accounting guidance note 2008/1 (revised) · web viewincluded in xyz’s trade receivables balance...

Accounting Guidance NoteNo. 2008/1 (Revised)

Accounting guidance notes are intended for use by Australian Government reporting entities covered by:

S49 of the Financial Management and Accountability Act 1997; or

Clause 2 of Schedule 1, of the Commonwealth Authorities and Companies Act 1997.

The aim of the accounting guidance notes is to provide non-mandatory explanation and examples relating to the interpretation and application of Australian Accounting Standards and the Finance Minister’s Orders (FMOs) to the above entities.

AASB 7 Financial Instruments: Disclosures

Purpose

To provide guidance on the disclosure requirements for financial instruments prescribed by AASB 7 Financial Instruments: Disclosures (AASB 7).

Target audience

This guidance note applies to wholly-owned Australian Government entities.

Applicable accounting pronouncements

AASB 7 Financial Instruments: Disclosures.

AASB 139 Financial Instruments: Recognition and Measurement.

Definitions used

Category of financial instrument refers to the categories listed in paragraph 9 of AASB 139 being ‘at fair value through profit or loss’, ‘held to maturity’, ‘loans and receivables’ and ‘available for sale’. It also includes ‘financial liabilities held at amortised cost’.

Class of financial instrument is a lower level of aggregation than a category. For example, loans from Government, trade receivables or payables could all be considered classes of financial instruments.

of 33 Accounting Guidance Note 2008/1(Revised)Department of Finance and Deregulation

Key points

1. AASB 7 became effective for entities from 1 July 2007 (i.e. 2007-08 financial year) and replaced the disclosure requirements for financial instruments that were contained in AASB 132 Financial Instruments: Disclosure and Presentation (AASB 132) (now Financial Instruments: Disclosures) and AASB 130 Disclosures in the Financial Statements of Banks and Similar Financial Institutions (AASB 130). AASB 7 has since been amended by various amending pronouncements, most notably AASB 2009-2 Amendments to Australian Accounting Standards – Improving Disclosures about Financial Instruments. The guidance note has been updated, taking into account AASB 7 amendments applicable for the 2010-11 financial year.

2. This guidance note has been designed to assist entities in the application of AASB 7 by illustrating the main disclosures required.

3. Entities applying AASB 7 should note that disclosure is only required where items are material. Therefore, an entity can consider whether to omit disclosures where it only has immaterial items to disclose.

4. AASB 7 can be broadly divided into four elements of disclosures which are: the statement of comprehensive income, balance sheet, other and risk. This guidance note has been divided into four attachments based on the elements of AASB 7 and where the disclosure is located. The included attachments are:

Attachment A – Statement of comprehensive income notes;

Attachment B – Balance sheet notes;

Attachment C – Other disclosures (Financial instruments note); and

Attachment D – Risk disclosures.

5. In addition to the requirements illustrated in the attachments, disclosure is also required of the significant accounting policies applied by the entity, and where hedge accounting has been performed, AASB 7 has specific disclosure requirements in paragraphs 22 to 24.

6. AASB 7 applies to all financial instruments (whether recognised in the balance sheet or unrecognised) with the exception of those excluded from the standard, for example, subsidiaries, associates and joint ventures where not accounted for under AASB 139 Financial Instruments: Recognition and Measurement (AASB 139). Therefore, AASB 7 applies to financial instruments such as leases, administered investments and some guarantees. An example of an unrecognised financial instrument is a loan commitment.

7. Statutory receivables (e.g. taxes), equity in statutory authorities, lease incentives received and appropriations (excluding loan appropriations) are not financial instruments.


8. The disclosures required by AASB 7 are generally applicable for a class of financial instrument.

9. A class is determined by the entity considering ‘the nature of information disclosed and that takes into account the characteristics of those financial instruments’ (AASB 7.6). At a minimum, a class only contains instruments measured on the same basis (fair value or amortised cost) and unrecognised financial instruments (those not on the balance sheet) are a separate class from recognised instruments.

10. Attachment E Checklist for Trade Receivables and Payables contains guidance of what is required by AASB 7 in relation to trade receivables and payables held at amortised cost.

11. A hypothetical agency, XYZ, is used to illustrate the main disclosures required.

Contacts

Questions or comments about this Guidance Note should be addressed to Accounting Policy Branch at [email protected]


mailto:[email protected]

ATTACHMENT ASTATEMENT OF COMPREHENSIVE INCOME NOTES

AASB 7 - Statement of comprehensive income notes disclosure requirements:

A1. Net gain or loss from each category of financial instrument (AASB 7.20(a)).

A2. Total interest income and total interest expense for financial assets and liabilities, excluding those at fair value through profit or loss (AASB 7.20(b)). Interest income on impaired assets (AASB 7.20(d)).

A3. Fee income and expense arising from financial instruments that are not held at fair value through profit or loss and trust activities (AASB 7.20(c)).

A4. The amount of any impairment loss for each class of financial asset (AASB 7.20(e)).

AASB 7 disclosures can be performed on the face of the statement of comprehensive income or by way of a note to the financial statements. The FMOs require disclosure in the financial instruments notes as demonstrated in this attachment and the illustrative disclosures for XYZ Agency (XYZ) in Attachment C.

A1. Net gain or loss

AASB 7 requires the net gain or loss from each category of financial instrument to be disclosed. XYZ has disclosed this item within the financial instruments note, see C2 in Attachment C.

A2. Total interest income and expense

Total interest income and total interest expense calculated using the effective interest method (as set out in paragraphs 9 and AG5-AG8 of AASB 139) are required to be disclosed, excluding interest income/expense on financial instruments at fair value through profit or loss (this is reflected in the fair value adjustment for the instrument).

