Objective

This chapter covers two aspects of presentation of financial instruments: presentation of items as current or non-current; and the principles relating to offsetting. It also addresses the disclosure of financial instruments.

Presentation as current or non-current

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 where a presentation based on liquidity provides information that is reliable and is more relevant. Where that exception applies, all assets and liabilities should be presented broadly in order of liquidity.

Current and non-current assets

If 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.

Current assets include the current portion of non-current financial assets and some financial assets held primarily for the purpose of trading, such as those that meet the definition of held for trading in IFRS 9.

Classification of trading and hedging derivatives as current or non-current f IAS 1 identifies that an entity should classify assets as current assets 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. Applying the above definition, it could be argued that financial assets that meet the definition of ‘held for trading’, in accordance with IFRS 9, should be presented as current assets. However, 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’ definition in IFRS 9. Rather, the requirements of paragraph 66 of IAS 1 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. 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.

Current and non-current liabilities

If an entity presents assets and liabilities as either current or non-current, it 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.

Classification of financial liabilities as current or noncurrent Similar to financial assets, where a portion of a financial liability (including a hedging derivative) is expected to be settled within 12 months after 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.

Under IAS 32, the equity and liability components of financial instruments must be classified separately as financial liabilities, financial assets or equity instruments.

Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

Classification of the liability component where the instrument is convertible to equity at any time within the next 12 months The liability component of financial instruments should be classified as current or non-current, depending on the terms of the contract. A question arises whether the liability component of a convertible financial instrument should be presented as current or non-current where 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 holder’s 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 the holder at the maturity date, which is more than one year after the balance sheet date. 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 where it is 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 repayable 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.

Classification of puttable debt that is puttable by the holder within the next 12 months An entity has 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 IFRS 9 requires the put option to be accounted for as a separate embedded derivative and, if it does, irrespective 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.

The presentation of financial liabilities as current or non-current should take account of similar considerations to financial assets. 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 where 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.

The current or non-current classification of financial liabilities is governed by the condition of those liabilities at the balance sheet date. If 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. If 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. However, if the entity expects to settle the obligation within 12 months, despite having the discretion to refinance for a longer period, the debt should be classified as current.

Rolling over of bank facilities An entity 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 three years from the balance sheet date. The entity has drawn down funds on this facility and these funds are due to be repaid six months after the balance sheet date. The entity intends to roll over this debt through the three-year facility arrangement. How should this borrowing be shown in the entity’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 entity is entitled to ‘roll over’ this borrowing into a ‘new loan’. The substance is, therefore, that the debt is not repayable until three years after the balance sheet date, when the committed facility expires. In addition, the entity expects to roll over the debt, so it 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 entity 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 loan. 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, because it is likely that the backup facility would be provided by a different bank.

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 covenants are measures of liquidity or solvency, based on ratios derived from the entity’s financial statements. If 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 nonadjusting post balance sheet event. The agreement of the lender had not been obtained at the year end, the condition of the borrowing at the balance sheet date was that it was immediately repayable, and it should, therefore, be shown as a current liability.

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, the liability should be shown as noncurrent. If the breach of the borrowing covenant occurs after the balance date, 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, the liability would be classified as current. The loan’s presentation is dictated by the loan’s condition as at the balance sheet date. Events after the balance sheet date might provide evidence of that condition, but they do not change it. This is consistent with IAS 10.

Breaches of banking covenants Breaches of borrowing covenants focus 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, 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.

Although post balance sheet events might not alter the liability’s classification, they might require disclosure as a non-adjusting event. 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.

IAS 10 requires disclosures of the nature and financial effects for each material category of non-adjusting event after the balance sheet date.

Offsetting a financial asset and a financial liability

General principle

A financial asset and a financial liability should be offset when, and only when, both of the following 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.

If the offset conditions are satisfied, and the entity has the right to receive or pay a single net amount and it 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. If 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.

There can be situations where there are transfers of financial assets that do not qualify for de-recognition and, in such cases, the entity has to recognise an associated liability. Derecognising a financial instrument not only results in the removal of the previously recognised item from the balance sheet, but it might also result in recognition of a gain or loss. Offsetting does not give rise to recognition of a gain or loss. When considering presentation of particular items, recognition, de-recognition and measurement need to be considered first.

Legal right of offset

A right of set-off is “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” . The conditions supporting the right might vary from one legal jurisdiction to another and, therefore, the laws applicable to the relationships between the parties would need to be considered carefully. 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.

A debtor might 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.

An 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.

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).

Intention to settle on a net basis

In order to achieve offset, an entity must have both the right to set off and the intention to do so. 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 might affect its exposure to credit and liquidity risk, it is, by itself, not a sufficient basis for offsetting. 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.

An entity’s intentions with respect to settlement of particular assets and liabilities might be influenced by its normal business practices, the requirements of financial markets and other circumstances that might limit the ability to settle net or to settle simultaneously. If an entity has the right of offset, but does not intend to settle net, this will have an effect on the entity’s credit risk exposure.

Simultaneous settlement

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 might 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 might 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, might be significant, and so net presentation is not appropriate.

The entity might have a right to settle net, but it might still realise the asset and settle the liability separately (for example, where balances are cleared through clearing houses or similar settlement systems). 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 of IAS 32 that the entity “ intends to either settle on a net basis or to realise the asset and settle the liability simultaneously ”. 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 IAS 32.

Situations where offset is usually inappropriate

In the following specific situations, the offset criteria are usually not met:

• Several different financial instruments are used to emulate the features of a single financial instrument (a ‘synthetic instrument’).

• 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 they 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.

Non-cash collateral Non-cash collateral received (rather than posted) by an entity, such as securities, will not be recognised on-balance sheet, because it will fail derecognition in the transferor, and so it does not provide the entity with any 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.

An example of a synthetic instrument is a floating-rate longterm debt combined with an interest rate swap that involves receiving floating payments and making fixed payments, which synthesises a fixedrate 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;
• can be transferred or settled separately; and is exposed to risks that might 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 net, unless they meet the criteria for offsetting.

Master netting arrangements

An entity might enter into a ‘master netting arrangement’ with a counterparty with which it undertakes a number of financial instrument transactions. Such an arrangement creates a right of set-off that becomes enforceable, and it 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. Such an agreement does not provide a basis for offsetting unless both of the offsetting criteria are satisfied. Where 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.

Cash management arrangements 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 have 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 might 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 might 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 IAS 32 should be satisfied. Group X should have a currently legally enforceable right to offset, 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 intention to settle the period end balances with the same counterparty, as clarified by the March 2016 IFRS IC agenda decision. A notional pooling, for the purpose of calculating interest that does not involve settlement of the associated balances, will not meet the requirements described. Assuming that the agreement with bank B gives group X the necessary legally enforceable right to offset, 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 might be circumstances where group X has separate cash and overdraft balances (for example, 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’, because the arrangement does not actually involve net cash settlement. Accordingly, the balances should be presented gross. ·        Where there is notional pooling with regular net settlement, entities will only be able to present notional pool balances net where they have the legal right and an intention to net settle the actual balances in place at the period end date. To the extent that the balances change between the period end and settlement date, the entity cannot demonstrate an intention to net settle the previous balance. 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 might be necessary if the amount at the balance sheet date does not reflect normal cash balances throughout the year.

Cash posted as collateral on derivatives Should cash collateral posted (for example, on a derivative) be netted with a balance sheet position? An entity might have entered into a derivative with a bank or clearing house. To reduce credit risk, the two entities might 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, bankruptcy or insolvency 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 offset 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.

Disclosure of financial instruments

IFRS 7 and IFRS 13 set out the disclosure requirements for financial instruments and fair value measurements, respectively. This chapter only considers the disclosure requirements of IFRS 7.

