1. Financial Instruments – Disclosure: IFRS 7 Wiecek and Young IFRS Primer Chapter 20

2. 2 Basic Financial Instruments Related standards IFRS 7 Current GAAP comparisons IFRS financial statement disclosures Looking ahead End-of-chapter practice

3. 3 Related Standards Various FAS—see Chapters 17–19 FAS 161 Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133

4. 4 Related Standards IAS 1 Presentation of Financial Statements IAS 32 Financial Instruments: Presentation IAS 39 Financial Instruments: Recognition and Measurement

5. 5 IFRS 7 – Overview Objective and scope Classes of financial instruments and level of disclosure Significance of financial instruments for financial position and performance Nature and extent of risks arising from financial instruments

6. 6 IFRS 7 – Objective and Scope This standard contains very detailed prescriptive guidance on required disclosures that are meant to assist users in assessing: 1. The significance of financial instruments, in terms of financial performance and position, and 2. The nature and extent of risks related to financial instruments IFRS 7 applies to all entities and all financial instruments except the following: Interests in subsidiaries, associates, and joint ventures accounted for under standards other than IAS 32 and 39 Employers’ rights and obligations Insurance contracts and Contracts related to share-based payments

7. 7 IFRS 7 – Classes of Financial Instruments and Level of Disclosure IFRS 7 groups financial instruments into classes for some disclosure requirements Instruments should be grouped taking into account their nature and characteristics

8. 8 IFRS 7 – Significance of Financial Instruments for Financial Position and Performance Statement of Financial Position Since the use of fair value can be subjective and has a significant impact on earnings, information about fair value and carrying amounts is required Carrying amounts for the following should be presented in the balance sheet or the notes: Financial assets and liabilities classified as fair value through profit and loss (FVTPL)  Show those that are initially classified as such as those that are held for trading (HFT) Held to maturity investments (HTM) Loans and receivables Available for sale assets (AFS) Financial liabilities measured at amortized cost

9. 9 IFRS 7 – Significance of Financial Instruments for Financial Position and Performance FVTPL For loans and receivables classified as FVTPL, the following should be disclosed: The maximum exposure to credit risk (the maximum exposure may be seen to be the varying amount or the cash loss that is the amount owed) The amount by which a derivative or other instrument mitigates credit risk The change in fair value during the period (and cumulatively) attributable to changes in credit risk, and The change in fair value during the period (and cumulatively) of related credit derivatives or other instruments that mitigate credit risk For financial liabilities designated as FVTPL, the following should be disclosed: The change in fair value during the period (and cumulatively) attributable to credit risk, and The difference between the carrying amount and the amount of contractual obligation at maturity For the above, the entity needs to disclose the methods used to determine disclosures concerning changes in fair value related to credit risk

10. 10 IFRS 7 – Significance of Financial Instruments for Financial Position and Performance Reclassification If an entity has reclassified an instrument between categories measured at fair value and amortized costs, respectively, the amount and reasons for reclassification need to be disclosed The classification of instruments is partly based on management intent and so it is important to show the reasons why instruments are reclassified Derecognition Where an entity has transferred financial assets and they do not qualify for derecognition, the following should be disclosed: The nature of the assets The nature of risks and rewards exposed The carrying amounts, and The carrying amount of original assets and any remaining assets/liabilities where there is continuing involvement

11. 11 IFRS 7 – Significance of Financial Instruments for Financial Position and Performance Collateral Where an entity has pledged assets as collateral, the following should be disclosed: The carrying amounts, and Conditions and terms Where it holds collateral and is able to sell or repledge it, the entity should disclose: The fair value of the collateral The fair value of the collateral sold or repledged, and The terms associated with the use of the collateral Allowance Account for Credit Losses When assets are impaired due to credit losses and the amounts are recorded in an allowance account, a reconciliation between the opening and closing balances should be disclosed

12. 12 IFRS 7 – Significance of Financial Instruments for Financial Position and Performance Compound Financial Instruments and Multiple Embedded Derivatives The entity should disclose the existence of compound instruments with multiple embedded derivatives whose values are interdependent Defaults and Breaches Where an entity has loans payable at the end of the period, it should disclose the following: Details of the defaults Carrying amounts of loans in default, and Whether the defaults were remedied The same information should be disclosed for a breach of a loan agreement during the period if the breach allows the lender to accelerate repayment

13. 13 IFRS 7 – Significance of Financial Instruments for Financial Position and Performance Statement of Comprehensive Income Items of Income, Expense, Gains, or Losses The following should be disclosed: – Net gains/losses on financial assets/liabilities at FVTPL AFS (showing the amount in other comprehensive income and profit and loss) HTM Loans and receivables, or Financial liabilities measured at cost – Interest income and expenses – Fee income and expenses – Interest income on impaired financial assets and – Impairment loss.

