for Accounting Professionals
IFRS 7 Financial instruments: Disclosure
2011
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IFRS 7 Financial instruments: Disclosure
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Moscow, Russia
2011 Updated
2
Other disclosures
27
Accounting policies .......................................................................... 27
CONTENTS
IFRS 7 Financial Instruments: Disclosures ................. 4
Hedge accounting
29
Introductory Notes
4
Fair value
37
Definitions
6
Nature and extent of risks arising from financial
instruments ................. 41
Main features of IFRS 7
10
Objective of IFRS 7
10
Qualitative disclosures ..................................................................... 42
Quantitative disclosures .................................................................. 44
IAS 1 Presentation of Financial Statements Update
(2007) ........................... 11
Credit risk .......................................................................................... 48
Scope
11
Market risk ......................................................................................... 53
Classes of financial instruments and level of disclosure .............. 12
Interest rate risk ................................................................................ 57
Liquidity risk ..................................................................................... 50
16
Currency risk..................................................................................... 59
Categories of financial assets and financial liabilities ................... 16
Other market risk disclosures .................................... 62
Financial assets or financial liabilities at fair value through profit
or loss ................................................................................................ 18
Transfers of financial assets
Reclassification ................................................................................ 19
Brief Notes on FINREP and Prudential Supervision of
Banks ........................... 65
Balance sheet (SFP)
Derecognition.................................................................................... 20
Collateral ........................................................................................... 20
Allowance account for credit losses ............................................... 23
Compound financial instruments with multiple-embedded
derivatives ......................................................................................... 23
Defaults and breaches ...................................................................... 23
Profit and Loss Account and Equity .......................... 24
Items of income, expense, gains or losses ..................................... 24
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Note: Material from the following PricewaterhouseCoopers
publications has been used in this workbook:
-Applying IFRS
-IFRS News
-Accounting Solutions
62
IFRS 7 Financial Instruments: Disclosures
IFRS 7 Financial Instruments: Disclosures
IFRS 7 combines all financial instruments disclosures in a single
standard. The remaining parts of IAS 32 deal only with financial
instruments presentation.
This workbook is complemented by our 5 workbooks on IAS 32/39
and IFRS 9 workbook.
IFRS 9 (effective from 2013) will replace IAS 39. As IAS 39 is
still in use, its elements remain in this workbook. We will
produce an IFRS 9 version of this IFRS 7 workbook.
Introductory Notes
IFRS 7 is applicable to all enterprises including banks which make
much greater use of financial instruments.
IFRS 7 requires qualitative and quantitative analysis of currency,
interest rate, liquidity and other price risk.
IFRS 7 is a comprehensive disclosure standard that applies to all
companies. It provides the market with more information about an
undertaking’s financial assets and liabilities, and their associated
risks. It requires disclosures about:
the significance of financial instruments for an undertaking’s
financial position and performance, including many of the
requirements currently in IAS 32; and
the nature and extent of risks arising from financial instruments.
Management must identify and consider the key messages it
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wishes to communicate to the market via the new disclosures.
These disclosures provide a significant opportunity for undertakings
to explain their risk management processes.
There is the risk of a negative market reaction if the enhanced and
more transparent disclosures reveal weaknesses in those
processes. The disclosures (especially those related to risk) will
require considerable resources to develop and draft.
The changes brought by the new standard can be split into four key
areas:
-disclosing risk ‘through the eyes of management’;
-expanded quantitative disclosures of risk;
-the introduction of sensitivity analysis; and
-enhanced disclosure of an undertaking’s financial position and
performance.
They apply to all undertakings. However, the extent of disclosure
required will reflect the undertaking’s use of financial instruments.
Undertakings that make more use of financial instruments and have
greater associated exposure to risk will need to give more
disclosures.
Disclosing risk ‘through eyes of management’
IFRS 7 requires quantitative (numbers) and qualitative (financial
position and performance) disclosures about an undertaking’s
exposure to credit risk, liquidity risk and market risk arising from its
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IFRS 7 Financial Instruments: Disclosures
use of financial instruments. It requires the following qualitative
disclosures for each type of risk:
-the exposures to the risk and how they arise;
-the undertaking’s objectives, policies and processes for
managing the risk;
-the methods used to measure the risk; and
-any changes to the above disclosures from the previous
reporting period.
risk have been expanded. In particular:
the quantitative disclosures for credit risk include the amount of
exposure to credit risk at the reporting date by each class of
financial instrument (trade debtors are captured by this
requirement); and
on liquidity risk, disclosure of financial liabilities categorised by
their earliest contractual maturity date and a description of how
the undertaking manages the liquidity risk inherent in these
financial liabilities is required.
For example, an undertaking that uses a stand-by line of credit
to manage their liquidity risk should disclose this fact.
The standard also requires summary quantitative data about the
undertaking’s exposure to each type of risk at the reporting date.
This information is to be given ‘through the eyes of management’
ie, based on internal reports provided to management.
Certain minimum disclosures are also required to the extent they
are not already covered by the ‘through the eyes of management’
information.
Undertakings are required to communicate to the market how they
perceive, manage and measure risk.
This change to a ‘through the eyes of management’ approach will
enable the market to better evaluate the strength (or otherwise) of
an undertaking’s risk management activities.
Expanded quantitative disclosures of risks
The quantitative minimum disclosures of interest rate risk and credit
Introduction of sensitivity analysis
The final, and in some respects most challenging, new disclosure
requirement is a sensitivity analysis for each component of market
risk to which an undertaking is exposed (currency risk, interest rate
risk and other price risk).
Every undertaking should disclose the impact of reasonably
possible movements in each relevant market risk variable on profit
and loss and equity. The format and presentation of this disclosure
is not prescribed in the new standard.
The application and implementation guidance, however, offers
advice on preparing the analysis. They also include an example
illustrating that the analysis can be simple; they show, for example,
the effect on post-tax profit of a 10 basis-points increase in interest
rates and a 10% weakening of a key exchange rate.
Disclosure of a sensitivity analysis will be new for many
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IFRS 7 Financial Instruments: Disclosures
undertakings, in particular those outside of the financial sector. Its
preparation may prove challenging for undertakings without
sophisticated risk management systems.
Enhanced disclosure of financial position and performance
IFRS 7 requires enhanced balance sheet and income statement
disclosures. Below are three examples:
-disclosure of the carrying amount and net gains/net losses for
each of the categories of financial instruments in IAS 39 (ie,
held-for-trading, available-for sale, etc). This will provide
increased transparency of the financial performance of the
various categories of instruments. Analysts and investors will be
interested in this information;
-disclosures when hedge accounting is used. These include the
ineffectiveness recognised in profit or loss for each type of
hedge (fair value hedges, cash flow hedges and hedges of net
investments in foreign operations). These will highlight the
performance (including any ineffectiveness) of an undertaking’s
hedging activities; and
-disclosure of movements on the allowance account, if an
undertaking uses such an account to record credit losses. This
is mainly relevant to the banking industry, where analysts and
investors view the level of the provision for credit losses and
movements in that provision as key performance indicators.
(especially those related to risk) will require considerable resources
to develop and draft. Management should begin to consider the
issues and understand that the disclosures will give the market
more information with which to make judgments on risk
management strategies and effectiveness.
IFRS News - December 2005
Definitions
There is only one basic type of risk, that is, an asset or liability may
not liquidate at the planned value. There are a number of ”risks”
that are considered below, but they subdivisions of the one basic
risk and represent a subset of basic risk.
amortised
cost of a
financial
asset or
financial
liability
This is the written-down cost. It is calculated as:
the amount at initial recognition
minus principal repayments,
plus or minus the cumulative amortisation of the
difference between the initial and the maturity
amounts, and
minus any reduction for impairment or bad debt
risk.
available-forsale financial
assets
Available-for-sale financial assets are those nonderivative financial assets that are so designated.
This is a default classification. It applies to any
financial assets that are not classified as
(i) loans and receivables,
Adoption of IFRS 7
IFRS 7 contains application guidance and implementation guidance
to help undertakings implement its requirements. The disclosures
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(ii) held-to-maturity investments or
(iii) financial assets at fair value through profit or
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IFRS 7 Financial Instruments: Disclosures
loss.
credit risk
currency risk
The risk that one party to a financial instrument will
cause financial loss for the other party by failing to
pay or discharge an obligation.
The risk that the fair value or future cash flows of a
financial instrument will fluctuate due to changes in
foreign exchange rates.
derecognition Derecognition is the removal of an asset or liability
from the balance sheet.
derivative
and interest income or interest expense over the
relevant period.
equity
instrument
An equity instrument is any contract that provides
a positive residual interest in the assets of an
undertaking after deducting all of its liabilities.
fair value
Fair value is the amount for which an asset could
be exchanged, or a liability settled, between
knowledgeable, independent parties.
financial
asset
A financial asset is any asset that is:
A derivative is a financial instrument or other
contract with all three of the following
characteristics:
(i)
(i) its value changes in response to the change in
a:
(iii)
(ii)
undertaking;
financial instrument price,
foreign currency rate,
other variable;
(ii) it requires little or no initial net investment; and
(iii) it is settled in the future.
effective
interest
method
The effective interest method calculates the
amortised cost of financial assets or financial
liabilities by allocating any premium or discount
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a contractual right:
-to exchange financial assets or financial
liabilities with another undertaking under
conditions that are potentially favourable to
the undertaking; or
commodity price,
credit rating or credit index, or
an equity instrument of another
-to receive cash or a financial asset from
another undertaking; or
specified interest rate,
index of prices or rates,
cash;
(iv)
a contract that may be settled in the
undertaking’s own equity instruments and is
either:
-a non-derivative for which the undertaking
may be obliged to receive a variable
number of the undertaking’s own equity
instruments; or
-a derivative that can be settled other than
by a fixed amount of cash or a fixed
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IFRS 7 Financial Instruments: Disclosures
number of the undertaking’s own equity
instruments.
financial
instrument
financial
liability
A financial instrument is any contract that involves
a financial asset (including cash) of one
undertaking and a financial liability or equity
instrument of another undertaking.
value through (i) It is recorded as held for trading. A financial
profit or loss asset or financial liability is recorded as held for
trading if it is:
-acquired or incurred primarily to sell or
repurchase it soon;
-part of a portfolio of financial instruments that
are managed together and for which there is a
recent pattern of short-term profit-taking; or
A financial liability is any liability that is:
(i) a contractual obligation:
-a derivative (except for a derivative that is a
designated hedging instrument).
-to deliver cash or a financial asset to
another undertaking; or
(ii) Upon initial recognition it is recorded as at fair
value through profit or loss. This applies to any
financial asset or financial liability except for:
-to exchange financial assets or financial
liabilities with another undertaking under
conditions that are potentially unfavourable
to the undertaking; or
(ii) a contract that can be settled in the
undertaking’s own equity instruments and is either:
-a non-derivative for which the undertaking
may be obliged to deliver a variable number of
the undertaking’s own equity instruments; or
-a derivative that can be settled other than by
a fixed amount of cash or a financial asset for
a fixed number of the undertaking’s own equity
instruments.
financial
asset or
financial
liability at fair
A financial asset or financial liability at fair value
through profit or loss is a financial asset or
financial liability that meets either of the following
conditions.
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investments in equity instruments that do not have
a quoted market price in an active market, and
whose fair value cannot be reliably measured.
financial
asset or
financial
liability held
for trading
Trading generally reflects active and frequent
buying and selling, and these financial instruments
are mostly used to generate a profit from shortterm fluctuations in price or dealer's margin.
Financial liabilities held for trading include:
i. derivative liabilities that are not accounted
for as hedging instruments;
ii. obligations to deliver financial assets
borrowed by a short seller (that is selling
financial assets it has borrowed and does
not yet own);
iii. financial liabilities that are incurred with an
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IFRS 7 Financial Instruments: Disclosures
intention to repurchase them in the near term
(such as a quoted debt instrument that the
issuer may buy back soon depending on
changes in its fair value); and
iv. financial liabilities that are part of a
portfolio of identified financial instruments
that are managed together and for which
there is evidence of a recent pattern of shortterm profit-taking.
The fact that a liability is used to fund trading
activities does not in itself make that liability one
that is held for trading. A bank overdraft would be
an example of a liability used to fund trading that
would not be recorded as held for trading.
forecast
transaction
A forecast transaction is a future transaction where
commitment has not yet been made.
hedging
instrument
A hedging instrument is a designated derivative or
(in the case of a hedge of changes in foreign
currency exchange rates only) a designated nonderivative financial asset (liability) whose fair value
or cash flows are expected to offset changes in the
fair value or cash flows of a designated hedged
item.
held-tomaturity
investments
Held-to-maturity investments are non-derivative
financial assets with determinable payments and
fixed maturity that an undertaking can and will hold
to maturity other than those recorded as:
(i) at fair value through profit or loss;
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(ii) available for sale; and
(iii) loans and receivables.
interest rate
risk
The risk that the fair value or future cash flows of a
financial instrument will fluctuate due to changes in
market interest rates.
liquidity risk
The risk that an undertaking will have difficulty in
settling its obligations.
loans and
receivables
Loans and receivables are non-derivative financial
assets with determinable payments that are not
quoted in an active market, other than:
(i) those that the undertaking intends to sell
immediately or soon, which shall be recorded as
held for trading, and those that the undertaking
designates as at fair value through profit or loss;
(ii) those recorded as available for sale; or
(iii) those for which the holder may not recover
most of its initial investment, other than because of
credit deterioration, which shall be recorded as
available for sale.
An interest acquired in a pool of assets that are
not loans or receivables (such as an interest in a
mutual fund) is not a loan or receivable.
loans
payable
Financial liabilities, other than short-term trade
payables on normal credit terms.
market risk
The risk that the fair value of future cash flows of a
financial instrument will fluctuate due to changes in
market prices.
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IFRS 7 Financial Instruments: Disclosures
Market risk comprises three types of risk: currency
risk, interest rate risk and other price risk.
(Market risk is thus a composite of currency risk,
interest rate risk and other price risk. Each may
individually or jointly impact market prices.)
other price
risk
The risk that the fair value or future cash flows of a
financial instrument will fluctuate due to changes in
market prices (other than those arising from
interest rate risk or currency risk).
Disclosure is required of:
(i)
the impact of financial instruments on an undertaking’s
financial position and performance. This updates IAS 32.
(ii)
qualitative and quantitative information about
exposure to risks arising from financial instruments.
Qualitative disclosures describe the undertaking’s objectives,
policies and processes for managing those risks.
past due
A financial asset is past due when a counterparty
has failed to make a payment when contractually
due.
The quantitative disclosures attempt to quantify risk and may be
based on internal reports.
regular way
purchase or
sale
A regular way purchase (or sale) is a purchase (or
sale) of a financial asset under a contract whose
terms require delivery of the asset within the time
established by regulation or convention in the
market specified.
Much of the material of IFRS 7 is based on the bank supervisory
regulations of the Bank for International Settlements (Basel 2):
www.bis.org/ which apply to international banks in the countries
that have adopted Basel 2.
Main features of IFRS 7
There are a number of differences. For example, Basel 2 requires
reporting on operational risk, which is nor required by IFRS 7. Also,
some definitions vary. The two systems are likely to converge over
the next few years.