Scope of IFRS 7

IFRS 7 applies to all types of financial instrument, 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 and certain instruments required to be classified as equity instruments in accordance with IAS 32. IFRS 7’s scope is similar to IFRS 9. However, although leases as a lessee and finance leases as a lessor are mostly outside the scope of IFRS 9, they remain within the scope of IFRS 7. Operating leases as a lessor are not regarded as financial instruments, and so they are not in the scope of either IFRS 9 or IFRS 7, except for those individual payments that are currently due and payable.

Entities not in the financial services industry Consistent with IAS 32 and IFRS 9, IFRS 7 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 might 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.

Scope of IFRS 7 for subsidiaries IFRS 7 has no scope exemption for the financial statements of subsidiaries. The application of IFRS 7 to subsidiaries might present a challenge, because financial risk is often managed at a consolidated or group level.

Scope of IFRS 7 for commodity contracts 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 and fail the ‘own use’ exemption, or are settled through other financial instruments, are within 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. For internal reporting purposes, management might exclude ‘own use’ contracts when assessing the entity’s exposure to financial risks, such as liquidity risk, credit risk and market risk, or it might 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.

Scope of IFRS 7 for provisions, accruals and prepayments Provisions (as defined in IAS 37) are outside the scope of IFRS 7, because they are not financial instruments. Accruals representing a right to receive cash or obligations to deliver cash are within IFRS 7’s scope. For example, an accrual for goods received but not yet invoiced is within 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.

Scope of IFRS 7 for issued financial guarantee contracts Issued financial guarantee contracts are measured in accordance with IFRS 9’s impairment principles if the amount of loss allowance is higher than the unamortised premium amount, but they are financial instruments within IFRS 9’s scope and so are within IFRS 7’s scope. Financial guarantee contracts that are considered insurance contracts, and are measured in accordance with IFRS 4, are outside the scope of IFRS 7.

IFRS 7 applies to both recognised and unrecognised financial instruments.

Scope of IFRS 7 for recognised and unrecognised financial instruments Some loan commitments are outside IFRS 9’s scope for measurement, but are within the scope of IFRS 9 for de-recognition and impairment. Loan commitments 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 IFRS 9’s hedge accounting rules. 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.

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

Non-current assets held for sale and IFRS 7

There is no scope exemption in IFRS 7 for financial assets and liabilities within the scope of IFRS 5. 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. Since financial instruments measured in accordance with IFRS 9 are outside the scope of IFRS 5’s measurement requirements, the IFRS 7 and IFRS 13 disclosures (where applicable) should be given.

Objectives of IFRS 7

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. An entity provides disclosures in its financial statements that enable users to evaluate:

• The significance of financial instruments for the entity’s financial position and performance. This covers the 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.
• 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).

General matters

Classes of financial instruments

Certain disclosures are required to be given by class of financial instrument. 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.

Classes are potentially determined at a lower level than the measurement categories, and they need to be reconciled to the balance sheet. A ‘class’ of financial instruments is not the same as a ‘category’ of financial instruments. Categories are those listed in IFRS 7.

The level of detail for a class should be determined on an entity-specific basis, and it might 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.

Classes of financial instrument for a bank In the case of banks, the category ‘financial assets measured at amortised cost’ typically comprises more than one class that could include loans and certain investments. The loans could be further divided, unless the loans have similar characteristics. In this situation, it might be appropriate to group the loans into the following classes: ·        types of customers (for example, commercial loans and loans to individuals); or ·        types of loan (for example, mortgages, credit cards, unsecured loans and overdrafts). However, in some cases, ‘loans to clients’ can be one class if all of the loans have similar characteristics (for example, a savings bank providing only one type of loan to individuals).

Location, level of disclosure and aggregation

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. 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 the standard (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.

An entity should decide, based on 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. A significant amount of judgement might be required to display the overall picture without combining information with different characteristics. A balance should be maintained between providing excessive detail that might 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.

Risks arising from financial instruments

IFRS 7 requires a significant amount of qualitative and quantitative disclosure about risks associated with 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.

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

Balance sheet disclosures

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

Financial assets or liabilities at fair value through profit or loss

If the entity has designated as measured at fair value a financial asset (or group of financial assets) that would otherwise be measured at amortised cost, the standard requires details of the impact and mitigation of credit risk on the fair value.

If the entity has designated a financial liability as at fair value through profit or loss and is required to present the effects of changes in that liability’s credit risk in other comprehensive income, the standard requires disclosure of the impact of credit risk on the fair value.

Fair value changes attributable to changes in a liability’s credit risk An entity is required to calculate the amount of change in a liability’s fair value that is attributable to changes in the liability’s credit risk. Quantifying such changes might be difficult in practice. Paragraph B5.7.18 of IFRS 9 provides a relatively easy method of computing the amount to be presented in other comprehensive income, as illustrated in the example below. The method can be applied when 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 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, the 10-year LIBOR swap rate 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 (years 2 to 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 bond’s 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 (years 2 to 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 reasonable 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 presented in other comprehensive income is C1,444.

If an entity has designated a financial liability as at fair value through profit or loss and is required to present all changes in the fair value of that liability (including the effects of changes in the credit risk of the liability) in profit or loss, the standard requires disclosure of the impact of credit risk on the fair value.

If an entity is providing disclosure of the impact of credit risk on the changes in fair value, it needs to disclose the methods used to comply with those disclosure requirements. However, if the entity believes that this disclosure does not faithfully represent the change in the financial instruments’s fair value attributable to changes in its credit risk, it should disclose the reasons and the factors that it believes are relevant in reaching that conclusion.

If an entity measures a financial liability at fair value through profit or loss, it should also provide a detailed description of the methodology or methodologies used to determine whether presenting the effects of changes in a liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. If an entity is required to present the effects of changes in a liability’s credit risk in profit or loss, the disclosure must include a detailed description of the economic relationship described in IFRS 9.

Equity instruments designated at fair value through other comprehensive income

Entities that apply IFRS 9 are required to disclose the following in relation to equity instruments measured at fair value through other comprehensive income (FVOCI):

• Which investments in equity instruments have been designated to be measured at FVOCI.
• The reasons for using this alternative presentation.
• The fair value of each such investment at the end of the reporting period.
• Dividends recognised during the period, showing separately those related to investments de-recognised during the reporting period and those related to investments held at the end of the reporting period.
• Any transfers of the cumulative gain or loss within equity during the period and the reason for such transfers.
• For any equity investments that were de-recognised during the period, the reason for disposing of the investments, the fair value of the investments at the date of de-recognition, and the cumulative gain or loss on disposal.

Other sundry balance sheet disclosure

Reclassification

If the entity has reclassified a financial asset due to changes in its business model in accordance with IFRS 9, the disclosures included in IFRS 7 are required.

Additional disclosures are required for instruments that are reclassified out of fair value through profit or loss to amortised cost or fair value through OCI.

Transfers of financial assets

Transferred assets are defined 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 disclosure requirements for the following two categories:

• transferred assets that are not de-recognised in their entirety; and
• transferred assets that are de-recognised in their entirety, where the entity has continuing involvement.

Entity retains the contractual rights to receive the cash flows but assumes a contractual obligation to pay the cash flows to another party f 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 IFRS 9 requirements, there is no requirement for the pass-through tests in IFRS 9 to be met in case (b). Therefore the IFRS 7 disclosures (including the existing IFRS requirements) are extended to those transferred assets that are not de-recognised because they fail the pass-through tests in IFRS 9.

Application to groups of similar, and parts of, financial assets The IFRS 9 de-recognition requirements apply to a group of similar financial assets, and so the disclosure requirements also apply to a transferred group of similar assets. Similarly, in certain circumstances the IFRS 9 de-recognition requirements apply to a part of a financial asset (or group of financial assets). Consistent with IFRS 7, if the conditions in IFRS 9 apply, 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 IFRS 9 the de-recognised ‘asset’ only relates to the interest cash flows and so, if that part is derecognised in its entirety without a continuing involvement, the disclosures in IFRS 7 do not apply.