Interest on impaired financial assets

AASB 7 requires interest on impaired assets accrued in accordance with application paragraph AG93 of AASB 139 to be disclosed separately. AG93 requires interest income on impaired financial assets to be calculated using the interest rate used to discount the future cash flows for the purpose of measuring the impairment loss.

A3. Fee income and expense arising from financial instruments that are not held at fair value through profit or loss and trust activities

Fee income and fee expense from financial instruments not at fair value through profit or loss are required to be disclosed, except where they were included in determining the effective interest rate. Entities will disclose fee income and expense separately where significant.

Fee income and expense from trust or fiduciary activities (for example banks, managed funds and superannuation funds) are required to be disclosed.


ATTACHMENT ASTATEMENT OF COMPREHENSIVE INCOME NOTES

A4. Impairment loss per class of financial asset

AASB 7 requires that impairment losses from each class of financial instrument be disclosed. The Finance Minister’s Orders 2010-11 require such impairment losses to be recognised in an allowance account for each class.

AASB 7 requires a reconciliation of each allowance account to be disclosed (this is illustrated in B7 in Attachment B).


ATTACHMENT BBALANCE SHEET NOTES

AASB 7 - Balance sheet notes disclosure requirements:

B1. Carrying amount of each category of financial instrument (AASB 7.8).

B2. Information that enables users to evaluate the significance of financial instruments to an entity’s financial position and performance (AASB 7.7).

B3. Credit risk where a loan or receivable financial asset (AASB 7.9) or a financial liability (AASB 7.10) is designated at fair value through profit or loss.

B4. Reclassification between categories (AASB 7.12-12A) 1.

B5. Continuing involvement in financial assets partially or fully derecognised (AASB 7.13).

B6. Carrying amount of financial assets pledged as collateral (AASB 7.14) and that are held as collateral (AASB 7.15).

B7. Reconciliation for each impairment allowance account (AASB 7.16).

B8. For loans payable an entity will disclose any defaults or breaches (AASB 7.18-19).

1 AASB 7 now also requires disclosure where, in accordance with AASB 139, financial assets are reclassified out of the fair value through profit or loss category (AASB 139.50B or 50D) or the available-for-sale category (AASB 139.50E).

AASB 7 disclosures of the carrying amounts of financial instruments can be performed on the face of the balance sheet or by way of a note to the financial statements. The FMOs require disclosure in the Financial Instruments note. Other balance sheet disclosures are required to be made in the notes. XYZ has disclosed this information as part of the financial instrument note, the disclosure illustrated in Attachment C.

B1. Carrying amount of each category of financial instrument

XYZ discloses the totals for each category within the financial instruments note by way of a table (see C1 in Attachment C).

B2. Significance of financial instruments

Additional information of the principal terms and conditions in regards to financial instruments may be illustrated in the form of footnotes. These footnotes are only required where the instrument is significant for the entity and where additional information would allow a user to assess its significance from its principal terms and conditions. An example of this is:



2011 2010 $'000 $'000

Overdraft facility 200 -Loans payable1 10,000 -

Total interest bearing debt 10,200 -1 XYZ entered into a five year loan as of 30 June 2011 at a variable rate. The rate at 30 June 2011 was 6% (2010: n/a).

B3. Credit risk on designated instruments

Disclosure in relation to credit risk is required where an entity designates an instrument with the characteristics of the ‘loan and receivable’ category, as being at ‘fair value through profit or loss’. If an entity has not designated these items, this disclosure is not required. Designation does not include those instruments that are considered ‘held for trading’ as these instruments naturally fall into this category.

The following is required to be disclosed for ‘loans and receivables’ financial assets designated at ‘fair value through profit or loss’:

maximum exposure to credit risk (on a gross basis);

the amount mitigated by instruments taken out to reduce the credit risk exposure, such as credit derivatives;

the amount of fair value change attributed to credit risk for the designated ‘loan and receivable’, for the period and cumulatively; and

for any related credit derivatives the change in fair value since the related ‘loan and receivable’ has been designated, for the period and cumulatively.

Maximum exposure to credit risk

Credit risk is the risk that the other party will not meet its obligation to the entity. An entity’s maximum exposure to credit risk is normally the carrying amount for loans granted and receivables with customers.

XYZ has loaned a company $1,000,000. The loan was designated at fair value through the profit and loss. There has been a downturn in the market for the company’s output and a downgrade in their credit rating. Bonds issued by the company are now trading with an effective interest rate 1% higher after the credit downgrade.

The change in fair value of ‘loans and receivables’ financial asset has been illustrated as follows for XYZ:

2011 2010 $'000 $'000



Fair value changes due to credit risk:During the period (10) -Prior periods - -

Cumulative change (10) 0

The following table illustrates the change in fair value of credit derivatives relating to loans and receivables designated at fair value through profit and loss.

2011 2010 $'000 $'000

Fair value changes due to credit risk:During the period 1

0 Prior periods

- -

Cumulative change 10

-

AASB 7 allows two methods to determine changes in credit risk which may not easily be observed by allowing an entity:

to determine the change in fair value that is not attributable to changes in market conditions1 that give rise to market risk; or

to use a method that the entity believes more faithfully represents the amount of change in fair value attributable to credit risk.