IFRS 7 applies to all risks arising from all financial instruments,
except those exempted in the ‘Scope’ (below).
Objective of IFRS 7
IFRS 7 applies to all undertakings, even undertakings that have few
financial instruments such as a trader whose only financial
instruments are accounts receivable and accounts payable.
The objective is that disclosures in the financial statements should
enable users to evaluate:
The disclosure required varies with use of financial instruments and
risk exposure.
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(i)
the importance of financial instruments for the undertaking’s
financial position and performance; and
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IFRS 7 Financial Instruments: Disclosures
(ii)
the nature and extent of risks arising from financial
instruments, and how the risks are managed.
The principles in IFRS 7 complement those in IAS 32, IAS 39 and
IFRS 9.
IAS 1 Presentation of Financial Statements Update (2007)
IFRS 7 is based on IAS 1 for the presentation of financial
statements.
IAS 1 was updated in 2007. The changes are listed in the IAS 1
workbook. One of the changes is the retitling of the balance sheet
as the statement of financial position.
The Board decided to rename a new statement a ‘statement of
comprehensive income’. The term ‘comprehensive income’ is not
defined in the Framework but is used in IAS 1 to describe the
change in equity of an undertaking during a period from
transactions, events and circumstances other than those resulting
from transactions with owners in their capacity as owners.
Although the term ‘comprehensive income’ is used to describe the
aggregate of all components of comprehensive income, including
profit or loss, the term ‘other comprehensive income’ refers to
income and expenses that under IFRSs are included in
comprehensive income but excluded from profit or loss (such as
revaluations of available-for-sale financial instruments, which
previously were accounted for directly in equity).
The Board decided that an undertaking should have the choice of
presenting all income and expenses recognised in a period in one
statement or in two statements.
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The Board acknowledged that the titles ‘income statement’
and ‘statement of profit or loss’ are similar in meaning and
could be used interchangeably, and decided to retain the title
‘income statement’ as this is more commonly used.
This workbook has not been updated with the new titles of
the statements, as most readers will be more familiar with the
previous titles and foreign translations (especially into
Russian) have yet to be agreed.
We recommend that readers review the section of IAS 1
workbook covering a ‘statement of comprehensive income’,
as this will cause presentation changes regardless of when (or
whether) the new titles of statements are adopted by users.
Scope
IFRS 7 applies to recognised and unrecognised financial
instruments.
Recognised financial instruments include financial assets and
financial liabilities that are within the scope of IFRS9.
Unrecognised financial instruments include some financial
instruments that are outside the scope of IFRS 9, such as some
loan commitments.
IFRS 7 applies to contracts to buy or sell a non-financial item that
are within the scope of IFRS 9.
Exceptions to IFRS 7:
(i)
interests in subsidiaries, associates and joint ventures
(though IFRS 7 applies to those accounted for under IFRS 9) and
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IFRS 7 Financial Instruments: Disclosures
to all derivatives linked to these interests, unless the derivative is an
equity instrument.
(ii)
employers’ rights and obligations arising from employee
benefit plans, to which IAS 19 applies.
(iii)
insurance contracts as defined in IFRS 4 (though IFRS 7
applies to derivatives that are embedded in insurance contracts if
IFRS 9 requires them to be accounted for separately).
(iv)
financial instruments, contracts and obligations under sharebased payment transactions to which IFRS 2 applies (though IFRS
7 applies to those within the scope of IFRS 9).
(ii)
treat as a separate class, or classes, those financial
instruments outside the scope of IFRS 7.
An undertaking decides how much detail it provides to satisfy the
requirements of IFRS 7, how much emphasis it places on different
aspects of the requirements and how it aggregates information to
display the overall picture without combining information with
different characteristics.
Classes of financial instruments
IFRS 7 requires certain disclosures to be given by class of financial
instrument, for example, the reconciliation of an allowance account.
Classes of financial instruments and level of disclosure
An undertaking shall group financial instruments into classes that
are suitable to the nature of the information disclosed and the
characteristics of those financial instruments.
An undertaking shall provide adequate information to enable
reconciliation to the line items presented in the balance sheet.
The classes are determined by the undertaking and are distinct
from the categories of financial instruments specified in IFRS 9
(which determine how financial instruments are measured and
where changes in fair value are recognised).
In determining classes of financial instrument, an undertaking shall:
(i)
distinguish instruments measured at amortised cost from
those measured at fair value.
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IFRS 7 does not provide a prescriptive list of classes of financial
instruments. It states that a class should contain financial
instruments of the same nature and characteristics and that the
classes should be reconciled to the line items presented in the
balance sheet.
What considerations should an undertaking apply in identifying
different classes of financial instruments since a prescriptive list of
classes is not provided?
For example, should a bank disclose .loans and advances as a
single class, or should it be split further into separate classes?
A class of financial instruments is not the same as a category of
financial instruments. Categories are defined in IFRS 9 as financial
assets at fair value through profit or loss, held-to-maturity
investments, loans and receivables, available-for-sale financial
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IFRS 7 Financial Instruments: Disclosures
assets, financial liabilities at fair value through profit or loss and
financial liabilities measured at amortised cost.
Classes are expected to be determined at a lower level than the
measurement categories in IFRS 9 and reconciled back to the
balance sheet, as required by IFRS 7.
However, the level of detail for a class should be determined on an
undertaking-specific basis. In the case of banks, the category loans
and advances is expected to comprise more than one class unless
the loans have similar characteristics. It may be appropriate to
provide separate classes by:
-types of customers: for example, commercial loans and loans to
individuals; or
- types of loans: for example, mortgages, credit cards, unsecured
loans and overdrafts.
In some cases, loans to clients can be one class if all the loans
have similar characteristics (eg, a saving bank providing only one
type of loan to individuals).
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The possible classes within the categories of the commercial bank’s financial assets and financial liabilities are presented below.
Categories (in accordance
with IAS 39)
Financial assets
Classes
Assets held for trading
Financial assets designated at
fair value through profit or loss
Debt securities
Equity securities
Derivative financial instruments
Financial assets designated at
fair value through profit or loss
Debt securities
Equity securities
Deposits at other banks
Loans to individual
(retail) borrowers
Loans and advances
Loans and advances to
customers
Debt securities
Held-to-maturity investments
Available for sale equity
investments
Listed
Unlisted
Debt securities
Equity securities
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Loans and advances
to corporate
undertakings
Listed
Unlisted
Listed
Unlisted
Credit cards
Auto loans
Mortgages
Other assets
Large corporate
undertakings
Medium and smallscale business
Others
IFRS 7 Financial Instruments: Disclosures
Categories (in accordance
with IAS 39)
Financial liabilities
Financial liabilities designated
at fair value through profit or
loss
Classes
Trading liabilities
Derivative financial instruments
Financial liabilities designated at fair value through
profit or loss
Debt securities in
issue
Due from other banks
Financial liabilities measured
at amortised cost
Due to customers
Personal customers
Large corporate undertakings
Medium and small-scale business
Debt securities in issue
Subordinated deposits
Other borrowed funds
Categories of liabilities are unchanged under IFRS 9. Asset
categories, except the first, will change under IFRS 9. Please see
the IFRS 9 workbook.
Examples of classes will still be usable under IFRS 9.
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IFRS 7 Financial Instruments: Disclosures
Importance of financial instruments for financial
position and performance
An undertaking shall disclose information that enables users to
evaluate the importance of financial instruments for its financial
Strategy in using financial instruments –Text example
from Illustrated Consolidated Financial Statements 2004Banks PwC
By their nature, the Group’s activities are principally related to the use of
financial instruments including derivatives. The Group accepts deposits
from customers at both fixed and floating rates, and for various periods,
and seeks to earn above-average interest margins by investing these
funds in high-quality assets. The Group seeks to increase these margins
by consolidating short-term funds and lending for longer periods at higher
rates, while maintaining sufficient liquidity to meet all claims that might fall
due.
The Group also seeks to raise its interest margins by obtaining aboveaverage margins, net of allowances, through lending to commercial and
retail borrowers with a range of credit standing. Such exposures involve
not just on-balance sheet loans and advances; the Group also enters into
guarantees and other commitments such as letters of credit and
performance, and other bonds.
The Group also trades in financial instruments where it takes positions in
traded and over-the-counter instruments, including derivatives, to take
advantage of short-term market movements in equities and bonds and in
currency, interest rate and commodity prices.
The Board places trading limits on the level of exposure that can be taken
in relation to both overnight and intra-day market positions. With the
exception of specific hedging arrangements, foreign exchange and interest
rate exposures associated with these derivatives are normally offset by
entering into counterbalancing positions, thereby controlling the variability
in the net cash amounts required to liquidate market positions.
position (balance sheet) and performance (profit and loss account).
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Balance sheet (SFP)
Categories of financial assets and financial liabilities
The carrying amounts of each of the following categories, as
defined in IAS 39, shall be disclosed either on the face of the
balance sheet or in the notes:
(i)
financial assets at fair value through profit or loss, showing
separately those designated as such upon initial recognition and
those classified as held for trading;
(ii)
held-to-maturity investments;
(iii)
loans and receivables;
(iv)
available-for-sale financial assets;
(v)
financial liabilities at fair value through profit or loss, showing
separately (1) those designated as such upon initial recognition and
(2) those classified as held for trading; and
(vi)
financial liabilities measured at amortised cost.
Example of Balance Sheet Assets
(Extract from FINREP table 1.1)
Amounts
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IFRS 7 Financial Instruments: Disclosures
Cash and cash balances with central banks
Financial assets held for trading
Derivatives held for trading
Equity instruments
Debt instruments
Loans and advances
Financial assets designated at fair value
through profit or loss
Equity instruments
Debt instruments
Loans and advances
Available-for-sale financial assets
Equity instruments
Debt instruments
Loans and advances
Loans and receivables (including finance
leases)
Debt instruments
Loans and advances
Held-to-maturity investments
Debt instruments
Loans and advances
Derivatives – Hedge accounting
Fair value hedges
Cash flow hedges
Hedges of a net investment in a foreign
operation
Fair value hedge of interest rate risk
Cash flow hedge interest rate risk
Fair value changes of the hedged items in
portfolio hedge of interest rate risk
Example of Balance Sheet Liabilities
(Extract from FINREP table 1.2)
Deposits from central banks
Financial liabilities held for trading
Deposits from credit institutions
Deposits (other than from credit
institutions)
Debt certificates (including bonds
intended for repurchase in short term)
Other financial liabilities held for trading
Financial liabilities designated at fair
value through profit or loss
Deposits from credit institutions
Deposits (other than from credit
institutions)
Debt certificates (including bonds)
Subordinated liabilities
Other financial liabilities designated at
fair value through profit or loss
Financial liabilities measured at
amortised cost
Deposits from credit institutions
Deposits (other than from credit
institutions)
Debt certificates ( including bonds)
Subordinated liabilities
Other financial liabilities measured at
amortised cost
Financial liabilities associated with
transferred financial assets
Derivatives – Hedge accounting
Fair value hedges
Cash flow hedges
Amounts
Derivatives held for trading
Short positions
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Hedges of a net investment in a foreign
operation
Fair value hedge of interest rate risk
Cash flow hedge interest rate risk
Fair value changes of the hedged items
in portfolio hedge of interest rate risk
17
IFRS 7 Financial Instruments: Disclosures
(Note: The copyright of FINREP belongs to the European Banking
Authority: www.eba.europa.eu/Home.aspx The complete copy of
FINREP is attached to this workbook.)
(iii)
the change, during the period and cumulatively, in the fair
value of the loans or receivables that is attributable to changes in
the credit risk of the financial asset calculated either:
Financial assets or financial liabilities at fair value through
profit or loss
(1)
as the change in its fair value that is not attributable to
changes in market conditions that give rise to market risk; or
In the following examples, I/B refers to Income Statement and
Balance Sheet (SFP).
(2)
by using an alternative method that better represents the
change in its fair value that is attributable to changes in the credit
risk of the asset.
EXAMPLE fair value through profit and loss
You hold a fixed-rate interest bond for trading purposes that
yields 10% interest per year. National interest rates fall from 7%,
when you bought it, to 5% at the reporting date. The market value
of the bond has increased by 43. This increase in fair value is
recorded in the Income Statement even though the profit has yet
to be realized.
I/B
DR
CR
Fair value through profit and loss –
B
43
debt instruments
Interest Income- fair value through
I
43
profit and loss financial assets
Revaluation of available for sale
debt instruments
Changes in market conditions giving rise to market risk include
changes in a benchmark interest rate, commodity price, foreign
exchange rate or indices of prices or rates.
(iv)
the change in the fair value of any related credit
derivatives or similar instruments that has occurred during the
period and cumulatively since the loan or receivable was
designated.
If the undertaking has recorded loans or receivables at fair value
through profit or loss, it shall disclose:
(i)
the maximum exposure of the loans or receivables to credit
risk at the reporting date.
(ii)
the amount by which any related credit derivatives or similar
instruments reduce that maximum exposure to credit risk.
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18
Financial assets at fair value through profit or loss (including
trading) –Example from Illustrated Consolidated Financial
2XX4
2XX3
IFRS 7 Financial Instruments: Disclosures
Statements 2004- Banks PwC
Trading
Government bonds included in cash equivalents (Note 41)
Other government bonds
Other debt securities
1,949
1,180
885
2,676
945
3,402
Equity securities:
– listed
– unlisted
1,083
134
1,080
101
Total trading
5,231
8,204
Financial assets at fair value through profit or loss (at initial recognition)
2,520
1,102
Total
7,751
9,306
Securities pledged under repurchase agreements with other banks
are government bonds with a market value at 31 December 2XX4
of €939 (2XX3: €1,041). Other non-government bonds are also
pledged under repurchase agreements with a market value of €31
(2XX3: €23). These are separately reclassified as pledged assets
on the face of the balance sheet. All repurchase agreements
mature within 12 months.
Included in financial assets at fair value through profit or loss are
primarily convertible bonds that would otherwise have been
classified as available for sale with the embedded conversion
option separately accounted for.
(i)
the change, during the period and cumulatively, in the fair
value of the financial liability that is attributable to changes in the
credit risk of that liability calculated either:
(1)
as the change in its fair value that is not attributable to
changes in market conditions that give rise to market risk; or
(2)
using an alternative method the undertaking believes better
represents the amount of change in its fair value that is attributable
to changes in the credit risk of the liability.
Changes in market conditions that give rise to market risk include
changes in a benchmark interest rate, the price of another
undertaking’s financial instrument, a commodity price, a foreign
exchange rate or indices of prices or rates.
(ii)
the difference between the financial liability’s carrying
amount and the amount the undertaking would be contractually
required to pay at maturity.
The undertaking shall disclose:
(i)
In 31 December 2XX3 financial statements, financial assets at fair
value through profit or loss were classified as originated loans and
receivables and had a carrying amount of €982. A fair value gain of
€20 was recognised in opening retained earnings due to this
reclassification.
the methods used to comply with the above requirements.
(ii)
if the disclosure does not faithfully represent the change in
the fair value of the financial asset or financial liability attributable to
changes in its credit risk, the reasons for reaching this conclusion.