Investment funds and insurance companies Some entities (such as investment funds and insurance companies) might 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 on the particular terms of the related instruments

Transferred assets that are not de-recognised in their entirety

IFRS 7 includes disclosures that relate 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 IFRS 9 are not met; or
• the entity retains substantially all the risks and rewards of ownership of the financial asset; 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.

Transferred assets that are de-recognised in their entirety where the entity has continuing involvement

An entity has continuing involvement in a transferred financial asset if, as part of the transfer, it 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. For transferred assets that are de-recognised in their entirety, where there is continuing involvement, an entity should provide the disclosures in IFRS 7.

The definition used in IFRS 7 for continuing involvement is not the same as the IFRS 9 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”.

IFRS 7 clarifies that the following 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 re-acquire 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 IFRS 9 are met.

Consideration of IFRS 7 definition of ‘continuing involvement’ 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 that they would be within 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 a change in tax or law that affects the asset), which does not fall within the exemptions in paragraph 42C of IFRS 7 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.

Continuing involvement in servicing contracts For those transferred assets that are de-recognised in their entirety (for example, non-recourse factoring), the transferor might 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. The term ‘payment’ in IFRS 7 does not include cash flows of the transferred financial asset that an entity collects and is required to remit to the transferee. An entity must assess a servicing contract to determine if it meets the definition of ‘continuing involvement’ in the context 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 the standard. Similarly, a servicer has continuing involvement, for the purposes of the disclosure requirements, if a fixed fee would not be paid in full because of nonperformance of the transferred financial asset. In these examples, the servicer has an interest in the future performance of the transferred financial asset.

Offsetting

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.

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 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.

The objective for the offsetting disclosures is to require 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.

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 of the standard above:

1. the gross amounts of those recognised financial assets and recognised financial liabilities;

1. the amounts that are set off in accordance with the criteria in IAS 32 when determining the net amounts presented in the statement of financial position;
2. the net amounts presented in the statement of financial position;
3. the amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including:
4. amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria in IAS 32; and
5. amounts related to financial collateral (including cash collateral); and

1. the net amount after deducting the amounts in (d) from the amounts in (c) above. 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.

Offsetting table: measurement differences IFRS 7 requires an entity to disclose the following quantitative information separately for recognised financial assets and recognised financial liabilities: the gross amounts; amounts that are offset in accordance with IAS 32; those amounts subject to enforceable master netting arrangements but where offsetting was achieved; collateral; and the net amount. This is typically done in the form of a table. It is possible that financial instruments disclosed under these requirements are measured differently − for example, a payable related to a repurchase agreement might be measured at amortised cost, while a derivative will be at fair value. Entities include financial instruments at recognised amounts, and they describe resulting measurement differences in the related disclosures.

Offsetting table: gross amounts IFRS 7 requires an entity to disclose the following quantitative information separately for recognised financial assets and recognised financial liabilities: the gross amounts; amounts that are offset in accordance with IAS 32; those amounts subject to enforceable master netting arrangements but where offsetting was achieved; collateral; and the net amount. This is typically done in the form of a table. The ‘gross amounts’ required by IFRS 7 relate to both: recognised financial instruments that are offset in accordance with 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 IFRS 7 do not relate to any amounts recognised as a result of collateral agreements that do not meet the offsetting criteria in IAS 32. Instead, such amounts are disclosed in accordance with IFRS 7 as part of the same offsetting table note.

Offsetting table: amounts that are offset IFRS 7 requires an entity to disclose the following quantitative information separately for recognised financial assets and recognised financial liabilities: the gross amounts; amounts that are offset in accordance with IAS 32; those amounts subject to enforceable master netting arrangements but where offsetting was achieved; collateral; and the net amount. This is typically done in the form of a table. With regard to the ‘amounts that are offset’ when determining the ‘net amounts’, as required by IFRS 7, the amounts of both the recognised financial assets and the recognised financial liabilities that are subject to offset 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 offset. For example, an entity might have a recognised derivative asset and a recognised derivative liability that meet the offsetting criteria in 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 and the entire amount of the derivative liability. However, while the financial liability disclosure table will include the entire amount of the derivative liability, it will only include the amount of the derivative asset that is equal to the amount of the derivative liability.

Offsetting table: net amounts IFRS 7 requires an entity to disclose the following quantitative information separately for recognised financial assets and recognised financial liabilities: the gross amounts; amounts that are offset in accordance with IAS 32; those amounts subject to enforceable master netting arrangements but where offsetting was achieved; collateral; and the net amount. This is typically done in the form of a table. With regard to the disclosure of ‘net amounts’ in the statement of financial position, as required by IFRS 7, clarifies the following: if an entity has instruments that meet the scope of these disclosures but that do not meet the offsetting criteria in IAS 32, the amounts required to be disclosed would equal the amounts required to be disclosed. Furthermore, the ‘net amounts’ required to be disclosed 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 back to the individual line item amounts presented in the statement of financial position. This is illustrated in the following table: Gross amounts of recognised financial instruments Amounts that are offset in the statement of financial position Net amounts of financial instruments presented in the statement of financial position Derivative asset 120 (100) 20 Derivative liability (100) 100 –

Offsetting table: amounts subject to an enforceable master netting arrangement or similar arrangement IFRS 7 requires an entity to disclose the following quantitative information separately for recognised financial assets and recognised financial liabilities: the gross amounts; amounts that are offset in accordance with IAS 32; those amounts subject to enforceable master netting arrangements but where offsetting was achieved; collateral; and the net amount. This is typically done in the form of a table. With regard to the disclosure of “amounts subject to an enforceable master netting arrangement or similar arrangement” , IFRS 7 refers to amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria in IAS 32 (for example, current rights of offset that do not meet the criterion in IAS 32, or conditional rights of offset 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). The standard 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 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.

Offsetting table: grouping by type of financial instrument or by type of transaction IFRS 7 requires an entity to disclose the following quantitative information separately for recognised financial assets and recognised financial liabilities: the gross amounts; amounts that are offset in accordance with IAS 32; those amounts subject to enforceable master netting arrangements but where offsetting was achieved; collateral; and the net amount. This is typically done in the form of a table. With regard to the quantitative offsetting disclosures, 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 is also allowed, with the disclosures 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.

Where an entity has received more collateral than the carrying value of the amounts on the balance sheet after offset, the collateral included in the offsetting table is limited to the balance sheet amount.

Offsetting table: over-collateralisation IFRS 7 requires an entity to disclose the following quantitative information separately for recognised financial assets and recognised financial liabilities: the gross amounts; amounts that are offset in accordance with IAS 32; those amounts subject to enforceable master netting arrangements but where offsetting was achieved; collateral; and the net amount. This is typically done in the form of a table. Where disclosing the amounts in the offsetting table (see below), an entity must take into account the effects of over-collateralisation by financial instruments. To do so, the entity must first deduct the amounts related to the recognised financial instruments that do not meet the offsetting criteria from the net balance sheet amount. The entity should then limit the amounts of the collateral to the remaining amount. Gross amounts of recognised financial instruments Amounts that are offset in the statement of financial position Net amounts of financial instruments presented in the statement of financial position Gross amounts not offset in the statement of financial position Net amounts not subject to offsetting arrangements Financial instruments Collateral pledged or received Derivative assets 500 (100) 400 (80) (320) * – Derivative liabilities (300) 100 (200) 80 – (120) * Total collateral held against the assets is C330; however, this is limited to the amount in 13C(c) (that is, C400) less the amount in 13C(d)(i) (that is, C80). If rights to collateral can be enforced across financial instruments, these rights can be included in the disclosure provided in accordance with paragraph 13D.

