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IFRS – 7

FINANCIAL
INSTRUMENTS:
DISCLOSURES
TOPICS COVERED ………….

APPLICABILITY AND SCOPE


DISCLOSURES BY CATEGORY
- Balance Sheet
- Profit & Loss Account & Equity
- Hedge Accounting
- Fair Value
- Collaterals, Defaults & Breaches

RISK DISCLOSURES
- Credit Risk
- Liquidity Risk
- Market Risk
i- Currency Risk
ii- Interest Rate Risk
iii- Other Price Risk

Qualitative Disclosures ……….

Quantitative Disclosures ……….

WAY FORWARD
PricewaterhouseCoopers
FACT OR FICTION ………
IFRS - 7
Only applies to banks and Applies to ALL entities that have financial
other financial institutions FICTION instruments

Only impacts entities that Impacts any entity that holds even simple
use derivative financial FICTION instruments such as borrowings,
instruments accounts payable and receivable, cash
and investments
Requires disclosure of Entities are required to report the metrics
certain management FACT they use internally to manage and
information measure financial risks

Introduces unprecedented Requires reporting entities to disclose the


level of market sensitive sensitivity of their results to movements in
disclosures FACT market risks as a consequence of their
financial instruments
APPLICABILITY AND SCOPE

Within Scope Outside Scope

 ALL Entities
x Interests in subsidiaries,
associates and joint ventures


ALL TYPES of Financial EXCEPT accounted for in
Instruments accordance with IAS 39

Recognised and un-


 recognised financial x Employers' rights and
obligations arising from
Instruments employee benefit plans


Contracts to buy or sell a
non-financial item that are
x Insurance contracts

within the scope of IAS 39


x Financial instruments under
share-based payment
transactions
APPLICABILITY AND SCOPE …..

International Application

For accounting periods beginning on or after January 1, 2007

Application in Pakistan

The Securities and Exchange Commission of Pakistan notified the


standard on April 28, 2008 to be effective for accounting periods
beginning on or after July 01, 2008
THE 11TH COMMANDMENT ……

Para 7 (Key Principle) ……

“ An entity shall disclose information that


enables users of its financial statements to
evaluate the significance of financial
instruments for its financial position and
performance ”
DISCLOSURES BY CATEGORY –
BALANCE SHEET -1

Carrying amount of each category of Financial Instruments:

► Financial assets at fair value through profit or loss


► Held for Trading
► Designated as such, using the fair value option

►Held-to-maturity investments

►Loans and Receivables

►Available for Sale financial assets

► Financial liabilities at fair value through profit or loss


► Held for Trading

► Designated as such, using the fair value option

►Financial Liabilities measured at amortised cost


DISCLOSURES BY CATEGORY
– BALANCE SHEET -2

Disclosure to be made :

► On the face of Balance Sheet


Or
► In the notes to the financial statements
DISCLOSURES BY CATEGORY –
BALANCE SHEET -3
DISCLOSURES BY CATEGORY
– PROFIT & LOSS & EQUITY -1

(A) Net gains or net losses on:

► financial assets / liabilities at fair value through profit or loss


► Held for Trading

► Designated as such, using the fair value option

►Available-for-salefinancial assets
► Recognised directly in equity

► Recycled through Profit & Loss

►Held-to-maturity investments

►Loans and receivables

► Financial liabilities measured at amortised cost


DISCLOSURES BY CATEGORY
– PROFIT & LOSS & EQUITY -2

(B) 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

(C) fee income and expense (other than amounts included in


determining the effective interest rate)

(D) interest income accrued on impaired financial assets

(E) the amount of any impairment loss for each class of financial asset
DISCLOSURES BY CATEGORY
– PROFIT & LOSS & EQUITY -3
DISCLOSURES BY CATEGORY
– HEDGE ACCOUNTING -1

For all types of hedges: Additionally, for cash flow hedges:

