denominated inter-company receivables and payables would be included because, even though they cancel in the consolidated balance sheet, the effect on profit or loss of their revaluation under IAS 21 is not fully eliminated. Although they cannot be included within the analysis of foreign currency risks, additional translation risks can, however, be separately disclosed. This may be appropriate where an entity manages its translation risks together with its foreign currency transaction risks (for example, where a forward contract hedges movements in the re-translation of a foreign operation).

6.9A.192 In the same way that translation exposures may have an impact on equity but are not included in the sensitivity analysis, there are other items that may be exposed to market price risk, but which are not necessarily included. For example, consider instruments that expose an entity to changes in its own share price. These include entities that have issued warrants with a foreign currency exercise price, those that have issued convertible debt that fails the ‘fixed for fixed’ requirement in IAS 32 and those that have issued share-based compensation awards that are classified as liabilities. In the first two cases, the entity should disclose information about the effect of reasonably possible changes in its share price on its profit or loss and equity. This is because the first two instruments are in the scope of IAS 39 and, therefore, in the scope of IFRS 7. The third instrument, although classified as a liability, is outside the scope of IAS 39 as it is accounted for under IFRS 2. It, therefore, also falls outside the IFRS 7’s scope.

6.9A.193 Because the factors affecting market risk vary depending on the specific circumstances of each entity, the appropriate range to be considered in providing a sensitivity analysis of market risk varies for each entity and for each type of market risk. [IFRS 7 para IG35].

6.9A.194 However, an entity is not required to determine what the profit or loss for the period would have been if relevant risk variables had been different. Instead, it should disclose the effect on profit or loss and equity at the balance sheet date, assuming that a reasonably possible change in the relevant risk variable had occurred at the balance sheet date and had been applied to the risk exposures in existence at that date. For example, if an entity has a floating rate liability at the end of the year, the entity would disclose the effect on profit or loss (that is, interest expense) for the current year if interest rates had varied by reasonably possible amounts. [IFRS 7 App B para 18(a)].

6.9A.195 Furthermore, an entity is not required to disclose the effect on profit or loss and equity for each change within a range of reasonably possible changes of the relevant risk variable. Disclosure of the effects of the changes at the limits of the reasonably possible range would be sufficient. [IFRS 7 App B para 18(b)].

6.9A.196 If an entity prepares a sensitivity analysis, such as value-at-risk (VaR), that reflects interdependencies between risk variables (for example, interest rates and exchange rates) and uses it to manage financial risks, it may use that sensitivity analysis in place of the analysis described above. However, a precondition for disclosing sensitivity in such a format (VaR) is that the company uses VaR in managing its financial risks. It cannot choose just to apply VaR for disclosures purposes but continue to manage each risk variable separately. In addition, it is likely that outstanding inter-company foreign currency receivables and payables at the year-end are not considered in the VaR model. If this is the case, the entity will need to prepare additional sensitivity disclosures for these amounts (see para 6.9A.191 above). The entity should also disclose:

an explanation of the method used in preparing such a sensitivity analysis, and of the main parameters and assumptions underlying the data provided; and
an explanation of the objective of the method used and of limitations that may result in the information not fully reflecting the fair value of the assets and liabilities involved.
[IFRS 7 para 41].

6.9A.197 In view of the requirement for VaR to be used in managing financial risk, IFRS 7 recognises that the measure used may not reflect the full potential risk over the next reporting period. [IFRS 7 App B para 20]. For example, an entity may use a 10 day VaR, or a measure that recognises only the potential for loss and not the potential for gain.

[The next paragraph is 6.9A.199.]

Financial instrument risk disclosures - Market risk - Other market risk disclosures

Publication date: 08 Dec 2017


6.9A.199 When the sensitivity analyses disclosed in accordance with paragraph 6.9A.185 above are unrepresentative of a risk inherent in a financial instrument (for example because the year-end exposure does not reflect the exposure during the year), the entity should disclose that fact and the reason it believes the sensitivity analyses are unrepresentative. [IFRS 7 para 42].

6.9A.200 As noted above, the sensitivity analysis might be unrepresentative of a risk inherent in a financial instrument where the year-end exposure does not reflect the exposure during the year. Other circumstances include the following:

A financial instrument contains terms and conditions whose effects are not apparent from the sensitivity analysis, for example options that remain out of (or in) the money for the chosen change in the risk variable. In such a situation, additional disclosure might include:
  the terms and conditions of the financial instrument (for example, the options);
  the effect on profit or loss if the term or condition were met (that is, if the options were exercised); and
  a description of how the risk is hedged.
Financial assets are illiquid, for example, when there is a low volume of transactions in similar assets and an entity finds it difficult to find a counterparty. In such a situation, additional disclosure might include the reasons for the lack of liquidity and how the entity hedges the risk.
An entity has a large holding of a financial asset that, if sold in its entirety, would be sold at a discount or premium to the quoted market price for a smaller holding. In such a situation, additional disclosure might include:
  The nature of the security (for example, entity name).
  The extent of holding (for example, 15% of the issued shares).
  The effect on profit or loss.
  How the entity hedges the risk.
[IFRS 7 para IG37-40].

6.9A.201 An entity should provide sensitivity analyses for the whole of its business, but may provide different types of sensitivity analysis for different classes of financial instruments. [IFRS 7 App B para 21].

6.9A.202 The sensitivity of profit or loss (that arises, for example, from instruments classified as at fair value through profit or loss and impairments of available-for-sale financial assets) is disclosed separately from the sensitivity of equity (that arises, for example, from instruments classified as available for sale). [IFRS 7 App B para 27]. For example, where the fair value of a non-monetary available-for-sale asset is close to the impairment threshold, an entity should distinguish between profit or loss and equity effects, taking into consideration its impairment policy. In cases where the asset is already impaired, the downward shift (due to the impairment) should be shown as affecting the profit or loss while the upward shift should be shown as affecting equity.

6.9A.203 Financial instruments that an entity classifies as equity instruments are not remeasured. Neither profit or loss nor equity will be affected by the equity price risk of those instruments. Accordingly, no sensitivity analysis is required. [IFRS 7 App B para 28].

Financial instrument risk disclosures - Disclosures on transition to IFRS 9

Publication date: 08 Dec 2017


6.9A.204 IFRS 7 requires certain disclosures when an entity first applies IFRS 9. IFRS 9 also includes consequential amendments to the disclosure requirement of IFRS 7. These amendments are detailed in chapter 42.
 
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