Reclassification
If the undertaking has recorded a financial liability as at fair value
through profit or loss, it shall disclose:
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If the undertaking has reclassified a financial asset as one
measured:
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IFRS 7 Financial Instruments: Disclosures
(i)
at cost or amortised cost, rather than at fair value;
or
(ii)
at fair value, rather than at cost or amortised cost,
it shall disclose the amount reclassified into and out of each
category, and the reason for that reclassification.
(Please see example in the last paragraph of the box above.)
The Group continues to recognise the asset to the extent of its
continuing involvement.
The total amount of the asset is €204, of which €104 represents
the Group’s additional continuing involvement from the
subordination of its retained interest for credit losses and the
excess spread. A liability with a carrying amount of €106.50 has
also been recognised.
Derecognition
(i)
An undertaking may have transferred (“sold”) financial assets in
such a way that part or all of the financial assets do not qualify for
derecognition (removal from the balance sheet). The undertaking
shall disclose for each class of such financial assets:
Derecognition-continuing involvement
– Example from Illustrated Consolidated Financial Statements
2004- Banks PwC Note – Loans and advances to customers
During the year, the Group transferred to a third party the right to
any collections of principal and 7.5% interest on €900 out of a
portfolio of €1,000 AA-rated loans.
The Group retains the right to €100 of any collection of principal
plus interest thereon of 8%, plus the excess spread of 0.5% on the
remaining €900 of principal, and any prepayments are allocated
proportionally. Any defaults on the €1,000 are first deducted from
the Group’s interest of €100 until that interest is exhausted.
the nature of the assets;
(ii) the nature of the risks and rewards to which it remains exposed;
(iii)
when the undertaking continues to recognise all of the
assets, the carrying amounts of the assets and of the associated
liabilities; and
(iv)
when the undertaking continues to recognise the assets to
the extent of its continuing involvement, the total carrying amount of
the original assets, the amount of the assets that the undertaking
continues to recognise, and the carrying amount of the associated
liabilities.
FINREP table 17 illustrates an example of Derecognition and
financial liabilities associated with transferred financial assets.
Collateral
An undertaking shall disclose:
The Group has transferred some significant risks and rewards (for
example, prepayment risk) and has also retained some significant
risks and rewards (for example, through the subordinated interest).
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(i)
the carrying amount of financial assets it has pledged as
collateral for liabilities or contingent liabilities; and
20
IFRS 7 Financial Instruments: Disclosures
(ii)
the conditions relating to its pledge.
When an undertaking holds collateral (of financial or non-financial
assets) and is allowed to sell or repledge the collateral without
default by the owner of the collateral, it shall disclose:
(i)
the fair value of the collateral held;
(ii)
the fair value of any such collateral sold or repledged, and
whether the undertaking has an obligation to return it; and
(iii)
collateral.
The Group has transferred some significant risks and rewards (for
example, prepayment risk) and has also retained some significant
risks and rewards (for example, through the subordinated interest).
The Group continues to recognise the asset to the extent of its
continuing involvement.
The total amount of the asset is €204, of which €104 represents
the Group’s additional continuing involvement from the
subordination of its retained interest for credit losses and the
excess spread. A liability with a carrying amount of €106.50 has
also been recognised.
the conditions associated with its use of the
Derecognition-continuing involvement
– Example from Illustrated Consolidated Financial Statements
2004- Banks PwC
Note – Loans and advances to customers
During the year, the Group transferred to a third party the right to
any collections of principal and 7.5% interest on €900 out of a
portfolio of €1,000 AA-rated loans.
The Group retains the right to €100 of any collection of principal
plus interest thereon of 8%, plus the excess spread of 0.5% on the
remaining €900 of principal, and any prepayments are allocated
proportionally. Any defaults on the €1,000 are first deducted from
the Group’s interest of €100 until that interest is exhausted.
Example of Collateral held FINREP table D - adapted
(When permitted to sell or repledge the collateral in the absence of default by the owner of collateral)
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21
IFRS 7 Financial Instruments: Disclosures
Fair values of collateral held
Fair values of collateral
sold/repledged
Financial assets
Equity instruments
Debt instruments
Loans & advances
Non-financial assets
Property, plant & equipment
Investment property
Other
Conditions associated with the use of the collateral
EXAMPLE Collateral permitted to sell
You hold 1000 of a client’s investment property that can be sold
even in the absence of default by the client. Any sale must be for
a price that is equal to, or more than, fair value. Any proceeds
from sale will reduce the client’s loan.
As you do not own the property, and have no right to the
proceeds, the property will not appear on your balance sheet.
You sell 400 of the investment property and reduce the client’s
loan.
I/B
DR
CR
Cash received from sale of
B
400
collateral
Client’s loan account
B
400
Sale of part of client’s investment
property pledged as collateral
possession during the period – FINREP
table E
Amount
Non-current assets held-for-sale
Property, plant and equipment
Investment property
Equity and debt instruments
Cash
Other
Total
EXAMPLE Collateral obtained by possession
Your client owes you 3500. The loan was unsecured, but you
now have a charge over some shares worth 3000 as collateral.
These would not be recorded in the balance sheet, but noted in
the table (E) above.
If the client defaults, and you sell the shares for their fair value,
the entries would be:
I/B
DR
CR
Example of Collateral obtained by taking
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22
IFRS 7 Financial Instruments: Disclosures
Cash received from sale of
collateral
Bad debt expense
Client’s loan account
Sale of client’s shares pledged as
collateral and recognition of a bad
debt
B
3000
I
B
500
3500
Allowance account for credit losses
When financial assets are impaired by credit losses and the
undertaking records the impairment in a separate account (or
accounts) rather than directly reducing the carrying amount of the
asset, it shall disclose a reconciliation of changes in that account
(those accounts) during the period for each class of financial
assets.
Compound financial instruments with multiple-embedded
derivatives
If an undertaking has issued an instrument that contains both a
liability and an equity component and the instrument has multipleembedded derivatives whose values are interdependent (such as a
callable convertible debt instrument), it shall disclose the existence
of those features.
A callable convertible debt instrument is a loan issued by the
undertaking that can be converted into equity under specified
conditions at specified times.
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The company may instruct (“call”) the holder to make the
conversion. There is a value to the loan and an additional value for
its convertibility. It the value of the equity falls, the value of the loan
falls as the company can force the holder to exchange the debt for
the lower value of equity.
Defaults and breaches
For loans payable (owed by the undertaking) recognised at the
reporting date, an undertaking shall disclose:
(i)
details of any defaults during the period of principal, interest,
sinking fund, or redemption terms of those loans payable;
(ii)
the carrying amount of the loans payable in default at the
reporting date; and
(iii)
whether the default was remedied, or the terms of the loans
payable were renegotiated, before the financial statements were
authorised for issue.
During the period, if there were breaches of other loan agreements
an undertaking shall disclose the same information if those
breaches enabled the lender to demand accelerated repayment
(unless the breaches were remedied, or the terms of the loan were
renegotiated, on or before the reporting date).
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IFRS 7 Financial Instruments: Disclosures
Default note (no defaults) – Example from
Illustrated Consolidated Financial Statements
2004- Banks PwC
The Group has not had any defaults of principal, interest or
redemption amounts during the period on its borrowed funds
(2XX3: nil)
The Group has not had any defaults of principal, interest or other
breaches with respect to their liabilities during the period (2XX3:
nil).
Profit and Loss Account and Equity
(FINREP tables 2 and 21 provide examples of a consolidated
income statement and Example of Note on Realised gains (losses)
on financial assets and liabilities not measured at fair value through
profit or loss,)
Items of income, expense, gains or losses
An undertaking shall disclose the following items of income,
expense, gains or losses either on the face of the financial
statements or in the notes:
(i)
total interest income and total interest expense
(calculated using the effective interest method) for financial assets
or financial liabilities that are not at fair value through profit or loss;
EXAMPLE effective interest method
You buy a bond with a face value of 100. It is paying a higher rate
of interest than other bonds and you buy it for 116. The premium
of 16 is capitalised and amortised over the period of the bond. It
reduces the interest received in each period.
I/B
DR
CR
Bond purchased
B
100
Bond premium
B
16
Cash paid
B
116
Purchase of bond
Interest received
I
2
Bond premium (amortisation)
B
2
Amortisation of bond premium in
period 1 = reduction of interest
received.
Interest and dividends on financial instruments
Undertaking A is applying IFRS 7 and is considering the
presentation of interest income, interest expense and dividend
income on financial instruments at fair value through profit or loss.
Should these items of income and expense be reported as part of
net gains or net losses on these financial instruments or disclosed
separately as part of interest income, interest expense or dividend
income?
IFRS 7 allows an accounting policy choice between these two
treatments. Undertaking A should apply its chosen policy
consistently and disclose the policy adopted.
Interest income is the charge for the use of cash or cash
equivalents or amounts due to the undertaking under IAS 18.
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IFRS 7 Financial Instruments: Disclosures
Dividend income is the distribution of profits to holders of equity
investments in proportion to their holdings of a particular class of
capital.
The nature of dividend income is therefore different from interest
income and it is possible to adopt one treatment for interest income
and interest expense and a different treatment for dividend income.
However, the reporting of interest income should be consistent with
that of interest expense.
IAS 18 requires undertakings to disclose the amount of dividend
income, if significant. Therefore, if undertaking A reports dividend
income from equity investments as part
of net gains or net losses on financial instruments at fair value
through profit or loss (FVTPL), the amount of dividend income on
financial assets at FVPTL should be disclosed in the notes.
(ii)
fee income and expense (other than amounts included in
determining the effective interest rate) arising from:
(i)
financial assets or financial liabilities that are not at fair value
through profit or loss; and
(ii)
trust and other fiduciary activities that result in the
holding or investing of assets on behalf of others;
EXAMPLE trust and other fiduciary activities
You manage some investment folios for clients and receive 48 as
a management fee.
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Cash Received
Fee income – fiduciary activities
Fee income – fiduciary activities
(iii)
I/B
B
I
DR
48
CR
48
interest income on impaired financial assets; and
(iv)
the amount of any impairment loss for each class of financial
asset.
EXAMPLE impairment loss
At the end of the period, you revalue your financial assets and
find that your equity instruments (shares) that are for trading have
fallen in value by 80.
I/B
DR
CR
Loss on Equity Instruments held for
I
80
trading
Held
for
trading
–
equity
B
80
instruments
Revaluation of financial assetsequity instruments
Gains and Losses
instruments)
–general
rules
(excluding
hedged
A gain or loss arising from a change in the fair value of a financial
asset or financial liability is recorded, as follows.
(i) A gain or loss on a financial asset or financial liability classified
as at fair value through profit or loss shall be recorded in profit or
loss.
(ii) A gain or loss on an available-for-sale financial asset shall be
recorded directly in equity, through the statement of changes in
25
IFRS 7 Financial Instruments: Disclosures
equity, except for impairment losses and foreign exchange gains
and losses, until the financial asset is derecognised, at which time
the cumulative gain or loss previously recorded in equity shall be
recorded in profit or loss.
Interest calculated using the effective interest method is recorded in
profit or loss.
Dividends on an available-for-sale equity instrument are recorded in
profit or loss, when receivable.
For financial assets and financial liabilities carried at amortised
cost, a gain or loss is recorded in profit or loss when the financial
asset or financial liability is derecognised or impaired, and through
the amortisation process.
(v)
net gains or net losses on:
(i)
financial assets or financial liabilities at fair value through
profit or loss, showing separately those on financial assets or
financial liabilities recorded as such upon initial recognition, and
those on financial assets or financial liabilities that are held for
trading;
(ii)
available-for-sale financial assets, showing separately the
amount of gain or loss recognised directly in equity during the
period and the amount removed from equity and recognised in
profit or loss for the period;
EXAMPLE net gains or net losses on available-for-sale financial
assets
At the end of the period, you revalue your available-for-sale
financial assets and find that your bonds that are available for
sale have fallen in value by 60, but there is a foreign exchange
gain of 14 relating to them.
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Available for Sale-Bonds
Loss on Available for Sale-Bonds
Exchange gain on Available for
Sale-Bonds
Revaluation of available-for-sale
financial assets - bonds
I/B
B
I
I
DR
CR
46
60
(iii)
held-to-maturity investments;
(iv)
loans and receivables; and
(v)
financial liabilities measured at amortised cost;
14
IFRS 7 for a first-time adopter
Undertaking A will transition to IFRS from its previous GAAP for the
year ending 31 December 2007. It will present two years of
comparative information so its date of transition will be 1 January
2005.
IFRS 7 is applicable for annual periods beginning on or after
1 January 2007 and so undertaking A will need to apply IFRS 7 to
its first IFRS financial statements.
IFRS 1, First Time Adoption of IFRS, provides relief for companies
that adopt IFRS before 1 January 2006.This relief exempts a firsttime adopter from presenting the comparative disclosures required
by IFRS 7 in its first IFRS financial statements.
Can A apply the exemption and not provide the IFRS 7 disclosures
for 2005 or 2006?
26
IFRS 7 Financial Instruments: Disclosures
No, undertaking A must provide IFRS 7 disclosures for all periods
presented, including 2005 and 2006. The exemption only applies to
first-time adopters whose date of adoption is before 1 January 2006
and who choose to early adopt IFRS 7. Undertaking
A’s date of adoption of IFRS is 1 January 2007. It therefore does
not qualify for the exemption.
IFRS 7 and interim reporting
Undertaking B is applying IFRS 7 for the first time from 1 January
2007.
When identifying the disclosures necessary to explain such an
event or transaction, consideration should be given to the IFRS 7
disclosures that might be required for that event or transaction in
the annual financial statements.
However, an undertaking that includes a complete set of financial
statements in its interim report, rather than condensed financial
information, should present all of
the disclosures required by IFRS 7, including full comparative
information.
Other disclosures
Management is preparing its condensed interim financial report for
the period ending 30 June 2007 in accordance with IAS 34, Interim
Financial Reporting.
Accounting policies
Should B apply IFRS 7 in the interim financial statements for the
period ending 30 June 2007?
An undertaking discloses, in the summary of important accounting
policies, the measurement bases used in preparing the financial
statements and the other accounting policies used that are relevant
to understanding the financial statements (IAS 1).
IFRS 7 is a disclosure standard rather than a measurement
standard. IAS 34 requires the interim report to be prepared using
the same policies as will be used for the next annual financial
statements, and that any changes to the policies are explained in
the notes.
Adopting IFRS 7 will not affect the amounts reported in the primary
statements and will not cause a change to the interim reporting
where a condensed interim report is presented.
However, IAS 34 requires that an explanation of events and
transactions is given where an understanding of these is significant
to understanding the current interim period.
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IAS 1 also requires undertakings to disclose, in the summary of
important accounting policies or other notes, the judgements, apart
from those involving estimates, that management has made in the
process of applying the undertaking’s accounting policies and that
have the most material impact on the amounts recognised in the
financial statements.
Critical accounting estimates, and judgements in applying
accounting policies - Example from Illustrated Consolidated
Financial Statements 2004- Banks PwC
The Group makes estimates and assumptions that affect the
reported amounts of assets and liabilities within the next financial
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IFRS 7 Financial Instruments: Disclosures
year. Estimates and judgements are continually evaluated and are
based on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances.
(i) Impairment losses on loans and advances
The Group reviews its loan portfolios to assess impairment at least
on a quarterly basis. In determining whether an impairment loss
should be recorded in the income statement, the Group makes
judgements as to whether there is any observable data indicating
that there is a measurable decrease in the estimated future cash
flows from a portfolio of loans before the decrease can be identified
with an individual loan in that portfolio.
