IFRS 7 – Financial Instruments: Disclosures

Overview

IFRS 7 Financial Instruments: Disclosures require a business to disclose information on the financial instruments’ relevance to the entity and the type and extent of the risks associated with those financial instruments, both qualitatively and quantitatively.

The main objective of IFRS 7 is to provide users of financial statements with relevant and reliable information about an entity’s financial instruments and the associated risks. The standard requires entities to disclose both qualitative and quantitative information in order to enable users to assess the nature, extent, and risks arising from the entity’s use of financial instruments.

Disclosure requirements of IFRS 7

Certain disclosures are required to be reported by instrument type per IAS 39 measurement categories. Additional disclosures are necessarily based on the kind of financial instrument. For those disclosures, a company must classify its financial instruments according to the type of information disclosed.

The two primary kinds of disclosures mandated by IFRS 7 are as follows:

• Information about the financial instruments’ importance.
• information on the type and intensity of financial instrument-related hazards

Other disclosure requirements under IFRS 7 can be broadly categorized into several key areas:

1. Financial instrument risk exposures: Entities are required to disclose information about their exposure to various risks arising from financial instruments, such as credit risk, liquidity risk, market risk (including interest rate risk, foreign exchange risk, and price risk), and concentration risk.

2. Summary of accounting policies: Entities should disclose their accounting policies for recognizing and measuring different categories of financial instruments. This includes information on the basis of measurement (e.g., historical cost or fair value), recognition criteria (e.g., amortized cost or fair value), and any valuation techniques used.

3. Fair value measurements: If an entity measures a financial instrument at fair value, it must disclose information about its valuation techniques used, including inputs used in determining fair value (e.g., market prices or model-based assumptions). Additional disclosures are required if there are significant changes in valuation techniques during the reporting period.

4. Transferability and liquidity restrictions: Entities must disclose any restrictions that affect the transferability or ability to sell certain classes of financial assets. These restrictions could include lock-up periods or contractual limitations on disposal.

5. Categorization & objective characteristics: Entities should disclose additional information about how they categorize their financial instruments (e.g., into different levels of fair value hierarchy) and the characteristics they consider in making these classifications.

6. Offsetting financial instruments: Disclosures are required for any recognized financial assets and liabilities that are subject to an enforceable master netting arrangement or similar agreement, regardless of whether they are offset on the balance sheet.

7. Credit risk: Entities should disclose information about credit risk exposures, including a description of the credit quality of financial assets, information about collateral held as security, and any significant concentrations of credit risk.

Transfers of financial assets

An entity shall publish information that enables users of its financial statements to make the following determinations:

• to comprehend the link between transferred financial assets that have not been fully derecognized and their associated obligations; and
• to assess the nature and risks of the entity’s continued engagement with derecognized financial assets.

Transferred financial assets that are not derecognised in their entirety

Required disclosures include a description of the transferred assets’ nature, the risk and reward connected with them, as well as a qualitative and quantitative explanation of the link between the transferred financial assets and their related obligations.

Transferred financial assets that are derecognised in their entirety

• Required disclosures include the carrying value of recognised assets and liabilities, the fair value of assets and liabilities that represent continuing involvement, the maximum risk of loss associated with continuing involvement, and a maturity analysis of the undiscounted cash flows used to repurchase derecognised financial assets.
• Additional disclosures are required for any gain or loss recognised at the time the assets were transferred, income or expenses recognised as a result of the entity’s continued involvement in the derecognised financial assets, and details of the uneven distribution of proceeds from transfer activity throughout the reporting period.

Conclusion

It’s important to note that while IFRS 7 provides specific guidance on disclosures related to financial instruments, entities must also apply other relevant IFRS standards when preparing their financial statements. This includes standards such as IFRS 9 – Financial Instruments (which addresses recognition, measurement, and impairment), among others.

Entities are encouraged to exercise judgment in determining which disclosures are relevant and material based on their individual circumstances.