Appendix B of AASB 7 paragraph B4 provides an example for changes in the credit risk of a liability where there is a change in the benchmark interest rate. A similar methodology could be employed for ‘loans and receivable’ financial assets designated ‘at fair value through profit or loss’. The method is:

1. calculate the internal rate of return for the liability at the start of the year (the interest rate that equates present value of the future cash flows to the current fair value as of 1 July);

2. deduct the opening benchmark interest rate (as of 1 July) from the internal rate of return calculated in 1. above;

3. calculate the present value of the liability at year end using a discount rate equal to the current benchmark interest rate (as at the end of the reporting period) plus the rate determined in 2. above; and

1 Market conditions that give rise to market risk include interest rates, commodity prices, foreign exchange or an index )



4. deduct the present value in 3. above from the fair value of the instrument as at the end of the reporting period to derive the change due to changes in credit risk.

B4. Reclassification

XYZ has disclosed this item within the financial instrument note, see C5 in Attachment C.

B5. Continuing involvement

Under AASB 139 it is possible to transfer a financial asset to another party but continue to recognise the asset due to continued involvement. The application guidance AG36 of AASB 139 provides a decision tree on whether an entity should continue to recognise an asset, in full or in part.

In summary, there will be continuing involvement when the entity transfers the financial asset but:

retains the rights to the cash flows from the asset, other than in an agency capacity (it will continue to recognise the asset);

transfers the right to the cash flows but retains the risk and rewards of ownership (it will continue to recognise the asset). Examples listed in AG40 include a sale transaction with the option to repurchase at a fixed price (i.e. repurchase agreements or repos, securities lending arrangements and the sale of receivables with a guarantee for any credit losses that result); or

transfers the cash flows and the risks and rewards of ownership but retains control of the asset (recognise an asset only to the extent of its continued involvement). This will occur where the entity sells a financial asset with an option to repurchase it, but that asset is not actively traded (cannot be substituted). Due to the need to honour the option the entity that has bought the asset is effectively restricted from selling it.

Where an entity has these transactions, the following is an example of the disclosure that would be required:

XYZ during 2010-11 sold $200,000 of receivables for goods and services to a debt collector for $205,000. XYZ also guarantee any defaults from the receivables up to $10,000. XYZ therefore recognises $10,000 being its continued involvement in the asset and a financial liability for the guarantee of $15,000.

B6. Collateral held or pledged

XYZ discloses this item within the financial instrument note, see C6 in Attachment C.



B7. Reconciliation of impairment account

AASB 7 requires reconciliation of each allowance account for credit losses for each class of financial assets (e.g. allowance for doubtful debts).

XYZ has written off $5,000 of receivables previously recognised in the impairment allowance account in 2011. $6,000 of impaired receivables were recovered and the amounts reversed from the allowance account. An additional $20,000 of receivables was impaired in 2011.

The following is an example of the disclosure required for XYZ’s impairment account:

2,011 2,010 $'000 $'000

Opening balance: (100) (90)Amounts written off 5 -Amounts recovered and reversed 6 -Increase/decrease recognised in net surplus (20) (10)

Closing balance (109) (100)

Statutory receivables (e.g. taxes) are not financial instruments and therefore there is no requirement for a reconciliation of related allowance accounts to be performed.

B8. Defaults

AASB 7 requires information regarding defaults or breaches for loans payable at the end of the reporting period. Loans payable are financial liabilities, other than short-term trade payables on normal credit terms.

For loans payable recognised at the end of the reporting period, an entity shall disclose:

details of the default;

carrying amount of loans in default; and

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

Similar disclosure is required for breaches that may trigger accelerated repayment of the loan.


ATTACHMENT COTHER DISCLOSURES (FINANCIAL INSTRUMENTS NOTE)

AASB 7 – Financial instruments disclosure requirements:

C1. Carrying amount of each category of financial instrument (AASB 7.8).

C2. Net gain or loss from each category of financial instrument (AASB 7.20(a)).

C3. Fair value of each class of financial instrument (AASB 7.25-30). 1

C4. Financial liabilities designated at fair value through profit or loss (AASB 7.10-11).

C5. Reclassification between categories (AASB 7.12). 2

C6. Collateral (AASB 7.14-15).1 AASB 7 now requires disclosures of financial instruments measured at fair value to be based on a three-level fair value hierarchy that reflects the significance of the inputs in the measurement.2 AASB 7 now also requires disclosure where, in accordance with AASB 139, financial assets are reclassified out of the fair value through profit or loss category (AASB 139.50B or 50D) or the available-for-sale category (AASB 139.50E).

C1. Carrying amount of each category of financial instrument

Rather than restructure the balance sheet notes to provide a total for each category XYZ presents this information in the financial instruments note.

Paragraph 6 of AASB 7 prescribes that an entity shall provide sufficient information to permit a user to reconcile financial instrument’s to the balance sheet. The reconciliation between financial instruments and balance sheet financial asset categories should include statutory receivables and equity in statutory authorities that do not qualify as financial instruments.

An example of the XYZ disclosure is:



2011 2010 $'000 $'000

Financial Assets:Loans and receivables financial assets:Cash and cash equivalents 7,089 6,131Trade Receivables 1,18

5 1,47

5 Loans 1,000 1,000Finance Lease Receivable 100 112

Total 9,374 8,718Available for sale financial assets:

Redeemable Notes 122

-

Unquoted equities -

54

Asset-backed securities 224

120

Total 346

174

Fair value through profit or loss (held for trading): Non-derivative financial assets held for trading - 211

Total -

211

Fair value through profit or loss (designated):Loans 990 1,000Derivative financial assets 728 122

Total 1,718 1,122

Carrying amount of financial assets 11,438 10,225

Financial Liabilities:At amortised cost:

Suppliers Payable 10

-

Loans Payable 10,600

630

Financial Guarantees 15

-

Total 10,625

630

Fair value through profit or loss (designated):Contingent consideration in a business combination 12

5 -

Other derivative financial liabilities -

147

Financial liabilities 59

-

Total 184 147

Carrying amount of financial liabilities 10,809 777



C2. Net gain/loss from each category of financial instrument

AASB 7 requires the net gain/(loss) from each category of financial instrument to be disclosed.