An entity should 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 including the nature of those rights.

IFRS 7 requires an entity that discloses the information required by the standard in more than one note to the financial statements to cross-refer between those notes.

The disclosures in are minimum requirements to meet the objective stated in the standard. Depending on facts and circumstances, there might need to be additional disclosures to meet the objective.

Collateral

If an entity has pledged collateral, it should disclose the carrying amount of financial assets that it has pledged as collateral for liabilities or contingent liabilities, and the terms and conditions relating to its pledge. If an entity holds collateral (of financial or non-financial assets) and is permitted to sell or re-pledge the collateral in the absence of default by the owner of the collateral, it should disclose: the fair value of the collateral held; the fair value of any such collateral sold or re-pledged, and whether the entity has an obligation to return it; and the terms and conditions associated with its use of the collateral.

Allowance for credit losses

The carrying amount of financial assets measured at fair value through other comprehensive income is not reduced by a loss allowance for impairment, and an entity should not present the loss allowance separately in the statement of financial position as a reduction of the carrying amount of the financial asset. However, an entity should disclose the loss allowance in the notes to the financial statements.

Compound financial instruments with multiple embedded derivatives

If an entity has issued an instrument that contains both a liability and an equity component, 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.

Defaults and breaches

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 might affect the liability’s classification as current or noncurrent, in accordance with IAS 1, and they might also require disclosure if the liability is considered as capital by the entity’s management.

For loans payable recognised at the reporting date, an entity should disclose:

1. details of any defaults during the period;
2. the carrying amount of the loans payable in default at the reporting date; and

iii. whether the default was remedied, or the terms of the loans payable were renegotiated, before the financial statements were authorised for issue.

If, during the period, there were breaches of loan agreement terms other than those described in the standard (such as breaches of covenants), an entity should disclose the same information as in previous paragraphs 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. These disclosures would still be required where the terms were renegotiated after the balance sheet date but before the signing of the financial statements.

Income statement and equity disclosures

An entity should disclose the following items of income, expense, gains or losses, either in the statement of comprehensive income or in the notes:

• Net gains or net losses on:
• financial assets or financial liabilities measured at fair value through profit or loss, showing separately those on financial assets or financial liabilities designated as such on initial recognition, and those on financial assets or financial liabilities that are mandatorily measured at fair value in accordance with IFRS 9 (for example, financial liabilities that meet the definition of held for trading in IFRS 9);
• for financial liabilities designated as at fair value through profit or loss, an entity should show separately the amount of gain or loss recognised in other comprehensive income and the amount recognised in profit or loss; financial assets measured at amortised cost;
• financial liabilities measured at amortised cost; and
• financial assets measured at fair value through other comprehensive income.
• Total interest revenue and total interest expense (calculated using the effective interest method) for financial assets that are measured at amortised cost or that are measured at fair value through other comprehensive income in accordance with IFRS 9 (showing these amounts separately); or financial liabilities that are not measured 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 measured at amortised cost or financial liabilities that are not at fair value through profit or loss; and
• 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.

An entity should disclose an analysis of the gain or loss recognised in the statement of comprehensive income arising from the derecognition of financial assets measured at amortised cost. This disclosure should include the reasons for de-recognising those financial assets.

Other disclosures

Accounting policies

IAS 1 requires an entity to disclose, in the 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.

Hedge accounting

The disclosures are required for each category of risk that an entity decides to hedge (for example, interest rate risk, foreign currency risk or commodity price risk). An entity should apply judgement and categorise risks on the basis of how it manages its risks through hedging. However, an entity should apply its risk categories consistently throughout the entire hedge accounting disclosures.

The required hedge accounting disclosures in IFRS 7 are very detailed and provide information about:

• an entity’s risk management strategy and how it is applied to manage risk;
• how the entity’s hedging activities might affect the amount, timing and uncertainty of its future cash flows;
• the effect that hedge accounting has had on the entity’s financial statements; and
• whether the entity is applying the option to designate a credit exposure as measured at fair value through profit or loss.

The risk management strategy

An entity should explain its risk management strategy for each category of risk exposures to which it applies hedge accounting. The explanation should enable users to evaluate, for example:

• how each risk arises; how the entity manages each risk;
• this includes whether it hedges an item in its entirety or a specific risk component, and why; and
• the extent of risk exposures that the entity manages.

The disclosures in the paragraph above should include a description of: the hedging instruments used; how the entity determines the economic relationship for the purpose of assessing hedge effectiveness; how the entity establishes the hedge ratio; and what the sources of hedge ineffectiveness are.

When an entity designates a specific risk component as a hedged item, it should provide the additional qualitative and quantitative information about:

• how the entity determined the risk component (including a description of the nature of the relationship between the risk component and the item as a whole); and
• how the risk component relates to the item in its entirety (for example, the risk components historically covered, on average, 80% of the changes in fair value of the item as a whole).

The amount, timing and uncertainty of future cash flows

An entity should disclose, by risk category, quantitative information to allow users of its financial statements to evaluate the terms and conditions of hedging instruments and how they affect the amount, timing and uncertainty of future cash flows of the entity. This should include:

• a profile of the timing of the nominal amount of the hedging instrument; and
• if applicable, the average price or rate (for example, strike or forward prices) of the hedging instrument.

If an entity uses a dynamic process, in which both the exposure and the hedging instruments used to manage that exposure do not remain the same for long, it is exempt from the disclosures above, but additional disclosures are required.

An entity should disclose, by risk category, a description of the sources of hedge ineffectiveness that are expected to affect the hedging relationship during its term. It should also provide disclosures of other sources of hedge ineffectiveness that emerge.

The effects of hedge accounting on financial position and performance

An entity should disclose, in a tabular format, the following amounts related to items designated as hedging instruments separately by risk category for each type of hedge (fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation):

• the carrying amount of the hedging instruments (financial assets separately from financial liabilities);

• the line item in the statement of financial position that includes the hedging instrument;
• the change in fair value of the hedging instrument used as the basis for recognising hedge ineffectiveness for the period; and

• the nominal amounts (including quantities, such as tonnes or cubic metres) of the hedging instruments.

Example of amounts related to items designated as hedging instruments IFRS 7 requires an entity to disclose amounts related to items designated as hedging instruments in a tabular format. The following example illustrates how that information might be disclosed: Carrying amount of the hedged item Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item Line item in the statement of financial position in which the hedged item is included Change in value used for calculating hedge ineffectiveness for 20X1 Cash flow hedge reserve Assets Liabilities Assets Liabilities Cash flow hedges Commodity price risk Forecast sales n/a n/a n/a n/a n/a xx xx Discontinued hedges (forecast sales) n/a n/a n/a n/a n/a n/a n/a Fair value hedges Interest rate risk Loan payable – xx – xx Line item xx xx n/a Discontinued hedges (loan payable) – xx – xx Line item xx n/a n/a Foreign exchange risk Firm commitment xx xx xx xx Line item xx xx xx

An entity should disclose, in a tabular format, the following amounts separately by risk category for the types of hedge:

Amounts related to hedged items Fair value hedges Cash flow hedges and hedges of a net investment in a foreign operation the carrying amount of the hedged item recognised in the statement of financial position (presenting assets separately from liabilities); the accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item (presenting assets separately from liabilities); the line item in the statement of financial position that includes the hedged item; the change in value of the hedged item used as the basis for recognising hedge ineffectiveness for the period; and the accumulated amount of fair value hedge adjustments remaining in the statement of financial position for any hedged items that have ceased to be adjusted for hedging gains and losses. the change in value of the hedged item used as the basis for recognising hedge ineffectiveness for the period; the balances in the cash flow hedge reserve and the foreign currency translation reserve Amounts that have affected the statement of comprehensive income for continuing hedges that are accounted for in accordance with IFRS 9; and the balances remaining in the cash flow hedge reserve and the foreign currency translation reserve from any hedging relationships for which hedge accounting is no longer applied.