This evidence may include observable data indicating that there
has been an adverse change in the payment status of borrowers in
a group, or national or local economic conditions that correlate with
defaults on assets in the group.
Management uses estimates based on historical loss experience
for assets with credit risk characteristics and objective evidence of
impairment similar to those in the portfolio when scheduling its
future cash flows. The methodology and assumptions used for
estimating both the amount and timing of future cash flows are
reviewed regularly to reduce any differences between loss
estimates and actual loss experience. To the extent that the net
present value of estimated cash flows differs by +/-5 percent, the
provision would be estimated €8 higher or €5 lower.
(ii) Fair value of derivatives
The fair value of financial instruments that are not quoted in active
markets are determined by using valuation techniques. Where
valuation techniques (for example, models) are used to determine
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fair values, they are validated and periodically reviewed by qualified
personnel independent of the area that created them.
All models are certified before they are used, and models are
calibrated to ensure that outputs reflect actual data and
comparative market prices. To the extent practical, models use only
observable data, however areas such as credit risk (both own and
counterparty), volatilities and correlations require management to
make estimates. Changes in assumptions about these factors could
affect reported fair value of financial instruments. For example, to
the extent that management used a tightening of 20 basis points in
the credit spread, the fair values would be estimated at €1,553 as
compared to their reported fair value of €1,548 at the balance sheet
date.
(iii) Impairment of available for-sale equity investments
The Group determines that available-for-sale equity investments
are impaired when there has been a significant or prolonged
decline in the fair value below its cost.
This determination of what is significant or prolonged requires
judgement. In making this judgement, the Group evaluates among
other factors, the normal volatility in share price. In addition,
impairment may be appropriate when there is evidence of a
deterioration in the financial health of the investee, industry and
sector performance, changes in technology, and operational and
financing cash flows.
Had all the declines in fair value below cost been considered
significant or prolonged, the Group would suffer an additional €105
loss in its 2004 financial statements, being the transfer of the total
fair value reserve to the income statement.
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IFRS 7 Financial Instruments: Disclosures
(iv) Held-to-maturity investments
The Group follows the guidance of IAS 39 on classifying nonderivative financial assets with fixed or determinable payments and
fixed maturity as held-to-maturity.
This classification requires significant judgement. In making this
judgement, the Group evaluates its intention and ability to hold
such investments to maturity. If the Group fails to keep these
investments to maturity other than for the specific circumstances –
for example, selling an insignificant amount close to maturity – it will
be required to reclassify the entire class as available-for-sale.
The investments would therefore be measured at fair value not
amortised cost. If the entire class of held-to-maturity investments is
tainted, the fair value would increase by €62m, with a
corresponding entry in the fair value reserve in shareholders’
equity.
(End of example)
Hedge accounting
(Please also see our workbook on hedging – part of the IAS 32/39
set of workbooks.)
Matching assets and liabilities that will be liquidated at the same
time eliminates timing differences and liquidity risk.
Hedging is a partial matching of financial assets and liabilities as an
insurance policy against an unprofitable rise, or fall, in either
instrument.
Fair value hedges recognise that financial instruments with fixed
rates of interest will gain or lose value if national interest rates
change (as they will be worth more or less due to the change).
Cash flow hedges match assets with liabilities in the same currency
at the time of their liquidation. Typically, this would involve financing
a loan to a client by borrowing the same amount, for the same
length of time, in the same currency from another lender. The rate
paid by the client would be higher than that paid to the lender, the
difference being the bank’s profit.
Hedges of net investments in foreign operations relate to the risk of
the value of foreign subsidiaries, subsidiaries and joint ventures
losing value when the local currency falls against that of the holding
company.
The hedge normally involves financing all or part of the foreign
operations by a loan (liability) in its local currency.
Hedge accounting seeks to match the hedged asset and liability
(including derivatives) so that their impact on the income statement
is simultaneous.
If their total impact will arise in the same period, no hedge
accounting is necessary. If not, any changes in the value of
hedged assets and liabilities is deferred by recording it in equity
until the entire hedge is liquidated.
An undertaking shall disclose the following separately for each type
of hedge (fair value hedges, cash flow hedges, and hedges of net
investments in foreign operations):
(i)
a description of each type of hedge;
(ii)
a description of the financial instruments recorded as
hedging instruments and their fair values at the reporting date; and
(iii)
the nature of the risks being hedged.
For cash flow hedges, an undertaking shall disclose:
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IFRS 7 Financial Instruments: Disclosures
(i)
the periods when the cash flows are likely to occur and when
they are expected to impact profit or loss;
(FINREP table A presents an example of a note covering
Derivatives used in Hedge Accounting.)
(ii)
a description of any forecast transaction for which hedge
accounting had previously been used, but which is no longer likely
to occur;
Hedge note – Example from Illustrated
Consolidated Financial Statements 2004- Banks
PwC
(iii)
The Group documents, at the inception of the transaction, the
relationship between hedging
instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge transactions.
The Group also documents its assessment, both at hedge inception
and on an ongoing basis, of whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items.
the amount that was recognised in equity during the period;
(iv)
the amount that was removed from equity and included in
profit or loss for the period, showing the amount included in each
line item in the income statement; and
(v)
the amount that was removed from equity during the period
and included in the original cost or other carrying amount of a nonfinancial asset or non-financial liability whose acquisition or
incurrence was a hedged highly-probable forecast transaction.
An undertaking shall disclose separately:
(i)
in fair value hedges, gains or losses:
(1)
on the hedging instrument; and
(2)
on the hedged item attributable to the hedged risk.
(ii)
the ineffectiveness recognised in profit or loss that arises
from cash flow hedges; and
(iv)
the ineffectiveness recognised in profit or loss that
arises from hedges of net investments in foreign operations.
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(i) Fair value hedge
Changes in the fair value of derivatives that are designated and
qualify as fair value hedges are recorded in the income statement,
together with any changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk.
If the hedge no longer meets the criteria for hedge accounting, the
adjustment to the carrying amount of a hedged item for which the
effective interest method is used is amortised to profit or loss over
the period to maturity. The adjustment to the carrying amount of a
hedged equity security remains in retained earnings until the
disposal of the equity security.
(ii) Cash flow hedge
The effective portion of changes in the fair value of derivatives that
are designated and qualify as cash
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IFRS 7 Financial Instruments: Disclosures
flow hedges are recognised in equity. The gain or loss relating to
the ineffective portion is recognised immediately in the income
statement.
Amounts accumulated in equity are recycled to the income
statement in the periods in which the hedged item will affect profit
or loss (for example, when the forecast sale that is hedged takes
place).
When a hedging instrument expires or is sold, or when a hedge no
longer meets the criteria for hedge accounting, any cumulative gain
or loss existing in equity at that time remains in equity and is
recognised when the forecast transaction is ultimately recognised in
the income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was reported in
equity is immediately transferred to the income statement.
(iii) Net investment hedge
Hedges of net investments in foreign operations are accounted for
similarly to cash flow hedges. Any gain or loss on the hedging
instrument relating to the effective portion of the hedge is
recognised in equity; the gain or loss relating to the ineffective
portion is recognised immediately in the income statement. Gains
and losses accumulated in equity are included in the income
statement when the foreign operation is disposed of.
(iv) Derivatives that do not qualify for hedge accounting
Certain derivative instruments do not qualify for hedge accounting.
Changes in the fair value of any derivative instrument that does not
qualify for hedge accounting are recognised immediately in the
income statement.
Such disclosure may include:
(i)
for financial assets or financial liabilities recorded as at fair
value through profit or loss:
(1)
the nature of the financial assets or financial liabilities the
undertaking has recorded as at fair value through profit or loss;
(2)
the criteria for so recording such financial assets or financial
liabilities on initial recognition; and
Classification of investments at initial recognition
note – Example from Illustrated Consolidated
Financial Statements 2004- Banks PwC
The Group classifies its financial assets in the
following categories: financial assets at fair value
through profit or loss; loans and receivables; held-tomaturity investments; and available-for-sale financial
assets. Management determines the classification of
its investments at initial recognition.
(i) Financial assets at fair value through profit or loss
This category has two sub-categories: financial assets
held for trading, and those designated at fair value
through profit or loss at inception. A financial asset is
classified in this category if acquired principally for the
purpose of selling in the short term or if so designated
by management. Derivatives are also categorised as
held for trading unless they are designated as hedges.
(ii) Loans and receivables
Loans and receivables are non-derivative financial
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IFRS 7 Financial Instruments: Disclosures
assets with fixed or determinable payments that are
not quoted in an active market. They arise when the
Group provides money, goods or services directly to a
debtor with no intention of trading the receivable.
(iii) Held-to-maturity
Held-to-maturity investments are non-derivative
financial assets with fixed or determinable payments
and fixed maturities that the Group’s management has
the positive intention and ability to hold to maturity.
Were the Group to sell other than an insignificant
amount of held-to-maturity assets, the entire category
would be tainted and reclassified as available for sale.
(iv) Available-for-sale
Available-for-sale investments are those intended to
be held for an indefinite period of time, which may be
sold in response to needs for liquidity or changes in
interest rates, exchange rates or equity prices.
Purchases and sales of financial assets at fair value through profit or
loss, held to maturity and available for sale are recognised on tradedate – the date on which the Group commits to purchase or sell the
asset. Loans are recognised when cash is advanced to the
borrowers. Financial assets are initially recognised at fair value plus
transaction costs for all financial assets not carried at fair value
through profit or loss. Financial assets are derecognised when the
rights to receive cash flows from the financial assets have expired or
where the Group has transferred substantially all risks and rewards
of ownership.
(3)
how the undertaking has satisfied the conditions in IFRS 9
for such designation. That disclosure includes a description of the
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circumstances underlying the measurement or recognition
inconsistency that would otherwise arise. That disclosure includes a
description of how recording at fair value through profit or loss is
consistent with the undertaking’s documented risk management or
investment strategy.
(ii)
the criteria for recording financial assets as available for sale.
Available for sale assets is the default group for any financial
instruments that have not been designated as belonging to one of
the other three categories. As the example note above illustrates,
they may be either sold when the need arises, or kept indefinitely.
(iii)
whether regular way purchases and sales of financial assets
are accounted for at trade date or at settlement date.
A regular way purchase (or sale) is a purchase (or sale) of a
financial asset under a contract whose terms require delivery of the
asset within the times established by regulation or convention in the
marketplace concerned. IFRS allows a choice of accounting
between the date of the agreement (the trade date) and the
settlement date, when the payment for the financial instrument is
made, which may be a few days later than the trade date. Having
made this choice of accounting date, it must be consistently
applied.
(iv)
when an allowance account is used to reduce the carrying
amount of financial assets impaired by credit losses:
From the Impairment of financial assets note below: “If there is
objective evidence that an impairment loss on loans and
receivables or held-to-maturity investments carried at amortised
cost has been incurred, the amount of the loss is measured as the
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IFRS 7 Financial Instruments: Disclosures
difference between the asset’s carrying amount and the present
value of estimated future cash flows (excluding future credit losses
that have not been incurred) discounted at the financial asset’s
original effective interest rate.
The carrying amount of the asset is reduced through the use of an
allowance account and the amount of the loss is recognised in the
income statement. ”
(If an allowance account is not used, then impairments will directly
reduce the carrying values of the assets.)
(1) the criteria for determining when the carrying amount of
impaired financial assets is reduced directly (or, in the case of a
reversal of a write-down, increased directly) and when the
allowance account is used; and
EXAMPLE impairment of financial assets – allowance account
At the end of the period, you revalue your available-for-sale
financial assets and find that your bonds that are available for
sale have fallen in value by 80 due to credit risk. You record this
in your allowance account
I/B
DR
CR
Allowance Account - Available for
B
80
Sale-Bonds
Loss on Available for Sale-Bonds
I
80
Impairment of available-for-sale
financial assets - bonds
(2) the criteria for writing off amounts charged to the allowance
account against the carrying amount of impaired financial assets.
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EXAMPLE impairment of financial assets – write off
Using the previous example: At the end of the following period,
you revalue your available-for-sale financial assets and find that
your bonds that are available for sale have fallen in value by
another 30 and are due to be redeemed. You record this in your
income statement and write off amounts charged to the
allowance account against the carrying amount of impaired
financial assets.
I/B
DR
CR
Allowance Account - Available for
B
80
Sale-Bonds
Loss on Available for Sale-Bonds
I
30
Available for Sale-Bonds
B
110
Partial write-off of available-for-sale
financial assets - bonds
(v)
how net gains or net losses on each category of financial
instrument are calculated, for example, whether the net gains or net
losses on items at fair value through profit or loss include interest or
dividend income.
How net gains or net losses on each category of
financial instrument are calculated note –
Example from Illustrated Consolidated Financial
Statements 2004- Banks PwC
Purchases and sales of financial assets at fair value through profit
or loss, held to maturity and available for sale are recognised on
trade-date – the date on which the Group commits to purchase or
sell the asset. Loans are recognised when cash is advanced to the
borrowers.
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IFRS 7 Financial Instruments: Disclosures
Financial assets are initially recognised at fair value plus
transaction costs for all financial assets not carried at fair value
through profit or loss. Financial assets are derecognised when the
rights to receive cash flows from the financial assets have expired
or where the Group has transferred substantially all risks and
rewards of ownership.
Purchases and sales of financial assets at fair value through profit
or loss, held to maturity and available for sale are recognised on
trade-date – the date on which the Group commits to purchase or
sell the asset.
Loans are recognised when cash is advanced to the borrowers.
Financial assets are initially recognised at fair value plus
transaction costs for all financial assets not carried at fair value
through profit or loss. Financial assets are derecognised when the
rights to receive cash flows from the financial assets have expired
or where the Group has transferred substantially all risks and
rewards of ownership.
Available-for-sale financial assets and financial assets at fair value
through profit or loss are subsequently carried at fair value.
Loans and receivables and held-to-maturity investments are carried
at amortised cost using the effective interest method.
Gains and losses arising from changes in the fair value of the
‘financial assets at fair value through profit or loss’ category are
included in the income statement in the period in which they arise.
Gains and losses arising from changes in the fair value of availablefor-sale financial assets are recognised directly in equity, until the
financial asset is derecognised or impaired at which time the
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cumulative gain or loss previously recognised in equity should be
recognised in profit or loss.
However, interest calculated using the effective interest method is
recognised in the income statement. Dividends on available-forsale equity instruments are recognised in the income statement
when the undertaking’s right to receive payment is established.
The fair values of quoted investments in active markets are based
on current bid prices. If the market for a financial asset is not active
(and for unlisted securities), the Group establishes fair value by
using valuation techniques. These include the use of recent arm’s
length transactions, discounted cash flow analysis, option pricing
models and other valuation techniques commonly used by market
participants.
(v)
the criteria used to determine that there is objective evidence
that an impairment loss has occurred.
Impairment of financial assets note – Example from
Illustrated Consolidated Financial Statements 2004- Banks
PwC
(1) Assets carried at amortised cost
The Group assesses at each balance sheet date whether there
is objective evidence that a financial asset or group of financial
assets is impaired.