In 2011 XYZ earned 10% interest on a $1,000,000 loan to an overseas entity denominated in the overseas currency. There was a 0.5% appreciation in the Australian dollar against the overseas currency in the 2011 financial year.

The table below illustrates the disclosure of net gains and losses on XYZ’s loans and receivables:

2011 2010 $'000 $'000

Loans and receivablesInterest revenue (see note x) 10

0 8

5 Exchange gains/(loss) (5) 5Impairment (see note x) (20) (10)Gain/(loss) on disposal (see note x) - -

Net gain/(loss) loans and receivables 75 80

Financial Instruments held at fair value through profit or loss

XYZ includes the fair value adjustment on financial instruments at fair value through profit or loss, such items as interest payments and dividends, within the gain/(loss).



The following is an example of XYZ’s disclosure:

2011 2010 $'000 $'000

Change in fair value through profit or loss Designated as fair value through profit and loss:Change in fair value 50 0Interest revenueDividend revenueExchange gain/(loss)

Net gain/(loss) at fair value through profit or loss 50 0

Financial liabilities at amortised loss

The following table illustrates XYZ’s disclosure for financial liabilities measured at amortised cost.

2011 2010 $'000 $'000

Financial liabilities – at amortised costInterest expense 648 38

Net gain/(loss) financial liabilities – at amortised cost 648 38

C3. Fair value

AASB 7 requires an entity to disclose the fair value and current carrying value for each class of financial instrument. The carrying amount and fair value may be different where the financial instrument is carried at amortised cost. For example, when interest rates change the fair value of a fixed interest rate loan carried at amortised cost also changes (note as the instrument is carried at amortised cost the value of the instrument within the balance sheet does not change, merely the disclosure in relation to the fair value of that instrument).

Where the carrying value reported in the balance sheet is a reasonable approximation of fair value this information does not need to be disclosed, for example:

financial instruments already carried at fair value; and

short term receivables and payables.

Financial instruments carried at cost because their fair value cannot be reliably ascertained do not need to be disclosed.



Carrying

Amount

Fair Value

Carrying

Amount

Fair Value

2011 2011 2011 2010

$'000 $'000 $'000 $'000

Financial assets:

Finance lease receivable1 100 80 112 105

Financial liabilities:

Loans payable2 (600) (550) (630) (590)

1 Future minimum lease payments under the finance lease have been discounted using current market rates, 8% (2010: 7.75%) for similar leases. 2 Future loan repayments under the loan agreement have been discounted using current market rates, 7% (2010: 6.5%).

Note: The carrying values of financial instruments presented in XYZ balance sheet approximate their fair value, otherwise the fair value amounts are presented in the table above – unless fair value for carrying amounts at cost are unable to be reliably measured.

Valuation techniques are used where market prices (for example the listed price of a share) are not directly observable. The methods and assumptions used to determine fair value are required to be disclosed where a valuation technique is used to determine fair value. Disclosure need not be numerical.

Where a valuation technique is employed and changing an assumption used to a reasonably possible alternative could materially affect the amount disclosed, this fact and its effect on the statement of comprehensive income should be disclosed. Where a valuation technique is changed AASB 7 requires disclosure of the change and reasons it was made.

The method used to determine fair value is required to be disclosed using the AASB 7 fair value hierarchy (ranked from high to lowest level) below (note that this is different to the implicit fair value hierarchy used in AASB 139 for recognition and measurement as there has not been an equivalent amendment to AASB 139):

Level 1: quoted prices (unadjusted) in active markets for identical instruments;

Level 2: observable inputs (either directly (i.e. as prices) or indirectly (i.e. derived from prices)) other than those included in Level 1; and

Level 3: inputs that are not based on observable market data (unobservable inputs).

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined based on the lowest level input that is significant to such fair value measurements. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. Assessing the significance of a particular input requires judgement, considering factors specific to the asset or liability.



This is demonstrated for XYZ as follows:

Level 1 Level 2 Level 3 Total

$'000 $'000 $'000 $'000

201

1201

0201

12010 201

1201

0201

12010

Financial assets at fair valueLoans 990 1,00

0990 1,00

0Derivative financial assets 320 - 123 - 285 122 728 122Non-derivative financial assets held for trading

- - - 211 - 211

Total Financial assets320 -

1,113 1,211 285 122

1,718 1,333

Available-for-sale financial assets

Redeemable notes - - 122 - - 122 -Unquoted equities - - 54 - - - 54Asset-backed securities reclassified from fair value through profit and loss

- - - 224 120 224 120

Total Available-for-sale - - 122 54 224 120 346 174

Financial liabilities at fair valueContingent consideration in a business combination

125 - - - - - 125 -

Other derivative financial liabilities - - 147 - - - 147Financial liabilities measured at fair value

- 59 - - 59 -

Total Financial liabilities 125 - 59 147 - - 184 147

Significant transfers between Level 1 and Level 2 and the reasons for those transfers are required to be disclosed. For this purpose, significance shall be judged with respect to profit or loss, and total assets or total liabilities. XYZ did not have any significant transfers between Level 1 and Level 2. An example of the type of disclosure required is illustrated below.

Bonds valued at $xx were transferred from Level 1 to Level 2 due to other bonds in the same cohort issued by the issuing entity being retired and no longer traded. Value has been imputed from bonds issued by the same entity still being traded in an active market.

Where an entity has a significant number of transfers between Level 1 and Level 2, a tabular format may be required.

