FINANCIAL RISK DISCLOSURES; IFRS 7 BY CPA OPANGA 21ST NOVEMBER, 2014 bopanga@yahoo.com 0727-404289 11/9/2018

FINACIAL RISK DISCLOSURES; IFRS 7` Rapid changes in the financial institutions in; operations, potential risk exposures, risk measurement and management

Derivatives can be used to off-set arising assets against liabilities Facilitates effective reporting for further analysis and interpretations amongst diversified users Fast adoption is due to the competition and rapid changes in the industry. Derivatives can be used to off-set arising assets against liabilities Originates from the financial instruments disclosures. Main basis was on IAS 30. CPA OPANGA 11/9/2018

APPLICATION OF IFRS 7 All entities with financial instruments regardless of the industry. Monetary assets like Cash, Cash equivalents,Debt securities, Accounts receivable and Notes receivable. Non monetary like Inventory Prepaid expenses,Equity securities, Investment property , plant, and equipment,Intangible assets (e.g. goodwill) Not limited to banks like deposit-taking, lending and those engaged in security activities due to unique risks they face. CPA OPANGA 11/9/2018

Items that will be paid out in a fixed or determinable amount of cash Monetary Liabilities Accounts payable Notes payable Bonds payable Leases payable Accruals Deferred tax (usual classification) Items that will be paid out in a fixed or determinable amount of cash CPA OPANGA 11/9/2018

KEY DRIVERS FOR THE ADOPTION Risk disclosures to diversified users. comparison of similar activities/entities Need to respond to IAS 32 on the need to improve risk disclosure requirements. Stiff competition among the industry players CPA OPANGA 11/9/2018

Exclusion of some financial instruments may increase the danger of the risks associated with it. There is no clear difference between deposit- taking, lending and security activities. CPA OPANGA 11/9/2018

EXCEMPTIONS OF IFRS 7 Derivatives held in subsidiaries, associates or joint ventures because; are regarded as equity instruments Do not expose the issuer to any risk. - Their disclosures about the significance of financial instruments for financial position and performance are not relevant to equity instruments. CPA OPANGA 11/9/2018

Insurers-these firms apply IFRS4 insurance contracts together with IAS 32 only the IFRS has to be consistent with IFRS 7 Small and medium-sized entities-because the extent to which they use financial instruments is limited. Subsidiaries- little public interest since the parent company’s information is public but the standard associated with subsidiaries should be followed. CPA OPANGA 11/9/2018

TRANSFERS OF FINANCIAL ASSETS Disclosure of financial assets and liabilities is by measurement categories-IFRS 9 disclosure of the carrying amounts go to income statement Change in fair value due to the liability’s credit risk due to interest and underlying derivative. CPA OPANGA 11/9/2018

A fair value and the basis of the method used will give a more faithful representation In case of change in index as a proxy used, proxy disclosure change is necessary. Settlement amount at maturity must be stated if the fair value differ from it. Additional disclosures needed incase any financial instrument is recorded at cost or amortized value other than the fair value. CPA OPANGA 11/9/2018

Financial instruments may be subject to different measurement requirement Example for a payable related to repurchase option, it might be measured at amortized cost but its underlying derivative measured at fair value. financial assets that do not meet the criteria for offsetting, their amounts should be disclosed accordingly. CPA OPANGA 11/9/2018

Any financial instrument should never have an understated collateral. use of collateral reduces the risks of default and the collateral should be liquidated immediately upon default as per agreed terms. Any financial instrument should never have an understated collateral. Entities should disclose all relevant information in relation to a given financial instrument to enable users evaluate the nature and extent of the risks. CPA OPANGA 11/9/2018

IMPORTANCE OF THE DISCLOSURE Easy Comparability Provision of information to diversified users Risk reduction Avoid losses by hedging the risks Easy reconciliation; offsetting. The need to report compound financial instruments with multiple derivatives. Need to show clearly items of income, gains or losses CPA OPANGA 11/9/2018

OTHER IMPORTANT DISCLOSURES Hedge accounting A technique of mitigating against identifiable risks. Hedge accounting should be presented in one location within an entity’s primary financial statements to provide a picture of the risk management activities Need to consistently apply hedge accounting. CPA OPANGA 11/9/2018

Risk management strategy for each risk. Need to disclose information on the risk exposure and the hedged rate for shadowing. Presentation in form of hedge type, risk category, risk information and risk management information is preferred. CPA OPANGA 11/9/2018

Fair value disclosure is more relevant since; Information about hedging should be tabulated to find out their effects on performance and financial position Fair value disclosure is more relevant since; it reflects market judgment, allows comparison and it is a neutral way of recording management’s stewardship. disclose the technique used to calculate the fair value. CPA OPANGA 11/9/2018

KEY RISKS OF FINANCIAL INSTRUMENTS Credit risk-collateral held as security and other enhancements credit quality of financial assets. Liquidity risk-maturity analysis for financial liabilities Market risk Requirements should be consistently applied and extent of the disclosure should be qualitatively and quantitatively Operational risk not yet disclosed. CPA OPANGA 11/9/2018

TRANSFERS OF FINANCIAL ASSETS This disclosure helps to understand the relationship between transferred financial assets that are not derecognized in their entirety and the associated liabilities and to evaluate the nature of and risks associated with them. There is need to disclose transferred financial assets not derecognized in their entirety plus a qualitative descriptive and schedule setting out their fair values and associated liabilities. CPA OPANGA 11/9/2018

Disclosures should focus on the risk exposure of the entity, timing of the return and the cash flow needed to repurchase the derecognized financial asset in future. Entities that apply IFRS 7 (August 2005) only when it becomes mandatory will have better comparison than those that apply it earlier due to its change from local GAAPS to IAS 32 and IAS 30 and then changing again to IFRS 7. CPA OPANGA 11/9/2018

SUMMARY OF MAIN CHANGES Entities to determine the amount of change in fair value attributable to change in the instrument’s credit risk using an alternative method which the entity believes will give a more faithful representation. A requirement has been added for disclosures about the difference between the transaction price at initial and the results of a valuation technique that will be used for subsequent measurement. . CPA OPANGA 11/9/2018

The exemption from presenting comparatives has been widened The capital disclosures are a stand-alone amendment to IAS 1 rather than part of the IFRS. No disclosure is required of whether the entity has complied with capital targets set by management and of the consequences of any non-compliance with those targets. The exemption from presenting comparatives has been widened CPA OPANGA 11/9/2018

The sensitivity analysis requirements have been clarified No disclosure is required of the fair value of collateral pledged as security and other credit enhancements. The amendments to IFRS 4 related to IFRS 7 have been modified to reduce systems changes for insurers CPA OPANGA 11/9/2018

THE END THANK YOU CPA OPANGA 11/9/2018