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IFRS 7 Financial Instruments: DisclosuresImproving Disclosures about Financial Instruments ( Amendments to IFRS 7)

IFRS 7 - disclosures

Effective for accounting periods beginning on or after 1 January 2007

Superseded IAS 30 and disclosure requirements of IAS 32

Broader scope than old IAS 32 provisions – aimed at enhancing user understanding of an entity’s risks and how it is managing them

Applies to

Applies to

•All entities

•All risks from financial instruments

•The level of disclosures required depends on the extent of the entity’s use of financial instruments and its exposure to financial risks.

Scope exemptions similar to IAS 32/IAS 39

Background to the amendment

•The IASB published Improving Disclosures about Financial Instruments (Amendments to IFRS 7) which amends the disclosure requirements in

respect of the fair values of financial statements.

•The Amendment introduces disclosures that are based on those required in US GAAP (SFAS 157) including the analysis of each class of financial

instrument into a three-level hierarchy and more detailed disclosures for instrument into a three-level hierarchy and more detailed disclosures for

financial instruments measured using valuation techniques which rely

heavily on unobservable data

•It also changes the definition of liquidity risk to exclude financial liabilities settled in equity instruments or non-financial assets and requires

a separate maturity analysis for derivative and non-derivative financial

liabilities.

Effective Date of the Amendment

•The Amendment is mandatory for accounting periods beginning on or after 1 January 2009

•no comparatives are required in the first year of application.

• Early adoption is permitted . If an entity applies the amendment for an earlier period, it has to disclose that fact.earlier period, it has to disclose that fact.

IFRS 7 - structure

Classes of financial instrument and level of disclosure

Significance of financial instruments for financial position and performance

•Statement of financial position

•Statement of comprehensive income

•Statement of comprehensive income

•Statement of changes in equity

•Other disclosures

Nature and extent of risks arising from financial instruments

•Qualitative disclosures

•Quantitative disclosures

Fair value disclosures

•The Amendment requires an entity to classify financial instruments using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.

•The fair value hierarchy has the following 3 levels:

•Level 1

•Level 2•Level 2

•Level 3

Level 1

•Quoted prices (unadjusted) in active markets for identical assets.

Quoted Active market

•Prices are readily and regularly available

•From an exchange /dealer, broker

•Representing actual and regular occurring transaction•Representing actual and regular occurring transaction

•E.g shares trading on the ZSE

Level 2

•Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. prices from

observable market transactions) or indirectly (i.e. derived using a

valuation technique that uses only data from observable markets).

Level 3

• Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

•The level in the fair value hierarchy within which a financial instrument is categorised is determined on the basis of the lowest level input that is

significant to the fair value measurement.significant to the fair value measurement.

•. For instance, if a fair value measurement of a financial instrument uses observable inputs (Level 2) that require significant adjustment based on

unobservable inputs (Level 3), that financial instrument would be

classified in Level 3

Examples of observable and unobservable inputs

Observable

•Quoted prices for similar (not identical instruments)

•Quoted foreign exchange rates and interest rates

•Interest rates in quoted bond markets

UnobservableUnobservable

•Credit risk adjustment based on historical data

•Volatility of share options based on historical data

Fair Value Disclosures

•The Amendment requires disclosures for each class of financial instrument which are measured at fair value in the statement of financial

position

•Classes of financial instrument are determined by the reporting entity, and are distinct from the categories specified by IAS 39and are distinct from the categories specified by IAS 39

•An entity determines classes of financial instrument, taking into account the type of financial information disclosed and the nature of the financial

instruments.


(a) The level in the fair value hierarchy into which financial instruments

are categorised.

(b) Significant transfers between Level 1 and Level 2 of the fair value

hierarchy and the reasons for those transfers with transfers into each level

being disclosed and discussed separately from transfers out of each level. being disclosed and discussed separately from transfers out of each level.

Fair Value Disclosures (c) For financial instruments in Level 3 of the fair value hierarchy, a

reconciliation from the opening balances to the closing balances,

disclosing separately changes during the period attributable to the

following:

(i) Total gains or losses for the period recognised in profit or loss

(including those relating to instruments disposed of during the period),

and a description of where they are presented in the statement of

comprehensive income or the separate income statement (if presented). comprehensive income or the separate income statement (if presented).

(ii) Total gains or losses recognised in other comprehensive income.

(iii) Purchases, sales, issues and settlements (with each type of movement

being disclosed separately).

(iv) Transfers into or out of Level 3 (e.g. transfers attributable to changes

in the observability of market data) and the reasons for those transfers.

For significant transfers, transfers into Level 3 are required to be disclosed

and discussed separately from transfers out of Level 3.


(d) The amount of total gains or losses for the period in (c)(i) above

included in profit or loss that are attributable to gains or losses relating to

those assets and liabilities held at the end of the reporting period and a

description of where those gains or losses are presented in the statement

of comprehensive income or the separate income statement (if

presented). presented).