For Level 3 fair value measurements, reconciliation from the opening balance to the ending balance is required to be disclosed. The following table illustrates the disclosures for XYZ.



Reconciliation of Level 3 fair value hierarchy

Financial assets at fair

valueAvailable-for-

sale TotalDerivative Financial

AssetsAsset-Backed

Securities 2011 2010 2011 2010 2011 2010

$'00

0$'00

0$'000 $'000 $'00

0$'00

0Opening balance 122 23 120 120 242 143Total gains or losses for the period recognised in profit or loss1 50 - - - 50 -Total gains or losses recognised in other comprehensive income - 10 18 - 18 10Purchases 215 324 86 - 301 324Sales

-(235

) - - -(235

)Issues - - - - - -Settlements - - - - - -Transfers into/out of Level 32

(102) - - - (102) -

Closing balance 285 122 224 120 509 242

1 Total gains for derivative financial assets are recognised as Other Revenue in the Statement of Comprehensive Income.

Where changing inputs in a Level 3 fair value measurement to a reasonably possible alternative assumption would change fair value significantly, the following should be disclosed:

the effect of the change; and how the effect of the change was calculated.

Significance is judged in respect total assets or total liabilities and, depending on whether the change in fair value is recognised in surplus (deficit) or other comprehensive income, profit and loss or total equity.

Level 1 Level 2 Level 3 Total

$'000 $'000 $'000 $'000

2011 2011 2011 2011

Financial assets at fair valueLoans 990 990Derivative financial assets 320 123 285 728Non-derivative financial assets held for trading - - -

Total Financial assets 320 1,113 285 1,718

Available-for-sale financial assets

Redeemable notes - 122 - 122



Unquoted equities - - -Asset-backed securities reclassified from fair value through profit and loss

- - 224 224

Total Available-for-sale - 122 224 346

Financial liabilities at fair valueContingent consideration in a business combination 125 - - 125Other derivative financial liabilities - - - -Financial liabilities measured at fair value - 59 - 59

Total Financial liabilities 125 59 - 184

1 These gains and losses are presented in the statement of comprehensive income under net gains … 2 $102,000 in derivatives was transferred to Level 2 for (reasons for transfers)^ Note: transfers into and out of Level 3 shall be disclosed and discussed separately where there are significant transfers.

The reconciliation disclosure table would be similar for financial liabilities at fair value.

Financial instruments carried at cost

AASB 139 allows equity instruments to be carried at cost where a reliable fair value cannot be ascertained. In such cases it is not possible to disclose a fair value estimate as above, AASB 7 therefore requires:

a brief description of the instrument, its carrying amount and why fair value cannot be reliable determined;

information about the market for the instrument;

whether and how the entity will dispose of the instrument; and

where financial instruments whose fair value previously could not be reliably measured are derecognised, the carrying amount at the time of derecognition, and the amount of gain or loss recognised.

C4. Financial liabilities designated at fair value through profit or loss

AASB 7 paragraph 10-11 requires information regarding changes in credit risk for financial liabilities designated at fair value through profit or loss. This disclosure is similar to the information required for financial assets that would be ‘loans and receivables’ but were designated at fair value through profit or loss (refer to Attachment B at B3 for further information).

Unlike the loans and receivables disclosure presented at B3, information regarding amounts mitigated by credit derivatives is not required to be disclosed. Instead, AASB 7 requires a comparison of the carrying amount to the amount payable on



maturity. The following table illustrates for XYZ the difference in the carrying value (assessed fair value) and the amount required to be paid.

Fair value

Repayable on

maturity

Difference

2011 2011 2011$'000 $'000 $'000

Financial liabilities designated at fair value: Loans Payable 59 50 9

The above table should be replicated to show 2010 comparatives.

C5. Reclassification

Where an entity reclassifies a financial asset from:

cost/amortised cost to fair value; or

fair value to cost/amortised cost,

the entity is required to show the amounts and reasons for items reclassified into and out of each measurement base. Additional disclosures are required where the financial asset is reclassified out of the fair value through profit or loss category in accordance with paragraph 50B or 50D of AASB 139 or the available-for-sale category in accordance with paragraph 50E of AASB 139.

AASB 139 restricts reclassification in a number of instances and therefore this is most likely to occur due to a change in the reliability of measuring an equity investment which is held at fair value. Where fair value cannot be reliably determined, an entity will change to cost until fair value again can be reliably determined.

2011 2010

$'000 $'000

Reclassified from fair value to amortised cost or cost:Unquoted equities1 54 -

Reclassified from amortised cost or cost to fair value:Derivatives 2 320 -

1 During the period the company in which XYZ held unquoted equities was de-listed from the Australian Stock Exchange and a fair value could not be reliably ascertained at balance date, and so have been reclassified to cost.

2 XYZ’s options in a private equity investment, previously measured at cost due to a fair value being unable to be established, has become listed on a secondary stock exchange and are now carried at fair value.

Additional disclosures are required where a financial instrument is reclassified from fair value to cost or amortised cost:



any gain or loss (any difference between fair value and cost) on reclassification in the current and previous reporting period;

for each reporting period following reclassification until derecognition the fair value gain or loss that would have been reported in the financial asset had not been reclassified; and

for fixed maturity financial instruments the effective interest rate and estimated cash flows expected to be recovered at the date of reclassification.

C6. Collateral

Financial assets pledged as collateral by the entity

AASB 7 requires the disclosure of the carrying amount of financial assets pledged as collateral for liabilities or contingent liabilities (including the terms and conditions).