Fair value hedges Cash flow hedges and hedges of a net investment in a foreign operation hedge ineffectiveness – that is, the difference between the hedging gains or losses of the hedging instrument and the hedged item – recognised in profit or loss (or other comprehensive income for hedges of an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income); and the line item in the statement of comprehensive income that includes the recognised hedge ineffectiveness. hedging gains or losses of the reporting period that were recognised in other comprehensive income; hedge ineffectiveness recognised in profit or loss; the line item in the statement of comprehensive income that includes the recognised hedge ineffectiveness; the amount reclassified from the cash flow hedge reserve or the foreign currency translation reserve into profit or loss as a reclassification adjustment (differentiating between amounts for which hedge accounting had previously been used, but for which the hedged future cash flows are no longer expected to occur, and amounts that have been transferred because the hedged item has affected profit or loss); the line item in the statement of comprehensive income that includes the reclassification adjustment; and for hedges of net positions, the hedging gains or losses recognised in a separate line item in the statement of comprehensive income.

Disclosure of amounts related to hedged items IFRS 7 requires an entity to disclose amounts related to items designated as hedging instruments in a tabular format. The following example illustrates how that information might be disclosed: Carrying amount of the hedged item Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item Line item in the statement of financial position in which the hedged item is included Change in value used for calculating hedge ineffectiveness for 20X1 Cash flow hedge reserve Assets Liabilities Assets Liabilities Cash flow hedges Commodity price risk Forecast sales n/a n/a n/a n/a n/a xx xx Discontinued hedges (forecast sales) n/a n/a n/a n/a n/a n/a n/a Fair value hedges Interest rate risk Loan payable – xx – xx Line item xx xx n/a Discontinued hedges (loan payable) – xx – xx Line item xx n/a n/a Foreign exchange risk Firm commitment xx xx xx xx Line item xx xx xx

Disclosure of amounts that have affected the statement of comprehensive income Cash flow hedges (a) Separate line item recognised in profit or loss as a result of a hedge of a net position (b) Change in the value of the hedging instrument recognised in other comprehensive income Hedge ineffectiveness recognised in profit or loss Line item in profit or loss (that includes hedge ineffectiveness) Amount reclassified from the cash flow hedge reserve to profit or loss Line itemaffected in profit or loss because of the reclassification Commodity price risk Commodity X n/a xx xx Line item xx xx Line item xx Discontinued hedge n/a n/a n/a n/a n/a Line item xx (a) The information disclosed in the statement of changes in equity (cash flow hedge reserve) should have the same level of detail as these disclosures. (b) This disclosure only applies to cash flow hedges of foreign currency risk. Fair value hedges Ineffectiveness recognised in profit or loss Line item(s) in profit or loss (that include(s) hedge ineffectiveness) Interest rate risk xx Line item XX Foreign exchange risk xx Line item XX

An entity should provide a reconciliation of each component of equity and an analysis of other comprehensive income that, taken together:

• differentiate, at a minimum, between the amounts that relate to hedging gains and losses (including reversals) and the amounts included in the initial measurement of hedged items in accordance with IFRS 9;
• differentiate between the amounts associated with the time value of options that hedge transaction-related hedged items and the amounts associated with the time value of options that hedge time-periodrelated hedged items where an entity accounts for the time value of an option in accordance with IFRS 9; and
• differentiate between the amounts associated with forward elements of forward contracts and the foreign currency basis spreads of financial instruments that hedge transaction-related hedged items, and the amounts associated with forward elements of forward contracts and the foreign currency basis spreads of financial instruments that hedge time-period-related hedged items where an entity accounts for those amounts in accordance with IFRS 9. An entity should disclose the above information separately by risk category. This disaggregation by risk might be provided in the notes to the financial statements.

Fair value

An entity should disclose, for each class of financial assets and financial liabilities, the fair value of that class of assets and liabilities in a way that permits it to be compared with its carrying amount. This disclosure is not required:

• if the carrying amount is a reasonable approximation of fair value (for example, short-term trade receivables and payables); and
• for contracts containing a discretionary participation feature (as described in IFRS 4/IFRS 17), if the entity is not able to reliably estimate the fair value of that feature.

Where an entity does not recognise a gain or loss on initial recognition of a financial asset or financial liability, because the fair value measurement is categorised within Level 3 of the fair value hierarchy, it should disclose, by class of financial asset or financial liability:

• its accounting policy for recognising the difference between the fair value and the transaction price in profit or loss to reflect a change in factors (including time) that market participants would take into account when pricing the asset or liability;
• the aggregate difference yet to be recognised in profit or loss at the beginning and end of the period and a reconciliation of changes; and
• why the entity concluded that the transaction price was not the best evidence of fair value, and a description of evidence supporting the fair value.

Risk management

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.

The disclosures in the standard 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.

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 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.

An entity that uses several methods to manage a risk exposure should disclose information using the method or methods that provide the most relevant and reliable information.

Qualitative disclosures

For each type of risk arising from financial instruments, an entity should disclose: the exposure to risk and how it arises; its objectives and policies for managing the risk; and any changes to these since the prior period.

Quantitative disclosures

For each type of risk arising from financial instruments, an entity should disclose:

1. Summary quantitative data about its exposure to that risk at the end of the reporting period. This disclosure should be based on the information provided internally to key management personnel of the entity (as defined in IAS 24) – for example, the entity’s board of directors or chief executive officer.
2. The disclosures required below, to the extent that they are not provided in accordance with (a).
3. Concentrations of risk, if not apparent from the disclosures made in accordance with (a) and (b).

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.

• 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.

Examples of concentrations of risk Concentrations of credit risk might arise from: ·        Industry sectors. If an entity’s counterparties are concentrated in one or more industry sectors (such as retail or wholesale), it would disclose separately its exposure to risks arising from each concentration of counterparties. ·        Credit rating or other measure of credit quality. 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 its exposure to risks arising from each concentration of counterparties. ·        Geographical distribution. If an entity’s counterparties are concentrated in one or more geographical markets (such as Asia or Europe), it would disclose separately its exposure to risks arising from each concentration of counterparties. ·        A limited number of individual counterparties or groups of closely related counterparties. Similar principles apply to identifying concentrations of other risks, including liquidity risk and market risk. For example, concentrations of liquidity risk might 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 might 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.

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. 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 it 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.

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.

Year end credit risk exposure unrepresentative due to a major acquisition On 30 November 20X6, entity A (which has euro as its functional currency) acquires a major competitor. Due to the acquisition, US dollar-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 requirements, 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.

Credit risk

The credit risk disclosures should enable users of financial statements to understand the effect of credit risk on the amount, timing and uncertainty of future cash flows. To achieve this objective, credit risk disclosures should provide:

• information about an entity’s credit risk management practices and how they relate to the recognition and measurement of expected credit losses, including the methods, assumptions and information used to measure expected credit losses;
• quantitative and qualitative information that allows users of financial statements to evaluate the amounts in the financial statements arising from expected credit losses, including changes in the amount of expected credit losses and the reasons for those changes; and
• information about an entity’s credit risk exposure (that is, the credit risk inherent in an entity’s financial assets and commitments to extend credit), including significant credit risk concentrations.

Credit risk management practices

An entity should explain its credit risk management practices and how they relate to the recognition and measurement of expected credit losses. IFRS 7 requires the following disclosures:

• how an entity determines increases in credit risk, including how financial assets are determined to have low credit risk and the presumption that there has been a significant increase in credit risk where financial assets are more than 30 days overdue has been rebutted;
• definitions of default and the reasons these were chosen; how instruments were grouped for the collective impairment test;
• how it was determined that assets were credit impaired;
• write-off policies, including the indicators that there is no reasonable expectation of recovery and information about the policy for financial assets that are written off but are still subject to enforcement activity; and
• how modifications of contractual cash flows have been treated.

