IFRS 7 Financial Instruments Disclosure

Objectives of IFRS 7

All companies are exposed to various types of financial risk. Some risks are obvious from looking at the statement of financial position.

IFRS 7 requires that an entity should disclose information that enables users of the financial statements to ‘evaluate the significance of financial instruments’ for the entity’s financial position and financial performance.

There are two main parts to IFRS 7:

1. A section on the disclosure of ‘the significance of financial instruments’ for the entity’s financial position and financial performance.
2. A section on disclosures of the nature and extent of risks arising from financial instruments.

Statement of financial position disclosures

The carrying amounts of financial instruments must be shown, either in the statement of financial position or in a note to the financial statements, for each class of financial instrument:

• Financial assets at fair value through profit or loss
• Financial assets at amortised cost
• Financial liabilities at fair value through profit or loss
• Financial liabilities measured at amortised cost.

Other disclosures relating to the statement of financial position are also required. These include the following:

• Collateral – A note should disclose the carrying amount of financial assets that the entity has pledged as collateral for liabilities or contingent liabilities, the terms and conditions relating to its pledge.
• Allowance account for credit losses
• Defaults and breaches

Statement of profit or loss disclosures

An entity must disclose the following items either in the statement of profit or loss or in notes to the financial statements:

• Net gains or losses on financial assets or financial liabilities at fair value through profit or loss.
• Net gains or losses on available-for-sale financial assets.
• Total interest income and total interest expense, calculated using the effective interest method, for financial assets or liabilities that are not at fair value through profit or loss.
• Fee income and expenses arising from financial assets or liabilities that are not at fair value through profit or loss.

Other disclosures

IFRS 7 also requires other disclosures. These include the following:

• Information relating to hedge accounting, for cash flow hedges, fair value hedges and hedges of net investments in foreign operations. The disclosures should include:
  • a description of each type of hedge
  • a description of the financial instruments designated as hedging instruments
  • their fair values at the reporting date, and the nature of the risks being hedged.
• With some exceptions, for each class of financial asset and financial liability, an entity must disclose the fair value of the assets or liabilities in a way that permits the fair value to be compared with the carrying amount for that class.

Risk disclosures

IFRS 7 also requires that an entity should disclose information that enables users of its financial statements to evaluate the nature and extent of the risks arising from its financial instruments.

These risks typically include, but are not restricted to:

• Credit risk
• Liquidity risk
• Market risk

For each category of risk, the entity should provide both quantitative and qualitative information about the risks.

Qualitative disclosures – For each type of risk, there should be disclosures of the exposures to risk and how they arise; and the objectives policies and processes for managing the risk and the methods used to measure the risk.

Quantitative disclosures – For each type of risk, the entity should also disclose summary quantitative data about its exposures at the end of the reporting period. This disclosure should be based on information presented to the entity’s senior management, such as the board of directors or chief executive officer.