Assets received by the entity as collateral (where they can be sold)

AASB 7 requires disclosure for financial assets (and non-financial assets) held as collateral where it is permitted to sell or repledge the collateral:

the fair value of the collateral held;

the fair value of any amount sold or re-pledged and whether the entity has an obligation to return it; and

the terms and conditions.

The quantitative disclosure for XYZ is illustrated below:

Assets held as collateral Fair value of assets held as collateral:Non-financial assets 2,500 2,500Total assets held as collateral 2,500 2,500


ATTACHMENT DRISK DISCLOSURES

AASB 7 – Risk disclosure requirements:

D1. Risk objectives and policies of the entity (AASB 7.33).

D2. Credit risk (AASB 7.36-38).

D3. Liquidity risk (AASB 7.39) 1.

D4. Market risk, including sensitivity analysis (AASB 7.40-42).1 AASB 7 now requires a maturity analysis for both non-derivative (including issued financial guarantee contracts) and derivative financial liabilities.

AASB 7 requires an entity to disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed.

AASB 7 paragraph 34(a) requires quantitative data to be disclosed about the entity’s exposure to risk, based on information provided to senior management and the disclosure of any concentrations of risk. Additional information is required where this disclosure is not representative of the entity’s exposure.

AASB 7 prescribes specific disclosures for credit risk, liquidity risk and market risk. Additional quantitative data is not required where this disclosure adequately expresses the quantitative data required by AASB 7 paragraph 34(a) or the risks are immaterial.

D1. Risk objectives and policies of the entity

For each type of risk arising from financial instruments AASB 7 requires a narrative description of:

the risks the entity is exposed to and how they arise;

the objectives, policies and processes for managing the risks;

the methods used to measure risk; and

any changes from the previous period to the entity’s exposure to risk, risk management objectives, policies and procedures and methods used to measure risk.

These qualitative disclosures are intended to assist readers of the financial statements to understand the entity’s risk management activities.

D2. Credit risk

AASB 7 Appendix A defines credit risk as:

“the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.”



For each class of financial instrument, AASB 7 disclosure requirements include:

the maximum exposure to credit risk and related collateral held where this differs from carrying amount;

information on the credit quality of assets that are neither past due nor impaired;

analysis of age of financial assets that are past due but not impaired; and

an analysis of financial assets that are individually determined to be impaired.

Maximum credit exposure

For a financial asset, maximum credit exposure is generally determined as the gross carrying amount, net of any available offset (AASB 132) and impairment losses recognised. Paragraph B9-10 in Appendix B of AASB 7 provides further guidance on the disclosure of maximum exposure to credit risk. B10 specifies the maximum credit exposure for:

loans granted, trade receivables and deposits with other entities – net carrying amount;

derivative contracts – carrying amount when the resulting asset is measured at fair value;

financial guarantees – maximum amount payable if it were to be called upon; and

loan commitments – full amount of the commitment, unless it can be settled net in cash.

The requirement to disclose the maximum exposure to credit risk for each class of financial instrument has been illustrated as follows in XYZ2:

XYZ senior management has endorsed policies and procedures for debt management (including the provision of credit terms), to reduce the incidence of credit risk. The majority of services provided by XYZ are delivered to other government entities and therefore represent minimal credit risk exposure for the agency. XYZ’s loans and other financial assets are from institutions with high quality credit ratings. Under XYZ’s debt management policy, collateral is required for any loan granted or where trading terms are extended significantly beyond normally trading terms.

The carrying amount of financial assets, net of impairment losses, reported in the balance sheet represents XYZ maximum exposure to credit risk, unless otherwise detailed in the table below:

2 The disclosures in the table below do not include all the financial instruments used as examples in the illustrative example of the fair value hierarchy.



2011 2010 $'000 $'000

Financial liabilities:Financial guarantee 10 10Loan commitments (callable within 1 year) 50 50Loan commitments (callable within 1 to 5 years) 150 250

Total 210 310In relation to XYZ’s gross credit risk, collateral in the form of property is held in relation to a loan receivable.

Credit quality

AASB 7 requires an entity to disclose the credit quality of financial assets that are not past due or impaired.

Finance considers that the impairment requirement refers to only those assets that are individually assessed as impaired rather than those assets which have been impaired on a group basis, as this provides more meaningful information.

Credit quality disclosure of financial assets that are neither past due nor impaired has been illustrated for XYZ as follows:

Not past due nor impaire

d 2011

Not past due or

impaired 2010

Past due or

impaired 2011

Past due or

impaired 2010

$’000 $’000 $’000 $’000

Financial assets:Trade receivables 991 1,240 194 235

Total 991 1,240 194 235

Included in XYZ’s trade receivables balance are debtors with a carrying amount of $85,000(2010: $100,000) which are past due at the end of the reporting period for which XYZ has not provided. Based on past experience XYZ believes that the amounts are still considered recoverable. XYZ does not hold any collateral over these balances. The average age of these receivables is 50 days (2010:60 days).

Financial assets that are either past due or impaired

AASB 7 requires disclosures of information relating to financial assets that are either past due or impaired. This includes:

an analysis of the age of financial assets that are past due but not impaired; and

an analysis of those financial assets that are individually determined as impaired.

Ageing of financial assets that are past due but not impaired for the year ended 30 June 2011:



0 to 30 days

31 to 60 days

61 to 90 days

Over 90 days Total

$’000 $’000 $’000 $’000 $’000Financial assets:Trade receivables 0 50 30 5 85

Total 0 50 30 5 85

The above table should be replicated to show 2010 comparatives.

AASB 7 requires an analysis of items individually (i.e. not performed on a group basis) determined as impaired, this can be accomplished by text or by a table. Such information should describe the methodology used to determine financial assets as being individually impaired, the carrying amount of receivables affected and the amount of impairment.