An entity should explain the inputs, assumptions and estimation techniques used to apply the impairment requirements of IFRS 9. For this purpose, an entity should disclose:

• The basis of inputs and assumptions and the estimation techniques used to: measure the 12-month and lifetime expected credit losses; determine whether the credit risk of financial instruments have increased significantly since initial recognition; and determine whether a financial asset is a credit-impaired financial asset.
• How forward-looking information has been incorporated into the determination of expected credit losses, including the use of macroeconomic information.
• Changes in the estimation techniques or significant assumptions made during the reporting period and the reasons for those changes.

Quantitative and qualitative information about amounts arising from expected credit losses

To explain the changes in the loss allowance and the reasons for those changes, an entity should provide, by class of financial instrument, a reconciliation from the opening balance to the closing balance of the loss allowance, in a table, showing separately the changes during the period for:

• The loss allowance measured at an amount equal to 12-month expected credit losses.

• The loss allowance measured at an amount equal to lifetime expected credit losses for:
• financial instruments for which credit risk has increased significantly since initial recognition but that are not creditimpaired financial assets;
• financial assets that are credit-impaired at the reporting date (but that are not purchased or originated credit-impaired); and
• trade receivables, contract assets or lease receivables for which the loss allowances are measured in accordance with IFRS 9.

• Financial assets that are purchased or originated credit-impaired. In addition to the reconciliation, an entity should disclose the total amount of undiscounted expected credit losses at initial recognition on financial assets initially recognised during the reporting period.

Disclosure of credit-impaired financial assets for which ECL is measured using the simplified approach Question: IFRS 7 require, by class of financial asset: a reconciliation from the opening balance to the closing balance of the loss allowance; and disclosure of the gross carrying amount of financial assets by credit risk rating grades. These disclosures are required to be given by ECL staging, including showing separately financial instruments that are: credit-impaired financial assets; and trade receivables, contract assets or lease receivables for which ECL is measured using the simplified approach in IFRS 9. How should a credit-impaired financial asset for which ECL is also measured using the simplified approach be disclosed in accordance with the requirements in IFRS 7? Solution: As stated in IFRS 7, credit-risk disclosures should enable users of financial statements to understand the effect of credit risk on the amount, timing and uncertainty of future cash flows. To meet this objective, information should be given about the sub-set of financial assets for which ECL is measured using the simplified approach that are also credit-impaired. Such information could be given as a separate column in the disclosure tables or by means of additional narrative information.

Should transfers between stages include interim movements in the reconciliation of opening to closing ECL? Question: IFRS 7 requires a reconciliation, by class of financial instrument, from the opening balance to the closing balance of the loss allowance, in a table, showing separately changes during the period for stage 1, stage 2 and stage 3 financial assets. If an entity prepares interim financial statements that include such reconciliations, should the transfers between stages in the equivalent reconciliations in the entity’s annual financial statements comprise: a. gross movements reflecting the transfers between stages of financial assets in interim periods previously reported; or b. net movements in stages of financial assets from the opening to the closing balance sheet? For example, consider the following scenarios where a financial asset moves from one stage to another within the reporting period: ·        Scenario 1: the asset was in stage 1 in its first quarter (Q1), moved to stage 2 by the end of its second quarter (Q2), and then moved back to stage 1 at the year end. ·        Scenario 2: the asset was in stage 1 in Q1, stage 2 in Q2, and then in stage 3 at the year end. If approach (a) is adopted, the changes between interim periods would be included in the annual reconciliations as follows: ·        Scenario 1: there would be a transfer from stage 1 to stage 2, and another transfer from stage 2 to stage 1. ·        Scenario 2: there would be a transfer from stage 1 to stage 2, and another transfer from stage 2 to stage 3. If approach (b) is adopted, the annual reconciliations would disclose changes in a financial asset’s stage from the beginning of the reporting period to that at the end of the reporting period, ignoring all movements during the interim periods, as follows: ·        Scenario 1: there would be no transfers between stages reflected in the reconciliations. ·        Scenario 2: there would be a movement from stage 1 to stage 3. Solution: IFRS 7 and IFRS 9 give no specific guidance, and so either approach is acceptable as a matter of accounting policy. Where information is available (as would be the case if included in interim reporting), approach (a) – that includes the transfers between interim reporting dates – might be more useful to the user of the financial statements. Conversely, approach (b) is consistent with the view that the frequency of interim reporting should not affect reporting in the annual financial statements. The chosen policy should be consistently applied and disclosed where the effect is material. IFRS 9 requires entities to provide an explanation of how significant changes in the gross carrying amount of financial instruments during the period contributed to changes in the loss allowance. Paragraph 35I does not explicitly require a reconciliation of gross carrying amounts. However, if reconciliations of gross carrying amounts are given in addition to the required reconciliations of the loss allowance, the same basis should be used for both reconciliations.

An entity should provide an explanation of how significant changes in the gross carrying amount of financial instruments during the period contributed to changes in the loss allowance. The information should be provided separately for financial instruments that represent the loss allowance and should include relevant qualitative and quantitative information. The standard includes examples of such changes.

Example of information about amounts arising from expected credit losses The following example from IFRS 7 illustrates one way of providing information about the changes in the loss allowance and the significant changes in the gross carrying amount of financial assets during the period that contributed to changes in the loss allowance, as required by IFRS 7. This example does not illustrate the requirements for financial assets that are purchased or originated credit-impaired. Mortgage loans–loss allowance 12- month expected credit losses Lifetime expected credit losses (collectively assessed) Lifetime expected credit losses (individually assessed) Credit-impaired financial assets (lifetime expected credit losses) CU’000 Loss allowance as at 1 January X X X X Changes due to financial instruments recognised as at 1 January: X – (X) – -Transfer to lifetime expected credit losses (X) X X – – Transfer to credit-impaired financial assets (X) – (X) X – Transfer to 12-month expected credit losses X (X) (X) – – Financial assets that have been de-recognised during the period (X) (X) (X) (X) New financial assets originated or purchased X – – – Write-offs – – (X) (X) Changes in models/risk parameters X X X X Foreign exchange and other movements X X X X Loss allowance as at 31 December X X X X Significant changes in the gross carrying amount of mortgage loans that contributed to changes in the loss allowance were as follows: ·        The acquisition of the ABC prime mortgage portfolio increased the residential mortgage book by ×%, with a corresponding increase in the loss allowance measured on a 12-month basis. ·        The write-off of the CU× DEF portfolio, following the collapse of the local market, reduced the loss allowance for financial assets, with objective evidence of impairment, by CU×. ·        The expected increase in unemployment in Region X caused a net increase in financial assets, whose loss allowance is equal to lifetime expected credit losses, and caused a net increase of CU× in the lifetime expected credit losses allowance. The significant changes in the gross carrying amount of mortgage loans are further explained below: Mortgage loans – gross carrying amount 12- month expected credit losses Lifetime expected credit losses (collectively assessed) Lifetime expected credit losses (individually assessed) Credit-impaired financial assets (lifetime expected credit losses) CU’000 Gross carrying amount as at 1 January X X X X Individual financial assets transferred to lifetime expected credit losses (X) – X – Individual financial assets transferred to creditimpaired financial assets (X) – (X) X Individual financial assets transferred from creditimpaired financial assets X – X (X) Financial assets assessed on collective basis (X) X – – New financial assets originated or purchased X – – – X – – – Write-offs – – (X) (X) Financial assets that have been de-recognised (X) (X) (X) (X) Changes due to modifications that did not result in de-recognition (X) – (X) (X) Other changes X X X X Gross carrying amount as at 31 December X X X X The reconciliation tables above are included in the implementation guidance of IFRS 7 and represent one way of providing the information required by the standard. In particular, the gross carrying amount reconciliation is included to meet the requirement to provide an explanation of how significant changes in gross carrying amount of financial instruments contributed to changes in the loss allowance. However, we note that this explanation is not required to be provided by way of a reconciliation, and so narrative explanation alone might also be appropriate.

