IFRS 7 is an international financial reporting standard issued by the International Accounting Standards Board (IASB) . This standard replaces IAS 32 Financial Instruments and IAS 30 Disclosure in the Financial Statements of Banks and Similar Financial Institutions.
The main objective of implementing IFRS 7 is to require entities that hold or issue financial instruments to disclose information that helps users of their financial statements assess the significance of financial instruments to their financial position and performance and the nature and extent of the risks arising from those instruments.
In this blog, we provide you with a clear vision and comprehensive answers on all the details related to the implementation of the Financial Reporting Standard (IFRS 7) Financial Instruments: Disclosures.
Scope of application of IFRS7
IFRS 7 (Financial Instruments: Disclosures) applies to all entities and all classes of financial instruments, except for the following:
- Rights in subsidiaries, joint ventures, and employee benefits.
- Contracts arising from contingent liabilities in a business combination under IFRS 3.
- Insurance contracts under IFRS 4.
- Financial instruments, contracts and obligations arising from share-based settlement transactions that are subject to the requirements of IFRS 2.
Accounting disclosure requirements according to IFRS 7
IFRS7 sets out the broad guidelines for disclosure of financial instruments while leaving some freedom in terms of presenting data in the financial statements by providing alternatives for presenting information related to financial instruments.
Here are the most important disclosures included in the standard’s rules:
The importance of financial instruments for financial position and performance
Accordingly, entities are required to disclose information that enables users of their financial statements to assess the significance of financial
instruments to the statement of financial position and income.
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Disclosure in the budget
The carrying amount of each class of financial assets and liabilities as defined in IAS 39 must be disclosed either in the balance sheet or in the notes.
Disclosure of financial assets and liabilities at fair value through profit or loss
Accordingly, establishments must disclose the following:
- Maximum exposure to credit risk arising from holding loans and receivables.
- The amounts of any credit derivatives or similar financial instruments reduce the maximum credit risk.
- The amount of change in the fair value of loans and receivables resulting from changes in the credit risk of financial assets, and the amount of change in the fair value of credit derivatives.
Disclosure of financial liabilities classified as financial liabilities at fair value through profit or loss
This includes disclosing the amount of change in the fair value of financial liabilities arising from changes in credit risk, in addition to disclosing the difference between the recorded carrying value and the contractual value of the financial liabilities required to be settled on the maturity date.
Reclassification
This results in reclassifying financial assets to fair value rather than cost or disclosing the amount of financial assets reclassified and the reasons for that.
Derecognition of the financial asset
The institution must disclose the nature of the financial asset transferred to a third party, and the nature of the risks and returns of its ownership.
Disclosure requirements in the income statement and equity
The standard requires disclosure of income, expense, profit and loss items either in the financial statements or the notes as follows:
- Net gain or loss.
- Total interest income and expense calculated using the effective interest method for assets and liabilities not measured at fair value.
- Fee income and expenses received and paid, excluding those included in the calculation of the effective interest rate.
- Interest income from impairment of financial assets under IAS 39.
- The amount of impairment loss in respect of each class of financial asset.
Hedge accounting
IAS 39 covers hedging techniques relating to both fair value and cash flows, as well as net investment in foreign operations. IFRS 7 therefore emphasizes the need for separate disclosure of each type.
fair value
IFRS 7 requires the following disclosures for fair value:
- The fair value of each class of financial assets and liabilities.
- Methods and techniques for determining fair value.
Risks arising from financial instruments
This relates to entities providing the necessary disclosures to users, so that they can assess the nature and extent of the risks arising from financial instruments to which they may be exposed, such as credit or liquidity risks.
Qualitative and quantitative disclosures
That is, the entity must disclose in the financial reports for each type of risk arising from the financial reports the following:
- Exposure to risks and how they arise.
- The objectives, policies and processes for managing these risks and the methods used to measure them.
- Disclosure of any change in any of the above two elements.
Disclosure for each type of risk
The standard requires providing disclosures for each type of risk as follows:
- Disclosure for each type of financial instrument of the maximum amounts of credit risk to which the entity may be exposed and the guarantees it has in this regard.
- Analyze the maturity dates of obligations and how to manage liquidity risk.
- Sensitivity analysis for each type of market risk and the methods used in preparing the sensitivity analysis, with a statement of the impact of these risks on the income statement and equity.
Inquiry about IFRS 7
There is no doubt that compliance requirements for transparency and clarity in financial statements and data pose a set of accounting challenges for many companies, requiring extensive professional expertise in preparing and presenting financial statements and data in accordance with applicable international accounting standards.
Farhat & Co., one of the leading accounting services firms in the UAE, can help you meet all your requirements for compliance with international accounting standards.
That was all about IFRS 7. If you are interested in reading more about International Financial Reporting Standards, we recommend the following articles:
- How businesses apply International Financial Reporting Standards for the first time (IFRS 1) .
- Share-based payment standard (IFRS2).
- Business Combinations Standard (IFRS 3).
- Insurance Contracts Standard (IFRS 4).
- Non-current assets held for sale and discontinued operations (IFRS 5).
- IFRS 6 Exploration and Evaluation of Natural Resources.
- International Auditing and Assurance Standards.
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