D3. Liquidity risk

AASB 7 Appendix A defines liquidity risk as:

“the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.”

AASB 7 requires a maturity analysis for both non-derivative and derivative financial liabilities to be presented showing the remaining contractual maturities and a description of how the liquidity risk is managed.

The following table illustrates the maturities for non-derivative financial liabilities for the year ended 30 June 2011:1

On deman

d

Within 1

year1 to 5 years

More than 5 years Total

$’000 $’000 $’000 $’000 $’000Supplier payables - 10 - - 10

Loans 100 200 30010,00

010,60

0Financial Guarantees 15 15

Total

115

210

300 10,000

10,625

XYZ undertakes cash forecasting to ensure it can meet these liabilities as they fall due.

1 AASB 7 requires a maturity analysis of derivative financial liabilities where the remaining contractual maturities are essential to an understanding of the timing of the cash flows. XYZ did not have any derivative financial liabilities for which this is the case.

The above tables should be replicated to show 2010 comparatives.

XYZ agency makes the following disclosure on liquidity risk:



The exposure to liquidity risk is based on the notion that XYZ will encounter difficulties in meeting its obligations associated with financial liabilities. This is highly unlikely due to government funding and internal policies and procedures put in place to ensure there are appropriate resources to meet financial obligations.



D4. Market risk

AASB 7 Appendix A defines market risk as:

“the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk.”

Currency risk is where the value of the instrument fluctuates due to changes in foreign currency. Interest rate risk is where the value of the instrument fluctuates due to changes in market interest rates. Other price risk is where the instrument fluctuates due to other market factors, for example equity risk (where the instrument is linked for example to movements in the ASX index) or commodity prices.

AASB 7 requires the following to be disclosed in relation to market risk:

a sensitivity analysis for each type of market risk to which the entity is exposed;

the effect on profit or loss and equity from reasonable possible changes in the risk variable;

the methods and assumptions used in preparing the analysis; and

changes from the previous period (AASB 7.40-42 and Appendix B17-28).

There are two ways in which market risk sensitivity may be disclosed - a sensitivity analysis or the use of a model, such as value-at-risk (VaR) that reflects the interdependencies between the various risks. VaR is a more complex method and is therefore not recommended for Australian Government entities unless it provides a more appropriate method for calculation.

Sensitivity analysis

AASB 7 requires a separate sensitivity analysis for each type of market risk to which the entity is exposed at the end of the reporting period (for assets and liabilities held as of the end of the reporting period, assets and liabilities disposed of or settled during the period are not included), based on changes in risk variable that are considered “reasonably possible” at that date.

AASB 7 paragraph B18 clarifies that the sensitivity analysis applies changes only to the items at the end of the reporting period, and that in calculating the effect on profit or loss or equity, the exposure as of balance date is considered to have existed for the current period in full. For example, an entity just prior to year end takes out a substantial variable rate loan the effect on profit or loss or equity from the sensitivity analysis considers that the loan existed in full for the current period. Likewise, a loan repaid prior to year would not be included as the entity is not exposed to that risk.

Note that where an instrument is carried at fair value, the total cash flows under the arrangement may not change due to a change in the risk variable (for example a fixed interest rate loan) but its fair value will.



To conduct market risk sensitivity analysis an entity would:

1. examine its balance sheet to identify those items which would be subject to market risk;

Note: Finance is of the view that exposure is based on the existing accounting policies adopted for the preparation of the financial report and that exposure is only direct exposure. Direct exposure is for example where interest rate varies and you have a variable interest loan. Indirect exposure is where interest rates increase and therefore supplier costs are likely to increase as they factor in their increased costs.

2. determine what a reasonable possible change in risk variables was for the period;

3. given those items subject to market risk and the possible change in risk variable consider whether the effect on the balance sheet or the profit or loss is significant and therefore requires disclosure;

4. if significant, perform the necessary calculations (see below); and

5. decide if disaggregation is appropriate (for example if there are two significant balance sheet items subject to interest rate risk consideration should be given to whether the effect on the income statement or the balance sheet requires separate disclosure. This would be the case where a change in a risk variable results in a small net effect but was the result of a large loss on affected assets balances and a large gain on affected liabilities balances).

Examples of items subject to market risk include:

loans at amortised cost (if at a variable rate) – if the interest rate changes the cash flows associated with the loan change (note if the loan is at a fixed rate no impact is experienced);

instruments at fair value through profit or loss – will vary in fair value depending on their sensitivity to interest rates, credit risk, etc. For example the fair value of a fixed rate loan will change due to a change in market interest rates, even though the cash flows do not. Such fair value gains and losses will affect both equity and the income statement; and

foreign currency receivables or payables – will vary due to changes in exchange rates.



An example of the sensitivity disclosure required is:

Interest rate risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. XYZ is exposed to interest rate risk primarily from loans and receivables. Foreign currency risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. XYZ is exposed to foreign exchange currency risk primarily through undertaking certain transactions denominated in foreign currency. XYZ is exposed to foreign currency denominated in USD.

The table below details:

1. the interest rate sensitivity analysis of the entity at the reporting date, holding all other variables constant. A 150 basis point change is deemed to be reasonably possible and is used when reporting interest rate risk.

2. the effect on the profit and equity as at the end of the reporting period for 2011 from a 14% favourable/unfavourable change in AUS dollars against the USD with all other variables held constant.