For loan commitments and financial guarantee contracts, the loss allowance is recognised as a provision. An entity should disclose information about the changes in the loss allowance for financial assets separately from those for loan commitments and financial guarantee contracts. However, if a financial instrument includes both a loan (that is, a financial asset) and an undrawn commitment (that is, a loan commitment) component, and the entity cannot separately identify the expected credit losses on the loan commitment component from those on the financial asset component, the expected credit losses on the loan commitment should be recognised together with the loss allowance for the financial asset. To the extent that the combined expected credit losses exceed the gross carrying amount of the financial asset, the expected credit losses should be recognised as a provision.

An entity should disclose the contractual amount outstanding on financial assets that were written off during the reporting period and are still subject to enforcement activity.

Modifications of contractual cash flows on financial assets that have not resulted in de-recognition

Disclosures are required to enable users of financial statements to understand the nature and effect of modifications of contractual cash flows on financial assets that have not resulted in derecognition and the effect of such modifications on the measurement of expected credit losses, including:

• the amortised cost before the modification and the net modification gain or loss recognised for financial assets for which the contractual cash flows have been modified during the reporting period while they had a loss allowance measured at an amount equal to lifetime expected credit losses; and
• the gross carrying amount at the end of the reporting period of financial assets that have been modified since initial recognition at a time when the loss allowance was measured at an amount equal to lifetime expected credit losses and for which the loss allowance has changed during the reporting period to an amount equal to 12-month expected credit losses.

Collateral and other credit enhancements

To enable users of financial statements to understand the effect of collateral and other credit enhancements on the amounts arising from expected credit losses, an entity should disclose, by class of financial instrument:

• The amount that best represents its maximum exposure to credit risk at the end of the reporting period, without taking account of any collateral held or other credit enhancements (such as netting agreements that do not qualify for offset in accordance with IAS 32).

• A narrative description of collateral held as security and other credit enhancements, including:
• a description of the nature and quality of the collateral held;
• an explanation of any significant changes in the quality of that collateral or credit enhancements as a result of deterioration or changes in the collateral policies of the entity during the reporting period; and
• information about financial instruments for which an entity has not recognised a loss allowance because of the collateral.

• Quantitative information about the collateral held as security and other credit enhancements (for example, quantification of the extent to which collateral and other credit enhancements mitigate credit risk) for financial assets that are credit-impaired at the reporting date.

What to include in the narrative description of collateral and other credit enhancements IFRS 7 requires an entity to make disclosures to enable users to understand the effect of collateral and other credit enhancements. This includes a requirement to provide a narrative description of collateral held as security and other credit enhancements. This 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.

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

• the nature and carrying amount of the assets; and
• where the assets are not readily convertible into cash, its policies for disposing of such assets or for using them in its operations.

Credit risk exposure

To enable users of financial statements to assess an entity’s credit risk exposure and to understand its significant credit risk concentrations, an entity should disclose, by credit risk rating grades, the gross carrying amount of financial assets and the exposure to credit risk on loan commitments and financial guarantee contracts. This information should be provided separately for financial instruments, on the same basis as those disclosures above.

Example of credit risk exposure and significant credit risk concentration disclosures The following example from IFRS 7 illustrates some ways of providing information about an entity’s credit risk exposure and significant credit risk concentrations, in accordance with IFRS 7. The number of grades used to disclose the information should be consistent with the number that the entity uses to report internally to key management personnel for internal credit risk management purposes. However, if information about credit risk rating grades is not available without undue cost or effort, and an entity uses past-due information to assess whether credit risk has increased significantly since initial recognition, in accordance with IFRS 9, the entity should provide an analysis by past-due status for those financial assets. Consumer loan credit risk exposure by internal rating grades 20XX Consumer— credit card Consumer— automotive CU’000 Gross carrying amount Gross carrying amount Lifetime 12- month Lifetime 12- month Internal Grade1–2 X X X X Internal Grade 3–4 X X X X Internal Grade 5–6 X X X X Internal Grade 7 X X X X Total X X X X Corporate loan credit risk profile by external rating grades 20XX Consumer—equipment Consumer— construction CU’000 Gross carrying amount Gross carrying amount Lifetime 12- month Lifetime 12- month AAA-AA X X X X A X X X X BBB-BB X X X X B X X X X CCC-CC X X X X C X X X X D X X X X Total X X X X Corporate loan risk profile by probability of default 20XX Consumer— unsecured Consumer— secured CU’000 Gross carrying amount Gross carrying amount Lifetime 12- month Lifetime 12- month 0.00 – 0.10 X X X X 0.11 – 0.40 X X X X 0.41 – 1.00 X X X X 1.01 – 3.00 X X X X 3.01 – 6.00 X X X X 6.01 – 11.00 X X X X 11.01 – 17.00 X X X X 17.01 – 25.00 X X X X 25.01 – 50.00 X X X X 50.01+ X X X X Total X X X X The credit risk exposure tables above are included in the implementation guidance of IFRS 7. Even though the ‘Lifetime’ column shown is not further analysed between the sub-items required by IFRS 7 – that is, the table does not show separately financial instruments in stage 2, stage 3 and originated credit-impaired financial assets – such analysis should be provided to meet the requirements of IFRS 7.

For trade receivables, contract assets and lease receivables to which the simplified approach is applied, the information provided in accordance with the paragraph above could be based on a provision matrix.

For all financial instruments within the scope of IFRS 7, but to which the impairment requirements in IFRS 9 are not applied, an entity should disclose, by class of financial instrument:

• The amount that best represents its maximum exposure to credit risk at the end of the reporting period, without taking account of any collateral held or other credit enhancements (such as netting agreements that do not quality for offset in accordance with IAS 32); 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 other credit enhancements, and their financial effect (for example, 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 requirements above or represented by the carrying amount of a financial instrument).

Liquidity risk

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 below.

Example of cash outflow occurring significantly earlier IFRS 7 requires disclosure of summary quantitative data about an entity’s exposure to liquidity risk that should be disclosed on the basis of the information provided internally to key management personnel. Where the outflows of cash (or another financial asset) included in those data occur significantly earlier than indicated in the data, this should be stated, along with quantitative information that enables users of its financial statements to evaluate the extent of liquidity risk. An example of a cash outflow that could occur significantly earlier than indicated in the data is a bond that is callable by the issuer in, say, two years but has a remaining contractual maturity of, say, 10 years.

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.

Maturity analysis: contractual cash flows The amounts disclosed in the maturity analyses on a contractual basis are the contractual undiscounted cash flows (including principal and interest payments). For example: ·        Gross 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. 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.

Maturity analysis: multiple analysis tables The maturity analyses and how the entity manages liquidity risk required by IFRS 7 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.

Maturity analysis: number of time bands In preparing the contractual maturity analyses described in paragraph 39 of IFRS 7, 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.

Maturity analysis: choice of payment and payments on demand If an entity is preparing a maturity analysis based on contractual cash flows, and the counterparty has a choice of when an amount is paid, the liability should be 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.

Maturity analysis: payments in instalments When preparing the contractual maturity analyses described in IFRS 7, if an entity is committed to making amounts available in instalments, each instalment should be 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 when it can be drawn down.

Maturity analysis: financial guarantee contracts Where an entity is preparing the contractual maturity analyses described in IFRS 7, and it 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.