(e) For fair value measurements in Level 3, if changing one or more of the

inputs to reasonably possible alternative assumptions would change fair

value significantly, this fact should be stated and the effect of those

changes disclosed. The disclosures should also include how the effect of a

change to a reasonably possible alternative assumption was calculated


The requirement to disclose the methods and assumptions applied in

determining fair values of each class of financial assets or financial

liabilities and the requirement to disclose the reasons for any change in

the valuation methodology included in the original standard have been

retained in the amended version

Fair Value Hierarchy disclosures - Example

Total Level 1 Level 2 Level 3

$000 $000 $000 $000

Financial assets @FVTPL

Trading securities XXX X X X

Available for sale financial Available for sale financial assets

Equity investments XXX X X X

Total XXX XX XX XX

Liquidity Risk Disclosures

•The Amendment changes the definition of liquidity risk so that it is limited only to financial liabilities that are settled by delivering cash or

another financial asset.

•The Amendment continues to require a contractual maturity analysis for non-derivative financial liabilities. The method of preparing this analysis is non-derivative financial liabilities. The method of preparing this analysis is

unchanged in that it should be based on contractual, undiscounted cash

flows that are analysed according to the earliest date that the

counterparty can require settlement.

•Unlike the original standard, a separate maturity analysis for derivative financial liabilities should only be based on the remaining contractual

maturities for those derivative financial liabilities where contractual

maturities are essential for an understanding of the timing of the cash

flows

Liquidity Risk Disclosures (Cont’d)

•The Amendment also provides additional guidance on how to meet the requirement in the paragraph 39(c) to provide a description of how it

manages the liquidity risk inherent in the maturity of financial liabilities.

• Included in this guidance is a requirement to disclose a maturity analysis of financial assets it holds for managing liquidity risk (e.g. financial assets of financial assets it holds for managing liquidity risk (e.g. 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.

Clarification of disclosure requirements- 2010 Amendment

The amendment clarifies quantitative disclosure requirements for risks

arising from financial instruments, and encourages accompanying

narrative disclosures if the concentration of risk is not apparent from

the quantitative disclosures.the quantitative disclosures.

The requirements for disclosures of credit risk, including collateral held,

are clarified and reduced, with the carrying amount of assets that would

have been past due or impaired unless they had been renegotiated no

longer needing to be disclosed.

Effective date and transition: Annual periods beginning on/after

1 January 2011, with earlier application permitted.

IFRS 7 Recap

Classes of financial instruments and level of disclosure

IFRS 7 specifies whether disclosures should be based on classes or

categories of financial instruments

Categories – as defined by IAS 39

Classes – to be determined by entity but must be appropriate to nature of

information disclosed

information disclosed


Statement of financial position disclosures include:

Carrying amount of financial instrument

• By IAS 39 category

Extensive disclosures for financial assets/liabilities held at fair value through profit or loss

through profit or loss

Reclassifications – change of measurement

• Amount reclassified and reason

Details of collateral pledged and received

Allowances for credit losses

Defaults and breaches of loans payable

• Includes any remedy of default between balance sheet date and date of issue of financial statements


Statement of comprehensive income disclosures include:

Net gains and net losses by IAS 39 category

Total interest income and interest expense

Fee income and expense

• Financial assets/liabilities not at FVTPL

• Financial assets/liabilities not at FVTPL

Interest income on impaired financial assets

• Calculated in accordance with IAS 39.AG93

Impairment losses for each class of financial instrument


Other disclosures include:

Accounting policies

• Relevant to understanding of financial statements

• Consistent with IAS 1.108

Hedge accounting – detailed disclosures for

Hedge accounting – detailed disclosures for

• Cash flow

• Fair value

• Net investment

Fair value – extensive disclosures, including

• Disclosure of fair values so as to enable comparison with carrying amount

• Methods/valuation techniques – by class

Nature and extent of risk arising from financial instruments

Qualitative disclosures

For each type of risk (e.g. interest rate, foreign exchange, credit), disclose:

The exposure and how they arise

Objectives, policies and processes for managing the risk and methods used

Objectives, policies and processes for managing the risk and methods used

to measure risk

Changes from the previous period


Quantitative disclosures

Base on information provided internally to key management

Minimum disclosures for:

Credit risk

Liquidity risk

Market risk

Market risk: currency, interest rate and other price risk


Credit risk disclosures include (by class)

Maximum exposure to credit risk

Collateral and credit enhancements obtained

• Nature and carrying amount of assets obtained

• Assets not readily convertible into cash

• Assets not readily convertible into cash

Credit quality (balances not past due or impaired)

Assets either past due or impaired

• Age analysis for assets past due but not impaired

• Individually impaired assets

Renegotiated assets that would otherwise be past due


Liquidity risk disclosures include

Maturity analysis of financial liabilities

• Analysis by reference to earliest contractual date

How liquidity risk is managed in the light of the maturity analysis

Market risk disclosures

Market risk disclosures

Sensitivity analysis

• By each type of market risk

• Methods and assumptions used

• May use sensitivity analysis reflecting interdependencies (such as value-at-risk)

Other market risk disclosures

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