Effect on Effect on

Change in

variable

Profit or loss

Equity

Profit or loss

Equity

Risk 2011 2011 2010 2010variabl

e $’000 $’000$’00

0 $’000Currency risk USD 14.00% 200 200 250 250Currency risk USD -

14.00%(200) (200) (250) (250)

Interest rate risk Interest 1.50% 33 33 27 27Interest rate risk Interest -1.50% (33) (33) (27) (27)

The method used to arrive at the possible interest rate risk of 150 basis points was based on both statistical and non-statistical analysis. The statistical analysis has been based on the cash rate for the past five years issued by the Reserve Bank of Australia (RBA) as the underlying dataset. This information is then revised and adjusted for reasonableness under the current economic circumstances.

The method used to arrive at the possible risk of 14% was based on both statistical and non-statistical analyses. The statistical analysis has been based on main currencies movement for the last five years. The main currency XYZ has exposure to is the USD. This information is then revised and adjusted for reasonableness under the current economic circumstances.

It is important to note that in situations where the sensitivity analysis disclosed is unrepresentative of a risk inherent in a financial instrument, the entity is required to disclose that fact and the reason it believes the sensitivity analysis are unrepresentative.

Australian Government entities who have their departmental appropriations adjusted on a ‘no win, no loss’ under the Australian Government Foreign Exchange Risk Management Guidelines would be subject to currency risk, despite receiving supplementation for foreign currency losses incurred.



Refer to Finance Brief 31 AASB 7 Financial Instruments: Disclosures Standardisation of market risk sensitivity analysis when disclosing market risk for guidance on standardisation of foreign exchange risk and interest rate risk sensitivity analysis for use in Financial Statements.


ATTACHMENT ECHECKLIST FOR TRADE RECEIVABLES AND PAYABLES

This checklist provides a simplified outline of the requirements for agencies whose only financial instruments are trade receivables and payables carried at amortised cost.

Disclosure Trade receivables

(at amortised cost)

Trade payables

(at amortised cost)

NOTE x: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting policies used (AASB 7.21)

Accounting policies

NOTE x: INTEREST REVENUE

Total interest income calculated using the effective interest rate method (AASB 7.20b)

Long term receivables only

Unless the receivable is of a long term nature it would not have been discounted on initial recognition and therefore subject to notional interest revenue.

Interest income on impaired assets (AASB 7.20d)

Long term receivables only

Unless the receivable is of a long term nature it would not have been discounted on initial recognition and therefore subject to notional interest revenue.

NOTE x: INTEREST EXPENSE

Total interest expense calculated using effective interest rate method (AASB 7.20b)

Long term liabilities only

Unless the payable is of a long term nature it would not have been discounted on initial recognition and therefore subject to notion interest expense.

NOTE x: IMPAIRMENT


Accounting policies



(at amortised cost)

Trade payables

(at amortised cost)

Impairment loss for each class of financial asset (AASB 7.20e)

Disclose by class

Disclose by class

NOTE x: RECEIVABLES

Reconciliation of allowance account for credit losses (AASB 7.16)

Disclose by class

Financial assets transferred with continuing involvement (AASB 7.13)

Disclose where assets transferred with continued involvement

Where an entity transfers an asset but maintains a right to the cash flows or to repurchase the asset in the future. Specific disclosure is required.

NOTE x: FINANCIAL INSTRUMENT NOTE

Carrying amount (AASB 7.8)

Include in loans and receivables

Include in liabilities at amortised cost

Net gain or loss (AASB 7.20a)

Include in loans and receivables

(e.g. impairment, gain/(loss) on settlement)

Include in liabilities at amortised cost

(e.g. gain/(loss) on settlement)

Fair value versus carrying amount (AASB 7.29)

Short-term receivables (text)

Long term receivables (calculation)

Short-term payables (text)

Long term payables (calculation)




(at amortised cost)

Trade payables

(at amortised cost)

The carrying amount of short-term receivables approximates their fair value and this can be disclosed by text. Longer term receivables will need to have fair value calculated based on current market rates. The basis used to value also needs to be disclosed (e.g. discounted cash flow using market rates).

The carrying amount of short-term payable approximates their fair value and this can be disclosed by text. Longer term payable will need to have fair value calculated based on current market rates. The basis used to value also needs to be disclosed (e.g. discounted cash flow using market rates).

Credit risk – discussion (AASB 7.33)

Discussion of how entity manages credit risk

Credit risk – maximum exposure (AASB 7.36)

Text stating the same as balance sheet

The maximum credit risk exposure of trade receivables is their carrying value as reported in the balance sheet.

Credit risk – credit quality (AASB 7.36)

Disclosure of credit quality

A discussion or table on the credit quality.

Credit risk – credit concentration (AASB 7.34)

Disclosure of credit concentration

A discussion on credit concentration (reliance on one or several customers).

Credit risk – ageing (AASB 7.37)

Age analysis (excluding impaired and past due)

An aged analysis of items past due or impaired (individually).




(at amortised cost)

Trade payables

(at amortised cost)

Liquidity risk – discussion (AASB 7.33)

Discussion of how entity manages liquidity risk

Liquidity risk – ageing (AASB 7.39)

Age analysis

Ageing of all financial liabilities

Market risk – discussion (AASB 7.33)

Discussion of how entity manages market risk

Discussion of how entity manages market risk

Market risk – sensitivity analysis (AASB 7.40)

Sensitivity analysis (those denomiated in foriegn currency)

Unless the receivable is denominated in a foreign currency it is unlikely to be affected by market risk, where this exposure is significant it should be disclosed.

Sensitivity analysis (those denomiated in foreign currency)

Unless the payable is denominated in a foreign currency it is unlikely to be affected by market risk, where this exposure is significant it should be disclosed.


accounting guidance note 2008/1 (revised) · web viewincluded in xyz’s trade receivables balance...

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