A financial asset or a group of financial assets is impaired and
impairment losses are incurred if, and only if, there is objective
evidence of impairment as a result of one or more events that
occurred after the initial recognition of the asset (a ‘loss event’)
and that loss event (or events) has an impact on the estimated
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IFRS 7 Financial Instruments: Disclosures
future cash flows of the financial asset or group of financial
assets that can be reliably estimated.
Objective evidence that a financial asset or group of assets is
impaired includes observable data that comes to the attention of
the Group about the following loss events:
(i) significant financial difficulty of the issuer or obligor;
(ii) a breach of contract, such as a default or delinquency in
interest or principal payments;
(iii) the Group granting to the borrower, for economic or legal
reasons relating to the borrower’s financial difficulty, a
concession that the lender would not otherwise consider;
(iv) it becoming probable that the borrower will enter bankruptcy
or other financial reorganisation;
(v) the disappearance of an active market for that financial asset
because of financial difficulties; or
(vi) observable data indicating that there is a measurable
decrease in the estimated future cash flows from a group of
financial assets since the initial recognition of those assets,
although the decrease cannot yet be identified with the
individual financial assets in the group, including:
– adverse changes in the payment status of borrowers in the
group; or
– national or local economic conditions that correlate with
defaults on the assets in the group.
impairment exists individually for financial assets that are
individually significant, and individually or collectively for
financial assets that are not individually significant.
If the Group determines that no objective evidence of
impairment exists for an individually assessed financial asset,
whether significant or not, it includes the asset in a group of
financial assets with similar credit risk characteristics and
collectively assesses them for impairment.
Assets that are individually assessed for impairment and for
which an impairment loss is or continues to be recognised are
not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss on loans
and receivables or held-to-maturity investments carried at
amortised cost has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows
(excluding future credit losses that have not been incurred)
discounted at the financial asset’s original effective interest rate.
The carrying amount of the asset is reduced through the use of
an allowance account and the amount of the loss is recognised
in the income statement. If a loan or held-to-maturity investment
has a variable interest rate, the discount rate for measuring any
impairment loss is the current effective interest rate determined
under the contract.
As a practical expedient, the Group may measure impairment
on the basis of an instrument’s fair value using an observable
market price.
The Group first assesses whether objective evidence of
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IFRS 7 Financial Instruments: Disclosures
The calculation of the present value of the estimated future cash
flows of a collateralised financial asset reflects the cash flows
that may result from foreclosure less costs for obtaining and
selling the collateral, whether or not foreclosure is probable.
For the purposes of a collective evaluation of impairment,
financial assets are grouped on the basis of similar credit risk
characteristics (ie, on the basis of the Group’s grading process
that considers asset type, industry, geographical location,
collateral type, past-due status and other relevant factors).
Those characteristics are relevant to the estimation of future
cash flows for groups of such assets by being indicative of the
debtors’ ability to pay all amounts due according to the
contractual terms of the assets being evaluated.
Future cash flows in a group of financial assets that are
collectively evaluated for impairment are estimated on the basis
of the contractual cash flows of the assets in the Group and
historical loss experience for assets with credit risk
characteristics similar to those in the Group.
Historical loss experience is adjusted on the basis of current
observable data to reflect the effects of current conditions that
did not affect the period on which the historical loss experience
is based and to remove the effects of conditions in the historical
period that do not exist currently.
Estimates of changes in future cash flows for groups of assets
should reflect and be directionally consistent with changes in
related observable data from period to period (for example,
changes in unemployment rates, property prices, payment
status, or other factors indicative of changes in the probability of
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losses in the group and their magnitude).
The methodology and assumptions used for estimating future
cash flows are reviewed regularly by the Group to reduce any
differences between loss estimates and actual loss experience.
When a loan is uncollectable, it is written off against the related
provision for loan impairment. Such loans are written off after all
the necessary procedures have been completed and the
amount of the loss has been determined. Subsequent
recoveries of amounts previously written off decrease the
amount of the provision for loan impairment in the income
statement.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an
event occurring after the impairment was recognised (such as
an improvement in the debtor’s credit rating), the previously
recognised impairment loss is reversed by adjusting the
allowance account. The amount of the reversal is recognised in
the income statement.
(2) Assets carried at fair value
The Group assesses at each balance sheet date whether there
is objective evidence that a financial asset or a group of
financial assets is impaired. In the case of equity investments
classified as available-for-sale, a significant or prolonged
decline in the fair value of the security below its cost is
considered in determining whether the assets are impaired.
If any such evidence exists for available for- sale financial
assets, the cumulative loss – measured as the difference
between the acquisition cost and the current fair value, less any
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IFRS 7 Financial Instruments: Disclosures
impairment loss on that financial asset previously recognised in
profit or loss – is removed from equity and recognised in the
income statement.
Impairment losses recognised in the income statement on
equity instruments are not reversed through the income
statement. If, in a subsequent period, the fair value of a debt
instrument classified as available for sale increases and the
increase can be objectively related to an event occurring after
the impairment loss was recognised in profit or loss, the
impairment loss is reversed through the income statement.
(vii) when the terms of financial assets that would otherwise be
past due or impaired have been renegotiated, the accounting policy
for financial assets that are the subject of renegotiated terms.
Fair value
For each class of financial assets and financial liabilities, an
undertaking shall disclose the fair value of that class of assets and
liabilities reconcilable with its carrying amount. (Exceptions detailed
below.)
In disclosing fair values, an undertaking shall group financial assets
and financial liabilities into classes, but shall offset them only to the
extent that their carrying amounts are offset in the balance sheet.
about the assumptions relating to prepayment rates, rates of
estimated credit losses, and interest rates or discount rates.
(ii)
whether the fair values recorded or disclosed in the financial
statements are determined in whole or in part using a valuation
technique based on assumptions that are not supported by prices
from observable current market transactions in the same instrument
(that is without modification or repackaging) and not based on
available observable market data.
(iii)
whether the fair values recorded or disclosed in the financial
statements are determined in whole or in part using a valuation
technique based on assumptions that are not supported by prices
from observable current market transactions in the same instrument
(that is without modification or repackaging) and not based on
available observable market data.
For fair values that are recorded in the financial statements, if
changing one or more of those assumptions to reasonably-possible
alternative assumptions would change fair value materially, the
undertaking shall state this fact and disclose the impact of those
changes. Materiality shall be judged with respect to profit or loss,
and total assets or total liabilities, or, when changes in fair value are
recognised in equity, total equity.
Materiality means that the impact on the profit or loss, total assets
or total liabilities or equity would cause the report’s user to change
his/her perception of the finances of the undertaking.
An undertaking shall disclose:
(iii)
(i)
the methods and, when a valuation technique is used, the
assumptions applied in determining fair values of each class of
financial assets or financial liabilities. For example, information
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whether fair values are determined, in whole or in
part, directly by reference to published price
quotations in an active market or are estimated
using a valuation technique.
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IFRS 7 Financial Instruments: Disclosures
(iv)
if (iii) applies, the total amount of the change in fair
value estimated using such a valuation technique
that was recognised in profit or loss during the
period.
(FINREP table 31 provides an Example of a Note
regarding Information on fair value of financial instruments.)
Fair Value Hierarchy (see IFRS 13 workbook)
To make the disclosures an undertaking shall classify fair value
measurements using a fair value hierarchy that reflects the
significance of the inputs used in making the measurements. The
fair value hierarchy shall have the following levels:
(a) quoted prices (unadjusted) in active markets for identical
assets or liabilities (Level 1);
(b) inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly (ie as
prices) or indirectly (ie derived from prices) (Level 2); and
(c) inputs for the asset or liability that are not based on
observable market data (unobservable inputs) (Level 3).
(d) The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety shall be
determined on the basis of the lowest level input that is significant
to the fair value measurement in its entirety.
For this purpose, the significance of an input is assessed against
the fair value measurement in its entirety. If a fair value
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measurement uses observable inputs that require significant
adjustment based on unobservable inputs, that measurement is a
Level 3 measurement.
Assessing the significance of a particular input to the fair value
measurement in its entirety requires judgement, considering
factors specific to the asset or liability.
For fair value measurements recognised in the statement of
financial position, an understanding shall disclose for each class
of financial instruments:
(a) the level in the fair value hierarchy into which the fair value
measurements are categorised in their entirety, segregating fair
value measurements.
(b) any significant transfers between Level 1 and Level 2 of the
fair value hierarchy and the reasons for those transfers. Transfers
into each level shall be disclosed and discussed separately from
transfers out of each level. For this purpose, significance shall be
judged with respect to profit or loss, and total assets or total
liabilities.
(c) for fair value measurements in Level 3 of the fair value
hierarchy, a reconciliation from the beginning balances to the
ending balances, disclosing separately changes during the period
attributable to the following:
(i) total gains or losses for the period recognised in profit or
loss, and a description of where they are presented in the
statement of comprehensive income or the separate income
statement (if presented);
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IFRS 7 Financial Instruments: Disclosures
(ii) total gains or losses recognised in other comprehensive
income;
(i)
when the carrying amount is a reasonable approximation of
fair value, for example, short-term trade receivables and payables;
(iii) purchases, sales, issues and settlements (each type of
movement disclosed separately); and
(ii)
for an investment in equity instruments that do not have a
quoted market price in an active market, or derivatives linked to
such equity instruments, that is measured at cost (IAS 39) because
its fair value cannot be measured reliably; or
(iv) transfers into or out of Level 3 (eg transfers attributable to
changes in the observability of market data) and the reasons for
those transfers. For significant transfers, transfers into Level 3
shall 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).
(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, the entity shall state that
fact and disclose the effect of those changes.
(iii)
for a contract containing a discretionary participation feature
(IFRS 4) if the fair value of that feature cannot be measured
reliably.
For (ii) and (iii), an undertaking shall disclose information to help
users make their own judgements about the extent of possible
differences between the carrying amount of those financial assets
or financial liabilities and their fair value, including:
(i)
the fact that fair value information has not been disclosed for
these instruments as their fair value cannot be measured reliably;
(ii)
a description of the financial instruments, their carrying
amount, and why fair value cannot be measured reliably;
(iii)
(f) The entity shall disclose how the effect of a change to a
reasonably possible alternative assumption was calculated. For this
purpose, significance shall be judged with respect to profit or loss,
and total assets or total liabilities, or, when changes in fair value are
recognised in other comprehensive income, total equity.
Disclosures of fair value are not required:
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information about the market for the instruments;
(iv)
information about whether and how the undertaking intends
to dispose of the financial instruments; and
(v)
if financial instruments whose fair value previously could not
be reliably measured are derecognised, that fact, their carrying
amount at the time of derecognition, and the amount of gain or loss
recorded.
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IFRS 7 Financial Instruments: Disclosures
Fair values of financial assets and liabilities - Example from Illustrated Consolidated Financial Statements 2004- Banks PwC
The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Group’s
balance sheet at their fair value. Bid prices are used to estimate fair values of assets, whereas offer prices are applied for liabilities.
Carrying value
2004
2XX3
Financial assets
Due from other banks
Loans and advances to
customers
Investment securities (heldto-maturity)
Financial liabilities
Due to other banks
Other deposits
Due to customers
Debt securities in issue
Other borrowed funds
Fair value
2004
2XX3
8,576
5,502
8,742
5,510
59,203 53,208 59,461 53,756
3,999
1,009
4,061
1,020
15,039 13,633 14,962 13,541
16,249 12,031 16,221 11,997
51,775 42,698 52,032 42,695
1,766
1,232
1,785
1,301
2,808
2,512
2,895
2,678
i) Due from other banks
Due from other banks includes inter-bank placements and items in the course of collection.
The fair value of floating rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed interest bearing
deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining
maturity.
ii) Loans and advances to customers
Loans and advances are net of provisions for impairment. The estimated fair value of loans and advances represents the discounted amount
of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value.
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IFRS 7 Financial Instruments: Disclosures
iii) Investment securities
Investment securities include only interest-bearing assets held to maturity, as assets available-for-sale are measured at fair value. Fair value
for held to maturity assets is based on market prices or broker/dealer price quotations. Where this information is not available, fair value has
been estimated using quoted market prices for securities with similar credit, maturity and yield characteristics.
iv) Deposits and borrowings
The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the amount repayable on
demand.
The estimated fair value of fixed interest-bearing deposits and other borrowings without quoted market price is based on discounted cash
flows using interest rates for new debts with similar remaining maturity.
v) Debt securities in issue
The aggregate fair values are calculated based on quoted market prices. For those notes where quoted market prices are not available, a
discounted cash flow model is used based on a current yield curve appropriate for the remaining term to maturity.
vi) Financial instruments measured at fair value in the financial statements
The total amount of the change in fair value estimated using a valuation technique that was recognised in profit or loss during the period is €28
(2XX3: €19). There are no (2XX3: nil) financial instruments measured at fair value using a valuation technique that is not supported by
observable market prices or rates.
(End of example)
Nature and extent of risks arising from financial instruments
An undertaking shall disclose information that enables users to evaluate the nature and extent of risks arising from financial instruments to
which it is exposed at the reporting date.
These risks typically include credit risk, liquidity risk and market risk.
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IFRS 7 Financial Instruments: Disclosures
The disclosures shall be either in the financial statements or incorporated by cross-reference from the financial statements to some other
statement, such as a management commentary or risk report, that is available to users on the same terms as the financial statements and at
the same time. Without the
information incorporated by cross-reference, the financial statements are incomplete.
Qualitative disclosures
For each type of risk, an undertaking shall disclose:
1.
2.
the exposures to risk and how they arise;
(its objectives, policies and processes for managing the risk and the methods used to measure the risk; and
3.
any changes in (i) or (ii) from the previous period
Credit quality disclosures
IFRS 7 requires an undertaking to provide disclosures about the credit quality of financial assets that are neither past due nor impaired. The
purpose of this disclosure is to give greater insight into the credit risk of fully performing assets and help users assess whether such assets are
more or less likely to become impaired in future. How does an undertaking provide such disclosures?
The IASB did not prescribe the manner of these disclosures, as these should be appropriate to the reporting undertaking’s circumstances,
which will differ between companies.
Companies should therefore devise a method appropriate to their circumstances. Where an undertaking manages its credit exposures using
an external credit grading system, an undertaking might disclose information about:
- the amounts of credit exposures for each external credit grade;
- the rating agencies used;
- the amount of an undertaking’s rated and unrated credit exposures; and
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IFRS 7 Financial Instruments: Disclosures
- the relationship between internal and external ratings.
If an undertaking manages its credit exposures using an internal credit grading system, an undertaking might disclose information about:
- the internal credit ratings process;
- the amounts of credit exposures for each internal credit grade; and
- the relationship between internal and external ratings.
An undertaking could, for example, group assets based on the length of the business relationship with the counterparty and the counterparty
default rates in the past.
An example of this could be as follows: the performing trade receivables consist of new customers (£11,000), existing customers with no
previous defaults (£20,000) and customers who had defaulted in the past, but those had been fully recovered (£3,000).
The nature of the counterparty would also provide useful information in this regard.
Market risk –Text example from Illustrated Consolidated Financial Statements 2004- Banks PwC
The Group takes on exposure to market risks. Market risks arise from open positions in interest rate, currency and equity
products, all of which are exposed to general and specific market movements. The Group applies a ‘value at risk’ methodology to
estimate the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various
changes in market conditions. The Board sets limits on the value of risk that may be accepted, which is monitored on a daily
basis.
