Scope & Objective
Objective: IFRS 7 requires entities to provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments and the nature and extent of risks arising from them.
- Applies to all entities that have financial instruments
- Complements IAS 32 (presentation) and IFRS 9 (recognition/measurement)
- Focuses on significance and risk disclosures
Significance Disclosure: Information about the significance of financial instruments for financial position and performance.
Risk Disclosure: Qualitative and quantitative information about risks arising from financial instruments.
| Category | Purpose | Examples |
|---|---|---|
| Statement of Financial Position | Show carrying amounts by category | Loans, investments, derivatives |
| Statement of Comprehensive Income | Show income/expenses by category | Interest income, fair value gains |
| Other Disclosures | Accounting policies, hedge accounting, defaults | Hedging strategies, collateral |
Categories to Disclose:
- Financial assets at fair value through profit or loss
- Financial assets at amortized cost
- Financial assets at fair value through OCI
- Financial liabilities at fair value through profit or loss
- Financial liabilities at amortized cost
- Carrying Amounts: By category in statement of financial position or notes
- Reclassification: When and why financial assets are reclassified
- Derecognition: When financial assets are derecognized
- Collateral: Nature and carrying amount of collateral held
| Income/Expense Item | Disclosure Requirement |
|---|---|
| Net gains/losses | By category of financial instrument |
| Interest income/expense | Total amount for each category |
| Fee income/expense | Not part of effective interest rate |
| Impairment losses | By class of financial asset |
Qualitative Risk Disclosures: Describe the exposures to risk, how they arise, and the entity's objectives, policies and processes for managing risk.
- Risk Management Philosophy: Overall approach to risk management
- Risk Measurement Methods: How risks are identified and measured
- Risk Management Policies: Policies for hedging, limits, monitoring
- Changes from Prior Period: Any changes in risk exposure or management
Credit Risk: "The company's credit risk arises from cash and cash equivalents, deposits with banks, and trade receivables. Credit risk is managed through credit approval processes, credit limits, and ongoing monitoring."
Market Risk: "The company is exposed to foreign currency risk on purchases denominated in foreign currencies. The risk is managed through natural hedging and forward contracts."
Quantitative Risk Disclosures: Provide information about the extent to which the entity is exposed to risk, based on information provided internally to key management personnel.
| Risk Type | Disclosure Method |
|---|---|
| Credit Risk | Maximum exposure, credit quality, collateral |
| Liquidity Risk | Maturity analysis of financial liabilities |
| Market Risk | Sensitivity analysis, VaR, gap analysis |
Credit Risk: Risk that one party will fail to discharge obligation
- Maximum exposure to credit risk
- Credit quality of financial assets
- Collateral held as security
- Financial assets that are past due or impaired
Liquidity Risk: Risk entity will encounter difficulty meeting obligations
- Maturity analysis for financial liabilities
- Description of how liquidity risk is managed
Market Risk: Risk that fair value/cash flows will fluctuate due to market factors
- Sensitivity analysis for each type of market risk
- Methods and assumptions used in preparing analysis
- Changes from previous period
- Accounting Policies: Methods and assumptions for financial instruments
- Hedge Accounting: Description of hedged items, hedging instruments, risk management objective
- Fair Value Hierarchy: Classification into Level 1, 2, or 3 fair values
- Transfers Between Levels: Reasons for transfers between fair value hierarchy levels
- Compound Financial Instruments: Terms and conditions, separation methodology
- Defaults and Breaches: Details of any defaults on payable loans
| Level | Description | Disclosure Requirements |
|---|---|---|
| Level 1 | Quoted prices in active markets | Description of valuation techniques |
| Level 2 | Observable inputs other than Level 1 | Sensitivity of fair value measurements |
| Level 3 | Unobservable inputs | Reconciliation of opening/closing balances |