Maturity analysis: undrawn loan commitments In preparing the contractual maturity analyses described in paragraph 39 of IFRS 7, the maximum amount of an undrawn loan commitment should be included, allocated to the earliest period in which the commitment could be called.

Maturity analysis: cash flows not fixed In preparing the contractual maturity analyses described in paragraph 39 of IFRS 7, where an 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, where the amount payable varies with changes in an index, the amount disclosed could be based on the level of the index at the end of the period. For floating-rate financial liabilities and foreign currency-denominated instruments, the use of forward interest rates and forward foreign exchange rates might 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.

Maturity analysis: cash flows of derivative instruments 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. Other derivatives are included in a separate maturity analysis on the basis on which they are managed. It might be expected that contractual maturities are essential for an understanding of the timing of cash flows for derivatives, unless the facts and circumstances indicate that 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.

Maturity analysis: gross-settled and net-settled derivatives 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 might be more helpful to also disclose the cash inflows (that is, the receive leg). As explained, 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 might also be required. A similar analysis to the previous paragraph applies in the case of grosssettled commodity contracts which fall within IFRS 9’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 might 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 might 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 crossreference 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. The liquidity risk disclosures for derivative financial liabilities can be summarised as follows:

Maturity analysis: embedded derivatives 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.

Maturity analysis: contracts settled in own shares that are not equity instruments of the issuer 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 on the holder’s request) are not in the scope of the maturity analysis, because the entity will issue own shares to meet the above obligation, and so it does not 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.

Maturity analysis: example maturity analysis – floating-rate notes Floating rate notes On 1 January 20X6, entity A issued two-year, US$30 million floating-rate notes that pay interest of 6-month 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$30 million (C21.6 million). The functional currency of the entity is C (currency units). The spot rate at the balance sheet date is US$ = 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) 6-month LIBOR yield curve 5.25% 5.50% 5.75% 5.40% 6-month 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 spot 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) 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 Financial liabilities as at 31 Dec 20X6 Floating-rate notes − − 1,512 23,112 − 21,600 Alternative answer based on forward rates 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 Financial liabilities as at 31 Dec 20X6 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 that they are properly disclosed and applied consistently. The sum of all of 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.

Maturity analysis: example maturity analysis – interest rate swap Interest rate swap Entity A entered into a two-year interest rate swap, notional value C10 million, 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 C171,000 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 31Mar 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 For net-settled derivatives, only the instruments with a negative fair value (financial liabilities) at the balance sheet date need to 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. In the case of gross-settled derivatives, 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. Liquidity analysis (based on forward rates) 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 Financial liabilities as at 31 Dec 20X6 Floating-rate notes 15 -33 -173 -171

Maturity analysis: perpetual bonds and written put options 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, 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 to disclose the principal amount in a 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. 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. 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 band, irrespective of whether the instrument is in- or out-of-the-money. An American-style option should be disclosed in the earliest time band, and a European-style option depending on the exercise date. 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 might vary if the conditions change. This is supported by paragraph B10A(b) of 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.

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.

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

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.

Collateral requirements Collateral requirements on financial instruments can pose a significant liquidity risk. For example, an entity with a derivative liability might be required to post cash collateral on the derivative if the liability exceeds certain limits. As a result, if collateral calls pose significant liquidity risk, entities should provide quantitative disclosures of their collateral arrangements, because those cash flows could occur earlier than the contractual maturity.

Market risk

Sensitivity analysis

Unless an entity provides a sensitivity analysis under a valueat-risk model, 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 is usually its next annual report. This disclosure is 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 might 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.

Aggregation of disclosures 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 paras B18–B19]. For example, an entity that trades financial instruments might disclose this information separately for financial instruments held for trading and for those not held for trading. Similarly, an entity would not aggregate its exposure to market risks from areas of hyper-inflation 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.

Impact of changes in volatility on prior year numbers 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.

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), 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); and
• where applicable, equity.

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.

Interest rate sensitivity analysis: 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, because 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, because 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”

Translation-related risk is not taken into account for the purposes of disclosing a sensitivity analysis for foreign currency risk. 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. 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 quasiequity 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 eliminate 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 might 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).

Instruments with market risk exposure that impact equity In the same way that translation exposures might have an impact on equity but are not included in the foreign exchange risk sensitivity analysis, there are other items that might 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 within the scope of IFRS 9 and, therefore, within the scope of IFRS 7. The third instrument, although classified as a liability, is outside the scope of IFRS 9, because it is accounted for under IFRS 2; so it also falls outside IFRS 7’s scope.

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.

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

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.

If an entity prepares a sensitivity analysis, such as value-atrisk (VaR) that reflects interdependencies between risk variables (for example, interest rates and exchange rates) and uses it to manage financial risks, it could 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 entity 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 intercompany 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. 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 might result in the information not fully reflecting the fair value of the assets and liabilities involved.

Other market risk disclosures

Where the sensitivity analyses disclosed in accordance with the standard 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 why it believes that the sensitivity analyses are unrepresentative.

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, where 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; and
• how the entity hedges the risk.

An entity should provide sensitivity analyses for the whole of its business, but it could provide different types of sensitivity analysis for different classes of financial instrument.

The sensitivity of profit or loss (that arises, for example, from instruments measured at fair value through profit or loss) is disclosed separately from the sensitivity of other comprehensive income (that arises, for example, from investments in equity instruments whose changes in fair value are presented in other comprehensive income).

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.

Transition to IFRS 9

When an entity first applies IFRS 9, there are disclosures required for each class of financial assets and financial liabilities on the date of initial application, as follows:

• The original measurement category and carrying amount, determined according to IAS 39.
• The new measurement category and carrying amount, determined according to IFRS 9.
• The amount of any financial assets and financial liabilities in the statement of financial position that were previously designated as measured at FVTPL but that are no longer so designated, distinguishing between those that IFRS 9 requires an entity to reclassify and those that an entity elects to reclassify.
• Qualitative information about how the entity applied the classification requirements in IFRS 9 to those financial assets whose classification has changed as a result of applying IFRS 9.
• Qualitative information about the reasons for any designation or dedesignation of financial assets or financial liabilities as measured at FVTPL.

In the reporting period when an entity first applies the classification and measurement requirements for financial assets in IFRS 9, it should disclose:

• The changes in the classifications of instruments, showing separately:
• the changes in the carrying amounts on the basis of their measurement categories according to IAS 39; and
• the changes in the carrying amounts arising from a change in measurement attribute on transition to IFRS 9.
• For financial assets and liabilities that have been reclassified on transition to IFRS 9 to amortised cost, or out of FVTPL and into FVOCI:
• the fair value of the financial assets or financial liabilities at the end of the reporting period;
• the fair value gain or loss that would have been recognised in profit or loss or other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified;
• For financial assets and liabilities that have been reclassified on transition to IFRS 9 out of FVTPL:
• the effective interest rate determined on the date of reclassification; and
• the interest income or expense recognised.

If an entity treats the fair value of a financial asset or a financial liability as the new gross carrying amount at the date of initial application, the disclosures in the last two bullets should be made for each reporting period following reclassification until de-recognition. Otherwise, all of the disclosures in this paragraph need not be made after the reporting period containing the date of initial application.

The disclosures must permit reconciliation between:

• the measurement categories according to IAS 39 and IFRS 9; and
• the class of financial instrument at the date of initial application.

On the date of initial application of the impairment requirements of IFRS 9, an entity should disclose information that permits a reconciliation of the ending loss allowances and provisions in accordance with IAS 39 and IAS 37, respectively, to the opening loss allowances in accordance with IFRS 9. In the case of financial assets, the disclosure should be provided by the measurement categories of IAS 39 and IFRS 9, showing separately the effect of changes in the measurement category on the loss allowance at that date.