The daily market value at risk measure (VAR) is an estimate, with a confidence level set at 97.5%, of the potential loss that might
arise if the current positions were to be held unchanged for one business day. The measurement is structured so that daily
losses exceeding the VAR figure should occur, on average, not more than once every 60 days. Actual outcomes are monitored
regularly to test the validity of the assumptions and parameters/factors used in the VAR calculation.
As VAR constitutes an integral part of the Group’s market risk control regime, VAR limits are established by the Board for all
trading and portfolio operations; actual exposure against limits, together with a consolidated Group-wide VAR, is reviewed daily
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IFRS 7 Financial Instruments: Disclosures
by management. Average daily VAR for the Group was €187 in 2XX2 (2XX1:€173). However, the use of this approach does not
prevent losses outside of these limits in the event of more significant market movements.
Interest
rate risk
Foreign
exchange
risk
Equities
risk
Total VAR
Average
165
12 months to 31 December 2XX4
High
179
Low
135
Average
154
12 months to 31 December 2XX3
High
173
Low
134
17
18
15
15
18
12
5
5
2
4
6
2
187
202
152
173
197
148
Quantitative disclosures
For each type of risk, an undertaking shall disclose:
(i)
summary quantitative data about its exposure to that risk at
the reporting date. This disclosure shall be based on the
information provided to key management, such as the board of
directors or chief executive officer.
that provide the most relevant and reliable information. IAS 8
discusses relevance and reliability.
Concentrations of risk arise from financial instruments that have
similar characteristics and are affected similarly by changes in
economic or other conditions. The identification of concentrations of
risk requires judgement reflecting the circumstances of the
undertaking.
Disclosure of concentrations of risk shall include:
(ii)
the disclosures detailed below, unless the risk is not material.
(i)
(iii)
how management determines concentrations;
concentrations of risk if not apparent from (i) and (ii).
If the quantitative data disclosed as at the reporting date are
unrepresentative of exposure to risk during the period, an
undertaking shall provide further information.
When using several methods to manage a risk exposure, the
undertaking shall disclose information using the method or methods
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(ii)
the shared characteristic that identifies each concentration
(eg counterparty, geographical area, currency or market); and
(v)
the amount of the risk exposure associated with all
financial instruments sharing that characteristic.
Value at risk (VaR) is a measure (a number) saying how the
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IFRS 7 Financial Instruments: Disclosures
market value of an asset (or of a portfolio of assets) is likely to
decrease over a certain time period (usually over 1 day or 10 days)
under usual conditions. It is typically used by security houses or
investment banks to measure the market risk of their asset
portfolios (market value at risk),
Example
Consider a trading portfolio. Its market value in US dollars today is
known, but its market value tomorrow is not known.
The investment bank holding that portfolio might report that its
portfolio has a 1-day VaR of $5 million at the 95% confidence level.
This implies that (provided usual conditions will prevail over the 1
day) the bank can expect that, with a probability of 95%, the value
of its portfolio will decrease by 5 million or less during 1 day, or in
other words: it can expect that with a probability of 5% (i. e. 100%95%) the value of its portfolio will decrease by more than 5 million
during 1 day. Stated yet differently, the bank can expect that the
value of its portfolio will decrease by 5 million or less on 95 out of
100 usual trading days, in other words by more than 5 million on 5
out of every 100 usual trading days.
Source: http://en.wikipedia.org/wiki/Value_at_risk
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IFRS 7 Financial Instruments: Disclosures
Geographical concentrations of assets, liabilities and off-balance sheet items –Example adapted from Illustrated
Consolidated Financial Statements 2004- Banks PwC
The following note incorporates credit risk disclosures, geographical concentrations of assets, liabilities and off balance sheet items
disclosures and a public enterprise’s secondary segment disclosures.
Total
Total
Credit
Capital
Assets
liabilities
commitments
Revenues
expenditure
At 31 December 2XX4
Russia
[Other individual countries in
Europe over 10% reporting threshold]
Other European countries
Canada and US
Australasia
South-East Asia
Other countries
Share of associates
Unallocated assets / liabilities
Total
23,938
22,092
6,716
1,561
187
29,543
20,298
15,390
6,421
3,372
2,075
33,211
16,789
10,019
5,212
2,760
520
10,537
4,981
2,789
1,069
561
–
3,335
1,974
1,075
566
270
88
168
73
41
–
–
–
112
390
–
5,391
101,539
95,994
26,653
8,869
469
19,702
14,606
5,986
1,465
143
25,868
16,437
11,390
6,769
4,892
678
23,433
15,735
9,742
6,241
3,772
490
5,218
3,873
2,663
1,367
1,210
–
2,951
1,662
1,109
458
367
9
157
40
17
15
8
2
As at 31 December 2XX3
Russia
[Other individual countries in
Europe over 10% threshold]
Other European countries
Canada and US
Australasia
South-East Asia
Other countries
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IFRS 7 Financial Instruments: Disclosures
Share of associates
Unallocated assets / liabilities
108
315
–
7,658
86,159
81,694
20,317
8,021
382
Although the Group’s three business segments are managed on a worldwide basis, they operate in eight main geographical areas. The
Group’s exposure to credit risk is concentrated in these areas.
Russia is the home country of the parent bank, which is also the main operating company. The areas of operation include all the
primary business segments.
In the UK (which is over the 10% reporting threshold in IFRS 8), the areas of operation include all the primary business
segments.
In other European countries (it is assumed that the countries in this category are individually less than the 10% threshold for a
separately reportable segment), the Group operates retail and corporate banking services.
In Canada, the US and Latin America, the predominant activity is corporate banking services.
In Australasia and South-East Asia, the main activities are corporate banking and corporate finance services.
In South-East Asia, the principal countries in which the Group operates are Japan, China and Thailand. As one of the largest
Russian banks, the Group accounts for a significant share of credit exposure to many sectors of the economy. However, credit
risk is spread over a diversity of personal and commercial customers.
As an active participant in the international banking markets, the Group has a significant concentration of credit risk with other
financial institutions. In total, credit risk exposure to financial institutions is estimated to have amounted to €13,637 at 31
December 2004 (2XX3: €12,457), of which €5,061 (2XX3: €3,367) consisted of derivative financial instruments.
The Group restricts its exposure to credit losses on sale and repurchase agreements by entering into master netting
arrangements and by holding the underlying securities as collateral. As at 31 December 2XX4, master-netting arrangements
reduced the credit risk by approximately €2,734 (2XX3: €2,963).
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IFRS 7 Financial Instruments: Disclosures
With the exception of Russia and [other individual countries in Europe over 10% reporting threshold] no other individual country
contributed more than 10% of consolidated income or assets.
Interest and fee income, total assets, total liabilities and contingent liabilities have generally been based on the country in which
the branch or subsidiary is located, with adjustments made for branches in offshore centres to reflect customers and
counterparties that are based elsewhere. The analysis would not be materially different if based on the country in which the
counterparty is located.
Capital expenditure is shown by the geographical area in which the buildings and equipment are located.
Geographic sector risk concentrations within the customer loan portfolio were as follows:
Russia
UK
Other European
countries
Canada and US
Australasia
South-East Asian
countries
Other countries
2XX4
2XX4
%
2XX3
2XX3
%
10,064
23,113
13,617
17
39
23
11,707
19,153
11,174
22
36
21
4,736
4,144
1,753
8
7
3
4,785
2,128
3,726
9
4
7
1,776
3
535
1
59,203
100
53,208
100
(End of example)
Credit risk
An undertaking shall disclose by class of financial instrument:
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(i)
the amount that best represents its maximum exposure to
credit risk at the reporting date, without deducting any collateral
held or other credit enhancements (such as netting agreements that
do not qualify for offset – see IAS 32);
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IFRS 7 Financial Instruments: Disclosures
(ii)
in respect of the amount disclosed in (i), a description of
collateral held as security and other credit enhancements;
on, which may be materially greater than the amount recorded as a
liability.
(iii)
information about the credit quality of financial assets that
are neither past due nor impaired; and
(iv)
making a loan commitment that is irrevocable over the life of
the facility or is revocable only in response to a material adverse
change.
If the issuer cannot settle the loan commitment net in cash or
another financial instrument, the maximum credit exposure is the
full amount of the commitment. This is because it is uncertain
whether the amount of any undrawn portion may be drawn upon in
the future. This may be greater than the amount recorded as a
liability.
(iv)
the carrying amount of financial assets that would otherwise
be past due or impaired whose terms have been renegotiated.
Maximum credit risk exposure
For a financial asset, this is normally the gross carrying amount, net
of:
Financial assets that are either past due or impaired
(i)
any amounts offset ( IAS 32); and
(ii)
any impairment losses (IAS 39).
An undertaking shall disclose by class of financial asset:
Activities that give rise to credit risk and the associated maximum
exposure to credit risk include:
(i)
granting loans and receivables to clients and placing
deposits with other undertakings. The maximum exposure to credit
risk is the carrying amount of the related financial assets.
(ii)
entering into derivative contracts, such as foreign exchange
contracts, interest rate swaps and credit derivatives. When the
resulting asset is measured at fair value, the maximum exposure to
credit risk at the reporting date will be the carrying amount.
(i)
an analysis of the age of financial assets that are past due as
at the reporting date but not impaired;
(ii)
an analysis of financial assets that are individually
determined to be impaired as at the reporting date, including the
factors the undertaking considered in determining that they are
impaired; and
(iii)
for the amounts disclosed in (i) and (ii), a description of
collateral held by the undertaking as security and other credit
enhancements and an estimate of their fair value.
Collateral and other credit enhancements obtained
(iii)
issuing financial guarantees. The maximum exposure to
credit risk is the maximum amount to pay if the guarantee is called
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When an undertaking acquires financial or non-financial assets
during the period by taking possession of collateral it holds as
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IFRS 7 Financial Instruments: Disclosures
security, or calling on other credit enhancements (such as
guarantees), and such assets meet the recognition criteria in other
Standards, an undertaking shall disclose:
(i)
(iii)
later than three months and not later than one year; and
(iv)
later than one year and not later than five years.
the nature and carrying amount of these assets; and
(ii)
when the assets are not readily convertible into cash, its
policies for disposing or for using them in its operations.
(FINREP table 7 provides an Example of a Note regarding
Information on Impairment and Past due assets)
Liquidity risk
An undertaking shall disclose:
(i)
a maturity analysis for financial liabilities (owed by the
undertaking) that shows the remaining contractual maturities; and
(ii)
a maturity analysis for derivative financial liabilities.
The maturity analysis shall include the remaining contractual
maturities for those derivative financial liabilities for which
contractual maturities are essential for an understanding of the
timing of the cash flows
(iii)
a description of how it manages the liquidity risk
inherent in (i) and (ii).
When a counterparty has a choice of when an amount is paid, the
liability is included at the earliest date on which the undertaking can
be required to pay. For example, financial liabilities that can be
required to be repaid on demand (eg demand deposits) are
included in the earliest time band.
When committed to make amounts available in instalments, each
instalment is allocated to the earliest period in which the
undertaking can be required to pay. For example, an undrawn loan
commitment is included in the time band containing the earliest
date it can be drawn down.
The amounts recorded in the maturity analysis are the contractual
undiscounted cash flows, for example:
(i)
gross finance lease obligations (before deducting finance
charges);
(ii)
prices specified in forward agreements to purchase financial
assets for cash;
(iii)
net amounts for pay-floating/receive-fixed interest rate swaps
for which net cash flows are exchanged;
For example, the following time bands may be suitable:
(i)
within one month;
(ii)
later than one month and not later than three months;
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(iv)
contractual amounts to be exchanged in a derivative financial
instrument (such as a currency swap) for which gross cash flows
are exchanged; and
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IFRS 7 Financial Instruments: Disclosures
(v)
gross loan commitments.
These contrasts with the amounts included in the balance sheet as
the balance sheet amount is based on discounted cash flows.
(IFRS 7 does not require reconciliations between the discounted
and undiscounted cash flows.)
When the amount payable is not fixed, the amount disclosed is
calculated by reference to the conditions existing at the reporting
date. For example, when the amount payable varies with changes
in an index, the amount disclosed may be based on the level of the
index at the reporting date.
another financial instrument, the maximum credit exposure is the
full amount of the commitment.
This is because it is uncertain whether the amount of any undrawn
portion may be drawn upon in the future. This may be significantly
greater than the amount recognised as a liability.
When an undertaking is committed to make amounts available in
instalments, each instalment is allocated to the earliest period in
which the undertaking can be required to pay.
For example, an undrawn loan commitment is included in the time
band containing the earliest date it can be drawn down.
Loan commitments and IFRS 7
Loan commitments and IFRS 7 – interest rate risk
IFRS 7 applies to recognised and unrecognised financial
instruments. Recognised financial instruments include financial
assets and financial liabilities that are within the scope of IFRS 9.
Unrecognised financial instruments include some financial
instruments that, although outside the scope of IFRS 9, are within
the scope of IFRS 7 (such as some loan commitments).
Loan commitments and IFRS 7 – credit risk
Activities that give rise to credit risk and the associated maximum
exposure to credit risk include, but are not limited to:
making a loan commitment that is irrevocable over the life of the
facility or is revocable only in response to a material adverse
change.
Interest rate risk arises on interest-bearing financial instruments
recognised in the balance sheet (for example loans and receivables
and debt instruments issued) and on some financial instruments not
recognised in the balance sheet (eg some loan commitments).
IFRS 7 requires the undertaking to describe how it manages the
liquidity risk inherent in the maturity analysis of financial liabilities.
The factors that the undertaking might consider in providing this
disclosure include, but are not limited to, whether the undertaking:
(i)
expects some of its liabilities to be paid later than the earliest
date on which the undertaking can be required to pay (as may be
the case for customer deposits placed with a bank);
(ii)
expects some of its undrawn loan commitments not to be
drawn.
If the issuer cannot settle the loan commitment net in cash or
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IFRS 7 Financial Instruments: Disclosures
Guarantees and IFRS 7 – collateral and other credit enhancements
obtained
When an undertaking obtains financial or non-financial assets
during the period by taking possession of collateral it holds as
security or calling on other credit enhancements ((examples of the
latter being guarantees, credit derivatives, and netting agreements
that do not qualify for offset in accordance with IAS 32)), and such
assets meet the recognition criteria in other Standards, an
undertaking shall disclose:
(i)
Other price risk arises on financial instruments because of changes
in, for example, commodity prices or equity prices. An undertaking
might disclose the effect of a decrease in a specified stock market
index, commodity price, or other risk variable.
For example, if an undertaking gives residual value guarantees that
are financial instruments, the undertaking discloses an increase or
decrease in the value of the assets to which the guarantee applies.
For example: a lessor (which may be a bank leasing subsidiary) of
motor cars that writes residual value guarantees is exposed to
residual value risk.
the nature and carrying amount of the assets obtained; and
(ii)
when the assets are not readily convertible into cash, its
policies for disposing of such assets or for using them in its
operations.
Liquidity Risk - Example from Illustrated
Consolidated Financial Statements 2004- Banks
PwC
Guarantees and IFRS 7 – credit risk
The table on the following page analyses the Group’s
assets and liabilities into relevant maturity groupings
based on the remaining period at balance sheet date
to the contractual maturity date.