14. 14 IFRS 7 – Significance of Financial Instruments for Financial Position and Performance Other Disclosures Hedge Accounting Disclosures For each type of hedge A description of each hedge A description of hedging instruments and their fair values, and The nature of risks being hedged For cash flow hedges The periods when the cash flows are expected to occur A description of forecasted transactions The amount recognized in other comprehensive income during the period The amount reclassified to profit and loss during the period, and The amount removed from equity and included in the initial cost or carrying value of the hedged item

15. 15 IFRS 7 – Significance of Financial Instruments for Financial Position and Performance Hedge Accounting Disclosures For fair value hedges Gains/losses on the hedging instrument, and Gains/losses on the hedged risk The entity should also disclose the amount of ineffectiveness recognized in profit and loss from cash flow hedges and hedges of net investment in foreign operations

16. 16 IFRS 7 – Significance of Financial Instruments for Financial Position and Performance Fair Value An entity should disclose: The fair values of each class of financial assets/liabilities in such a way to allow them to be compared with carrying values The methods and assumptions used to calculate fair value Where fair values are based on published price quotations in an active market or valuation techniques Where valuation techniques are used and fair value is based on assumptions that are not supported by prices from observable market transactions or observable market data; and Where changing assumptions will change the value significantly

17. 17 IFRS 7 – Significance of Financial Instruments for Financial Position and Performance Fair Value If there is no active market for a financial instrument and an entity uses a valuation technique on initial recognition, an entity should disclose: The accounting policy for recognizing these differences, and The aggregate difference to be recognized in profit and loss at the beginning and end of period and a reconciliation between the two Fair value disclosures are not required: When the carrying amount is a reasonable approximation of the fair value For equity instruments that do not have quoted market prices in an active market because the fair value cannot be measured reliably, or In other situations where the fair value cannot be measured reliably

18. 18 IFRS 7 – Nature and Extent of Risks Arising from Financial Instruments Qualitative Disclosures An entity shall disclose for each type of risk: Exposures to risks and how they arise Objectives, policies, and processes for managing risks and methods used to measure them and Any changes during the period Quantitative Disclosures For each of the risks the entity should disclose: Summary quantitative data about the exposures at the end of the reporting period (based on information provided internally to management), and Concentrations of risks If the end-of-period exposures are not representative of exposures during the period, additional disclosures should be given

19. 19 IFRS 7 – Nature and Extent of Risks Arising from Financial Instruments Credit Risk An entity should disclose the following by class of financial instrument: The maximum exposure to credit risk A description of collateral held Information about credit quality of financial assets, and Carrying amounts of renegotiated financial assets that would otherwise be past due or impaired Liquidity Risk The entity should disclose: A maturity analysis for financial liabilities that shows the remaining contractual maturities, and A description of how it manages the liquidity risk

20. 20 IFRS 7 – Nature and Extent of Risks Arising from Financial Instruments Market Risk An entity shall disclose a sensitivity analysis for each type of market risk, including methods and assumptions used to calculate the risk and any changes from the previous period The various market risks are defined in Appendix A to IFRS 7 – Currency risk is the risk that future cash flows or fair values will fluctuate due to foreign currency changes – Interest rate risk is the risk that fair values or the cash flow will change due to changes in interest rates – Other price risks include the risks that fair value and prices will fluctuate due to changes in other market prices, for example, share prices

21. 21 IFRS 7 – Nature and Extent of Risks Arising from Financial Instruments Market Risk – Sensitivity Analysis In order to complete the sensitivity analysis, the following steps might be taken: 1. Identify risks 2. Identify exposures at the balance sheet date 3. Determine which financial statement balances might change and why 4. Determine the appropriate level of aggregation for the analysis 5. Calculate and present the sensitivity analysis

22. 22 Current GAAP Comparisons Page 142 of 164 of http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

23. 23 IFRS Financial Statement Disclosures Del Monte Pacific Limited http://www.delmontepacific.com/ir/media/ar_ipo/AR2007.pdf Financial Risk Management Note Risks related to agricultural activities page 98 of 108 Fair Values page 99 of 108 Credit Risk page 98 of 108 Interest rate risk - Sensitivity analysis page 96 of 108 Foreign exchange risk - Sensitivity analysis page 98 of 108

24. 24 Looking Ahead The IASB is currently studying the area of financial instruments and hedging as noted in Chapter 17 Additional disclosures provide useful information; however, there reaches a point where too much disclosure results in information overload The IASB has a goal to simplify financial reporting as it relates to financial instruments and the nature and extent of disclosures is part of this issue

25. 25 End-of-Chapter Practice 20-1 IFRS requires a sensitivity analysis for key risks. Instructions Find the statements for L’Oreal and identify the main risks that the company faces. Review the disclosures regarding risks. Discuss whether they meet the overall objective of IFRS 7. 20-2 The standard requires significant disclosures about fair values. Instructions Why are these additional disclosures important? Write a short essay. 20-3 IFRS 7 is a fairly lengthy standard requiring a significant number of detailed disclosures. Instructions Discuss the pros and cons of mandating such detailed and voluminous disclosures. 20-4 Sensitivity analysis requires a significant amount of judgments. Instructions Discuss what judgments go into providing a sensitivity analysis. Do they add value to the statements? How easy are these types of disclosures to understand? How easy are they to audit?

26. 26 End-of-Chapter Practice

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