Activities that give rise to credit risk and the associated maximum
exposure to credit risk include, but are not limited to:
granting financial guarantees. In this case, the maximum exposure
to credit risk is the maximum amount the undertaking could have to
pay if the guarantee is called on, which may be significantly greater
than the amount recognised as a liability.
Guarantees and IFRS 7 – other price risk
There are three types of market risk: interest rate risk, currency risk
and other price risk.
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IFRS 7 Financial Instruments: Disclosures
As at 31 December
2004
Assets
Cash and central
banks balances
Treasury and other
eligible bills
Due from other banks
Financial assets at
fair value through
profit or loss
(including trading)
Derivative financial
instruments
Loans to customers
Investment securities
– available-for-sale
– held-to-maturity
Other assets
Total assets
Liabilities
Due to other banks
Other deposits
Derivative financial
instruments
and trading liabilities
Due to customers
Debt securities in
issue
Other borrowed
funds
Other liabilities
Total liabilities
Up to
1
month
1-3
months
3-12
months
1-5
years
Over
5
years
Total
6,080
–
–
–
–
6,080
712
773
–
–
–
1,485
2,157
1,640
3,127
1,309
2,507
1,898
785
1,915
–
1,959
8,576
8,721
1,301
1,453
1,258
991
322
5,325
4,676
11,583
24,008
14,432
4,504
59,203
–
–
328
–
–
342
–
1,499
15
692
988
12
3,314
1,512
3,447
4,006
3,999
4,138
16,894
18,587
31,185
19,815
15,058
101,539
4,145
3,706
4,564
4,639
3,813
3,219
1,681
3,390
836
1,295
15,039
16,249
1,140
26,056
55
1,072
8,387
69
1,062
12,973
1,076
580
2,445
566
185
1,914
–
4,039
51,775
1,766
–
–
–
937
1,871
2,808
1,316
367
926
597
1,112
4,318
36,418
19,098
23,069
10,196
7,213
95,994
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Net liquidity gap
As at 31 December
2XX3
(19,524)
(511)
8,116
9,619
7,845
5,545
Total assets
Total liabilities
Net liquidity gap
17,055
38,428
(21,373)
11,703
25,159
(13,456)
13,342
6,266
7,076
24,129
6,404
17,725
19,930
5,437
14,493
86,159
81,694
4,465
The table shows a short-term funds deficit (up to 3 months), as
customers can quickly remove much of their funds.
If experience shows this is likely to happen, then the bank will need
to provide substantial short-term funds. If not, the bank needs to
calculate a likely level of funds required based on historical
experience.
Market risk
Sensitivity analysis
A sensitivity analysis is needed for each type of market risk to
which the undertaking is exposed.
If an undertaking prepares a sensitivity analysis, such as value-atrisk, that reflects interdependencies between risk variables (eg
interest rates and exchange rates) and uses it to manage financial
risks, it may use that sensitivity analysis.
The undertaking shall also disclose:
(i)
the method used in preparing the sensitivity analysis, and the
main parameters and assumptions underlying the data provided;
and
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IFRS 7 Financial Instruments: Disclosures
(ii)
the objective of the method used and of limitations that may
result in the information not fully reflecting the fair value of the
assets and liabilities involved.
EXAMPLE - Sensitivity analysis
FRS 7 requires a sensitivity analysis for each type of market risk.
Market
risk is defined as the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market
prices.; it includes currency risk, interest rate risk and other price
risk.
The sensitivity analysis must show the impact of a reasonably
possible change in the relevant risk variable on profit or loss and
equity.
An undertaking hedges its exposure to variable interest rate risk on
an issued bond. The hedge is designated as a cash flow hedge.
The bond and the hedging instrument (interest rate swap) have a
five-year remaining life.
If the variable leg of the swap exactly matches the variable interest
of the bond (causing no ineffectiveness), how should the
undertaking reflect the effect of the hedge on profit or loss and
equity in the sensitivity analysis?
The high effectiveness of the hedge does not necessarily mean that
there would be no impact on equity or profit or loss due to changes
in interest rate risk.
The accounting for a cash flow hedge means that the fair value
movement related to the effective part of the hedging instrument is
included in equity.
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Amounts deferred in equity are recycled in profit or loss when the
hedged transaction occurs. Hence, reasonably possible movements
in the interest rate risk exposure have an impact on both profit or
loss and equity.
At the same time, reasonably possible movements in the interest
rate risk exposure on the outstanding bond would impact profit or
loss, as the bond was a recognised financial liability at the balance
sheet date.
If the effects of recycling and ineffectiveness are not material, the
undertaking could consider the following disclosure as an
approximation for the sensitivity analysis:
The movements related to the bond and the variable leg of the
swap are not reflected, as they offset each other. The movements
related to the remaining fair value exposure on the fixed leg of the
swap are shown in the equity part
of the analysis.
Market Interest Rate Risk - Example from
Illustrated Consolidated Financial Statements
2004- Banks PwC
In the table below, assuming the financial assets and liabilities at 31
December 2004 were to remain until maturity or settlement without
any action by the Group to alter the resulting interest rate risk
exposure, an immediate and sustained increase of 1% in market
interest rates across all maturities would reduce net income for the
following year by approximately €90 (2003: €75) and the Group’s
equity by approximately €270 (2003: €240).
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IFRS 7 Financial Instruments: Disclosures
As at 31
December
2003
Assets
Cash and
central
banks
balances
Treasury
and other
eligible
bills
Due from
other
banks
Financial
assets at
fair value
through
profit or
loss
(including
trading)
Loans to
customer
s
Investme
nt
securities
Other
assets
Total
assets
Up to
1
month
4,315
532
2,257
1-3
month
s
–
239
2,426
3-12
month
s
–
–
1,507
1-5 Over
year
5
s year
s
–
–
414
1,643
8,676
1,110
16,583
1,898
23,008
1,30
5
4,56
7
–
–
–
392
228
242
13
17,651
20,600
26,426
Nonintere
st
bearin
g
Total
–
4,315
–
–
–
–
2,23
9
324
–
771
6,604
1,181
50
9,376
53,20
8
1,61
6
202
2,210
10
5
9,177
9,675
6,68
8
4,18
4
10,610
86,15
9
s
Due to
other
banks
Other
deposits
8,345
3,764
1,015
489
20
–
13,63
3
1,736
8,639
950
297
409
–
Due to
customer
s
Debt
securities
in issue
Other
borrowed
funds
Other
liabilities
18,670
11,232
10,276
2,36
5
134
21
12,03
1
42,69
8
59
45
870
258
–
–
1,232
67
564
1,244
637
–
–
2,512
14
8
7
34
–
9,525
9,588
Total
liabilities
28,891
24,252
14,362
4,08
0
563
9,546
81,69
4
Total
interest
sensitivi
ty gap
(11,24 (3,652)
0)
12,064
2,60
8
3,62
1
If not, it shall disclose:
(i)
a sensitivity analysis for each type of market risk to which the
undertaking is exposed at the reporting date, showing how profit or
loss and equity would have been impacted by changes in the
relevant risk variable that were reasonably-possible at that date;
(ii)
the methods and assumptions used in preparing the
sensitivity analysis; and
Liabilitie
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55
IFRS 7 Financial Instruments: Disclosures
(iii)
changes from the previous period in the methods and
assumptions used, and the reasons for such changes.
current year if interest rates had varied by reasonably-possible
amounts.
An undertaking decides how it aggregates information to display the
overall picture without combining information with different
characteristics about exposures to risks from materially different
economic environments. For example:
(ii)
undertakings are not required to disclose the impact on profit
or loss and equity for each change within a range of reasonablypossible changes of the relevant risk variable. Disclosure of the
impacts of the changes at the limits of the reasonably-possible
range would be adequate.
(i)
an undertaking that trades financial instruments might
disclose this information separately for financial instruments held for
trading and those not held for trading.
(ii)
an undertaking would not aggregate its exposure to market
risks from areas of hyperinflation with its exposure to the same
market risks from areas of low inflation.
If an undertaking has exposure to only one type of market risk in
only one economic environment, it would aggregate information.
The sensitivity analysis must show the impact on profit or loss and
equity of reasonably-possible changes in the relevant risk variable
(such as current market interest rates, currency rates, equity prices
or commodity prices). For this purpose:
(i)
undertakings are not required to determine what the profit or
loss for the period would have been if relevant risk variables had
been different. Instead, undertakings disclose the impact on profit
or loss and equity at the balance sheet date assuming that a
reasonably-possible change in the relevant risk variable had
occurred at the balance sheet date and had been applied to the risk
exposures in existence at that date. For example, if an undertaking
has a floating rate liability at the end of the year, the undertaking
would disclose the impact on profit or loss (interest expense) for the
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In determining what a reasonably-possible change in the relevant
risk variable is, an undertaking should consider:
(i)
the economic environments in which it operates. A
reasonably-possible change should not include remote or ‘worst
case’ scenarios or ‘stress tests’. If the rate of change in the
underlying risk variable is stable, the undertaking need not alter the
chosen reasonably-possible change in the risk variable.
For example, assume that interest rates are 14 per cent and an
undertaking determines that a fluctuation in interest rates of ±50
basis points is reasonably possible.
It would disclose the impact on profit or loss and equity if interest
rates were to change to 13.5 per cent or 14.5 per cent.
In the next period, interest rates have increased to 14.5 per cent.
The undertaking continues to believe that interest rates may
fluctuate by ±50 basis points (ie that the rate of change in interest
rates is stable).
The undertaking would disclose the impact on profit or loss and
equity if interest rates were to change to 14 per cent or 15 per cent.
The undertaking would not be required to revise its assessment that
interest rates might reasonably fluctuate by ±50 basis points, unless
56
IFRS 7 Financial Instruments: Disclosures
there is evidence that interest rates have become importantly more
volatile.
Interest rate risk
(ii)
the time frame over which it is making the assessment. The
sensitivity analysis shall show the impacts of changes that are
considered to be reasonably-possible over the period until the
undertaking will next present these disclosures, which is usually its
next annual reporting period.
Interest rate risk arises on interest-bearing financial instruments
recorded in the balance sheet (such as loans and receivables and
debt instruments issued) and on some financial instruments not
recognised in the balance sheet (such as some loan commitments).
An undertaking may use a sensitivity analysis that reflects
interdependencies between risk variables, such as a value-at-risk
methodology, if it uses this analysis to manage its exposure to
financial risks.
Cash flow interest rate risk - Example from Illustrated
Consolidated Financial Statements 2004- Banks PwC
Interest sensitivity of assets, liabilities and off balance sheet items –
repricing analysis
This applies even if such a methodology measures only the
potential for loss and does not measure the potential for gain. Such
an undertaking might disclose the type of value-at-risk model used
(such as whether the model relies on Monte Carlo simulations), an
explanation about how the model works and the main assumptions
(such as the holding period and confidence level).
Cash flow interest rate risk is the risk that the future cash flows of a
financial instrument will fluctuate because of changes in market
interest rates. Fair value interest rate risk is the risk that the value
of a financial instrument will fluctuate because of changes in market
interest rates. The Group takes on exposure to the effects of
fluctuations in the prevailing levels of market interest rates on both
its fair value and cash flow risks. Interest margins may increase as
a result of such changes but may reduce or create losses in the
event that unexpected movements arise. The Board sets limits on
the level of mismatch of interest rate repricing that may be
undertaken, which is monitored daily.
Undertakings might also disclose the historical observation period
and weightings applied to observations within that period, an
explanation of how options are dealt with in the calculations, and
which volatilities and correlations are used.
An undertaking shall provide sensitivity analyses for the whole of its
business, but may provide different types of sensitivity analysis for
different classes of financial instruments.
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The table below summarises the Group’s exposure to interest rate
risks. Included in the table are the Group’s assets and liabilities at
carrying amounts, categorised by the earlier of contractual repricing
or maturity dates. The carrying amounts of derivative financial
instruments, which are principally used to reduce the Group’s
exposure to interest rate movements, are included in ‘other assets’
and ‘other liabilities’ under the heading ‘Non-interest bearing’.
57
IFRS 7 Financial Instruments: Disclosures
Expected repricing and maturity dates do not differ significantly
from the contract dates, except for the maturity of €27,456 (2XX3:
€18,670) of ‘Due to’ customers up to one month, of which 74%
(2XX3: 73%) represent balances on current accounts considered
by the Group as a relatively stable core source of funding of its
operations.
Up to
1
month
As at 31
December
2XX4
1-3
months
3-12
months
1-5
years
Over
5
years
Noninterest
Total
bearing
Assets
Cash and
6,080
–
–
–
–
–
central
banks
balances
Treasury
712
773
–
–
–
–
and other
eligible
bills
Due from
3,157
3,647
1,507
265
–
–
other
banks
Trading
1,643
1,619
1,798 1,705
739
1,217
securities
Loans to
12,676
19,583
22,008 4,432
492
12
customers
Investment
securities:
–
–
–
–
892 1,616
1,498
availablefor-sale
– held-to–
1,000
899
888 1,212
–
maturity
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6,080
1,485
8,576
8,721
Other
assets
328
342
15
12
2
8,770
9,469
Total
assets
24,596
26,964
26,227
8,194
4,061
11,497
101,539
9,345
4,764
413
381
136
–
15,039
3,736
10,639
1,219
390
265
–
16,249
27,456
11,987
9,673
1,345
1,284
30
51,775
55
69
1,076
566
–
–
1,766
35
439
868
295
1,171
–
2,808
12
12
267
13
–
8,053
8,357
40,639
27,910
13,516
2,990
2,856
8,083
95,994
(16,043)
(946)
12,711
5,204
1,205
Liabilities
Due to
other
banks
Other
deposits
Due to
customers
Debt
securities
in issue
Other
borrowed
funds
Other
liabilities
Total
liabilities
Total
interest
sensitivity
gap
59,203
4,006
The table below identifies the different rates of interest by currency
between assets and liabilities. As the amounts are not included in
the table,
conclusions as to the impact of interest rate changes need to be
noted.
3,999
58
IFRS 7 Financial Instruments: Disclosures
Fair value interest rate risk - Example from Illustrated
Consolidated Financial Statements 2004- Banks PwC
It summarises the effective interest rate by major currencies for
monetary financial instruments not carried at fair value through
profit or loss:
As at 31 December 2004
€
%
Assets
Cash and balances with central
banks
Treasury bills and other eligible bills
Due from other banks
Loans and advances to customers
Investment securities:
- available-for-sale debt securities
- held-to-maturity
£
%
4.76
5.34
6.71
4.16
4.52
5.01
8.04
5.65
5.21
7.31
6.92
6.45
7.28
4.23
4.22
6.02
6.81
6.83
6.49
6.52
7.85
7.90
5.30
5.21
US$ Swiss
Franc
£
€
Liabilities
Due to other banks
Other deposits
Due to customers
Debt securities in issue
Other borrowed funds
US$ Swiss
Franc
%
%
%
4.93
5.22
5.90
5.32
5.35
%
5.20
5.18
4.39
6.32
6.41
%
6.44
6.32
5.49
6.87
6.91
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%
4.20
4.18
3.99
4.43
4.45
Assuming the financial assets and liabilities at 31 December 2XX4
were to remain until maturity or settlement without any action by the
Group to alter the resulting interest rate risk exposure, an
immediate and sustained increase of 1% in market interest rates
across all maturities would reduce net income for the following year
by approximately €90 (2XX3: €75) and the Group’s equity by
approximately €270 (2XX3: €240).
(End of example)
Currency risk
Currency risk (or foreign exchange risk) arises on financial
instruments that are denominated in a foreign currency (in a
currency other than the functional currency (see IAS 21) in which
they are measured). For IFRS 7, currency risk does not arise from
financial instruments that are non-monetary items or from financial
instruments denominated in the functional currency.
A sensitivity analysis is disclosed for each currency to which an
undertaking has material exposure.
The table below reflects a bank’s current position in matching
currencies and includes credit commitments such as undrawn loans
and guarantees.
This table does not reflect the settlement dates of the assets and
liabilities. These would normally be managed by currency under
liquidity risk.
59
IFRS 7 Financial Instruments: Disclosures
Example -Risk disclosures under IFRS 7
Undertaking A invests in a foreign currency bond maturing in one
year. At the same time it enters into a foreign exchange forward
contract with a corresponding
maturity to offset the foreign currency risk.
IFRS 7 requires specific risk disclosures for material risks. Is the
materiality of the foreign currency risk on the bond assessed with or
without the foreign exchange forward contract?
The Group takes on exposure to effects of fluctuations in the
prevailing foreign currency exchange rates on its financial position
and cash flows. The Board sets limits on the level of exposure by
currency and in total for both overnight and intra-day positions,
which are monitored daily. The table below summarises the
Group’s exposure to foreign currency exchange rate risk at 31
December. Included in the table are the Group’s assets and
liabilities at carrying amounts, categorised by currency.
Concentrations of assets, liabilities and off balance
sheet items
The materiality of the foreign currency risk on the bond is assessed
without the foreign exchange forward contract.
The bond and the foreign exchange forward are dissimilar items
(IAS 1, Presentation of Financial Statements). The materiality
assessment of the foreign currency risk is therefore performed
without considering the foreign exchange forward contract.
However, if it is established that the foreign currency risk is
material, the disclosure required in the sensitivity analysis under
IFRS 7 is based on the net foreign exchange exposure.
That is, after offsetting the foreign currency bond against the foreign
exchange forward contract.
The same approach would apply for the assessment of credit risk,
liquidity risk and other market risk.
Currency risk - Example from Illustrated Consolidated
Financial Statements 2004- Banks PwC
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€
US$
Swiss
franc
£
Other
Total
As at 31 December
2004
Assets
Cash and balances
with central banks
Treasury bills and other
eligible bills
Due from other banks
Financial assets at fair
value through profit or
loss (including trading)
Derivative financial
instruments
Loans and advances to
customers
Investment securities:
– available-for-sale
– held-to-maturity
Investments in
associates
Intangible assets
Property and
equipment
1,824
912
1,216
1,236
892
6,080
100
235
150
1,000
–
1,485
2,572
1,435
1,876
2,324
1,715
1,365
1,849
3,397
564
200
8,576
8,721
1,643
1,459
398
1,627
198
5,325
20,264
15,987
6,984
7,873
8,095
59,203
1,555
998
45
501
880
21
432
–
35
1,379
2,001
–
139
120
11
4,006
3,999
112
116
903
96
275
61
261
–
–
–
80
273
1,519
60
IFRS 7 Financial Instruments: Disclosures
Other assets, including
tax assets
Total assets
1,156
264
589
275
99
2,383
32,611
24,830
13,206
20,637
10,398
101,539
Liabilities
Due to other banks
Other deposits
Derivative financial
instruments
And trading liabilities
Due to customers
Debt securities in issue
Other borrowed funds
Other liabilities,
including tax
liabilities
Retirement benefit
obligations
5,785
6,076
3,532
2,478
2,784
3,218
1,169
3,804
1,769
673
15,039
16,249
1,156
16,155
1,194
2,212
589
12,354
189
93
432
3,278
183
177
1,576
14,839
200
251
286
5,149
–
75
4,039
51,775
1,766
2,808
749
64
561
32
634
45
1,458
18
679
78
4,081
237
Total liabilities
33,391
19,828
10,751
23,315
8,709
95,994
Net on-balance sheet
position
(844)
4,949
2,421
(2,678)
1,689
5,537
Credit commitments
7,432
4,562
3,278
1,324
10,057
26,653
€
US$
Swiss
franc
£
Other
Total
Total assets
Total liabilities
29,772
36,147
19,675
16,945
11,956
9,657
12,905
10,270
11,851
8,675
86,159
81,694
Net on-balance sheet
position
(6,375)
2,730
2,299
2,635
3,176
4,465
6,234
3,654
2,976
1,234
6,219
20,317
At 31 December 2XX3
Credit commitments
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61
IFRS 7 Financial Instruments: Disclosures
Other market risk disclosures
When the sensitivity analyses are unrepresentative of a risk
inherent in a financial instrument (for example if the year-end
exposure does not reflect the exposure during the year), the
undertaking shall disclose that fact and the reason it believes the
sensitivity analyses are unrepresentative.
An undertaking might disclose the impact of a decrease in a
specified stock market index, commodity price, or other risk
variable. If an undertaking gives residual-value guarantees (such as
when it leases assets) that are financial instruments, it discloses an
increase or decrease in the value of the assets to which the
guarantee applies.
Examples of financial instruments that give rise to equity price risk
are a holding of equities in another undertaking, and an investment
in a trust, which in turn holds investments in equity instruments.
Fiduciary activitiesExample from Illustrated Consolidated Financial Statements 2004Banks PwC
Other examples include forward contracts and options to buy or sell
specified quantities of an equity instrument, and swaps that are
indexed to equity prices.
The fair values of such financial instruments are affected by
changes in the market price of the underlying equity instruments.
The sensitivity of profit or loss (that arises, for example, from
instruments classified as at fair value through profit or loss and
impairments of available-for-sale financial assets) is disclosed
separately from the sensitivity of equity (that arises, for example,
from instruments classified as available for sale).
(Please see section of Gains and Losses for treatment by financial
instrument.)
Financial instruments that an undertaking classifies as equity
instruments are not remeasured. Neither profit or loss nor equity will
be affected by the equity price risk of those instruments. Therefore,
no sensitivity analysis is required.
Transfers of financial assets
The Group provides custody, trustee, corporate administration, investment
management and advisory services to third parties, which involve the Group
making allocation and purchase and sale decisions in relation to a wide
range of financial instruments. Those assets that are held in a fiduciary
capacity are not included in these financial statements.
These disclosure requirements relating to transfers of financial
assets supplement the other disclosure requirements of IFRS 7.
An undertaking shall present the disclosures in a single note in its
financial statements.
Some of these arrangements involve the Group accepting targets for
benchmark levels of returns for the assets under the Group’s care. These
services give rise to the risk that the Group will be accused of
maladministration or under-performance.
An undertaking shall provide the required disclosures for all
transferred financial assets that are not derecognised and for any
continuing involvement in a transferred asset, existing at the
reporting date, irrespective of when the related transfer
transaction occurred.
At the balance sheet date, the Group had investment custody accounts
amounting to approximately €87,000 (2XX3: €68,000) and financial assets
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
under administration estimated to amount to approximately €63,000 (2XX3:
€45,000).
62
IFRS 7 Financial Instruments: Disclosures
For the purposes of applying the disclosure requirements, an
undertaking transfers all or a part of a financial asset (the
transferred financial asset), only if it either:
(a) transfers the contractual rights to receive the cash flows of
that financial asset; or
(b) retains the contractual rights to receive the cash flows of
that financial asset, but assumes a contractual obligation to pay
the cash flows to one or more recipients in an arrangement.
An undertaking shall disclose information that enables users of its
financial statements:
(b) forward, option and other contracts to reacquire the
transferred financial asset for which the contract price (or
exercise price) is the fair value of the transferred financial asset;
or
(c) an arrangement whereby an undertaking retains the
contractual rights to receive the cash flows of a financial asset but
assumes a contractual obligation to pay the cash flows to one or
more undertakings.
Transferred financial assets that are not derecognised in their
entirety
(a) to understand the relationship between transferred financial
assets that are not derecognised in their entirety and the
associated liabilities; and
An undertaking may have transferred financial assets in such a
way that part or all of the transferred financial assets do not
qualify for derecognition. The undertaking shall disclose at each
reporting date for each class of transferred financial assets that
are not derecognised in their entirety:
(b) to evaluate the nature of, and risks associated with, the
undertaking's continuing involvement in derecognised financial
assets.
(a)
An undertaking has continuing involvement in a transferred
financial asset if, as part of the transfer, the undertaking retains
any of the contractual rights or obligations inherent in the
transferred financial asset, or obtains any new contractual rights,
or obligations, relating to the transferred financial asset. The
following do not constitute continuing involvement:
(a) normal representations and warranties relating to fraudulent
transfer and concepts of reasonableness, good faith and fair
dealings that could invalidate a transfer as a result of legal action;
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
the nature of the transferred assets
(b) the nature of the risks and rewards of ownership to which
theundertaking is exposed.
(c) a description of the nature of the relationship between the
transferred assets and the associated liabilities, including
restrictions arising from the transfer on the reporting
undertaking's use of the transferred assets.
(d) when the counterparty (counterparties) to the associated
liabilities has (have) recourse only to the transferred assets, a
schedule that sets out the fair value of the transferred assets, the
fair value of the associated liabilities and the net position (the
63
IFRS 7 Financial Instruments: Disclosures
difference between the fair value of the transferred assets and
the associated liabilities).
derecognised financial assets, and information showing how the
maximum exposure to loss is determined.
(e) when the undertaking continues to recognise all of the
transferred assets,the carrying amounts of the transferred assets
and the associated liabilities.
(d) the undiscounted cash outflows that would or may be
required to repurchase derecognised financial assets (eg the
strike price in an option agreement) or other amounts payable to
the transferee in respect of the transferred assets. If the cash
outflow is variable then the amount disclosed should be based on
the conditions that exist at each reporting date.
(f) when the undertaking continues to recognise the assets to
the extent of its continuing involvement, the total carrying amount
of the original assets before the transfer, the carrying amount of
the assets that the undertaking continues to recognise, and the
carrying amount of the associated liabilities.
Transferred financial assets that are derecognised in their
entirety
When an undertaking derecognises transferred financial assets in
their entirety, but has continuing involvement in them, the
undertaking shall disclose, as a minimum, for each type of
continuing involvement at each reporting date:
(a) the carrying amount of the assets and liabilities that are
recognised in the undertaking's statement of financial position
and represent the undertaking's continuing involvement in the
derecognised financial assets, and the line items in which the
carrying amount of those assets and liabilities are recognised.
(e) a maturity analysis of the undiscounted cash outflows that
would or may be required to repurchase the derecognised
financial assets or other amounts payable to the transferee in
respect of the transferred assets, showing the remaining
contractual maturities of the undertaking's continuing
involvement.
(f) qualitative information that explains and supports the
quantitative disclosures.
An undertaking may aggregate the information in respect of a
particular asset if the undertaking has more than one type of
continuing involvement in that derecognised financial asset, and
report it under one type of continuing involvement.
In addition, an undertaking shall disclose for each type of
continuing involvement:
(b) the fair value of the assets and liabilities that represent the
undertaking'scontinuing involvement in the derecognised financial
assets.
(a) the gain or loss recognised at the date of transfer of the
assets.
(c) the amount that best represents the undertaking's
maximum exposure to loss from its continuing involvement in the
(b) income and expenses recognised, both in the reporting
period and cumulatively, from the undertaking's continuing
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64
IFRS 7 Financial Instruments: Disclosures
involvement in the derecognised financial assets (eg fair value
changes in derivative instruments).
(c) if the total amount of proceeds from transfer activity (that
qualifies for derecognition) in a reporting period is not evenly
distributed throughout the reporting period (eg if a substantial
proportion of the total amount of transfer activity takes place in
the closing days of a reporting period):
(i) when the greatest transfer activity took place within that
reporting period (eg the last five days before the end of the
reporting period),
(ii) the amount (eg related gains or losses) recognised from
transfer activity in that part of the reporting period, and
(iii) the total amount of proceeds from transfer activity in that
part of the reporting period.
An undertaking shall provide this information for each period for
which a statement of comprehensive income is presented.
Supplementary information
An undertaking shall disclose any additional information that it
considers necessary to meet the disclosure objectives.
Brief Notes on FINREP and Prudential Supervision of Banks
Supervision of banks and many other financial institutions is a
major activity of central banks (including CBRF), and other
supervisors (their idundertakings varying between countries:
Federal Reserve Bank=US, Bank of England=UK).
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Prudential supervision by these organisations has confidence in
the national banking system as a primary concern (and as a
second, the international banking system). CBRF produces
comprehensive annual reports in both Russian and English on its
supervision procedures and practice, at the foot of the first page of
its website:
www.cbr.ru/
www.cbr.ru/eng/daily.aspx
A failure of a major bank may create a domino effect causing other
innocent banks nationally and internationally to fail, or be seriously
weakened.
Prudential supervision has more emphasis on liquidity than
profitability to assess whether (or not) a bank can survive a shortterm crisis. Reports from banks to the supervisors range between
daily (such as liquidity) and annual (details on auditors).
Given the different objectives and requirements of the supervisors
and IFRS, banks and financial institutions (such as insurance
companies and investment funds) have sought to provide financial
statements that please both supervisors and IFRS at minimal cost.
The European Banking Authority (formerly CEBS) has addressed
this issue and produced FINREP. FINREP will be the standard for
European banks to use for their financial reporting to encompass
both prudential and IFRS requirements.
The English edition of FINREP has been available since December
2005 on the EBA / CEBS website
(http://www.eba.europa.eu/Home.aspx ).
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IFRS 7 Financial Instruments: Disclosures
We attach it to our workbook with all the accompanying documents
and acknowledge that the copyright of all of this material resides
with EBA. The English text takes precedent over any translation
into other language. The originals and any updates are to be found
on the EBA website.
These financial statements of major IFRS-compliant banks will also
give an idea of the quality and amount of detail required to comply
with IFRS 7 (and perhaps FINREP) that is adequate without
becoming excessive.
We hope that our IFRS 9 + five IAS 32/39 books will also provide
help in this complex area of financial reporting.
We are privileged to have been allowed by the EBA to translate the
FINREP documents into Russian (the translation of which we are
responsible for).
We recognise that neither the IASB nor CBRF have endorsed
FINREP, but we have translated it as contribution to the further
development of financial reporting in Russia.
FINREP also illustrates how financial statements will appear. Such
illustrations were not included in IFRS 7. This is an additional major
benefit of FINREP to our readers, many of whom have limited
experience of IFRS financial statements of banks and financial
institutions.
Understanding the financial statements of banks and other financial
institutions is likely to become increasingly complicated. This
reflects the increased complexity of these institutions in global
markets and a plethora of new financial instruments every year.
To our readers who do not produce or audit IFRS statements of
financial institutions, we suggest that you download the IFRS
financial statements of major banks in your country and contrast the
presentation with FINREP to identify quantitive differences and this
workbook for the qualitative differences.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
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