(A) a description of each type of (A) when the cash flows are
hedge expected to occur and when
they are expected to affect
(B) a description of the financial profit or loss
instruments designated as
hedging instruments and (B) amount that was recognised
their fair values at the in equity during the period
reporting date
(C) amount that was re-cycled
through P&L, showing line
(C) the nature of the risks being item
hedged
(D) amount that was taken to the
initial cost of a non-financial
asset or non-financial liability
DISCLOSURES BY CATEGORY
– HEDGE ACCOUNTING -2

Amount to be separately disclosed in Profit or Loss

Gains / Losses on the Hedging Instrument


Fair Value Hedges
Gains / Losses on the Hedged Item

Cash Flow Hedges

The Ineffectiveness Recognised in Profit or


loss
Hedges of Net
Investments in Foreign
Operations
DISCLOSURES BY CATEGORY
– HEDGE ACCOUNTING -3

Fair Value Hedge


DISCLOSURES BY CATEGORY
– HEDGE ACCOUNTING -4
Cash Flow Hedges
DISCLOSURES BY CATEGORY
– -1

FAIR VALUE
As was in IAS 32, IFRS 7 retains: New in IFRS 7:

(A) Disclose the fair value for (A) Disclosure of Day 1 Profit or
each class comparable with Loss
carrying amounts
(B) Accounting Policy in respect
(B) Methods, techniques and of Day 1 Profit or Loss
assumptions used to estimate
fair values (C) Day 1 Profit or Loss
recognised in the Profit or
(C) Extent to which Fair Values Loss in the current period
are based on market quotes, along with opening and
observable variables, and closing cumulative recognised
non-observable variables amount

(D) Changes in FV recognised in


P&L based on valuation
techniques
DISCLOSURES BY CATEGORY
– -2

FAIR VALUE
Fair Value Disclosure NOT required :

(A) WHEN the carrying amount is a reasonable approximation of fair


value

(B) FOR an investment in equity instruments that do not have a


quoted market price in an active market, and that is measured at
cost in accordance with IAS 39

(In such cases (b), disclose information to help users make their own judgement
about the extent of possible differences between the carrying amount of those
financial assets or financial liabilities and their fair values)
DISCLOSURES BY CATEGORY
– -3

FAIR VALUE
DISCLOSURES BY CATEGORY
– -4

FAIR VALUE
Tier-Wise Fair Value Disclosure
DISCLOSURES BY CATEGORY
– -5

FAIR VALUE
Day 1 Profit or Loss - Policy

Day 1 Profit or Loss - Disclosure


DISCLOSURES BY CATEGORY
– -1

COLLATERALS,
Collaterals Given: DEFAULTS & BREACHES
Defaults & Breaches:
(A) Carrying amounts of pledged (A) If related liability exists at
financial assets reporting date:
(B) Terms and conditions relating i. Details of defaults during
to the pledge the period
ii. the carrying amount of
Collaterals Held: amount in default
iii. Whether default has been
(A) Fair Value of Collateral Held remedied / renegotiated
before date of authorisation
(B) Fair Value of any collateral
(B) Otherwise :
sold or re-pledged
Disclose same information as
(C) Terms and conditions above ONLY IF LENDER
associated with the use of GOT ENTITLED TO
ACCELERATED
collateral
PAYMENTS
RISK DISCLOSURES
THE 11TH COMMANDMENT (AGAIN)
……
Para 31 (Key Principle) ……

“An entity shall disclose information that


enables users of its financial statements to
evaluate the nature and extent of risks
arising from financial instruments to which
the entity is exposed at the reporting date ”
RISK DISCLOSURES –
ALL RISKS (FIN. INST. RELATED)
-1
QUALITATIVE

► The exposures to risk and how they arise


► Objectives, policies and processes for managing the risk and
the methods used to measure the risk
► Any changes in above from the previous periods

QUANTITATIVE

► Exposures at reporting date, based on information provided


internally to key management personnel
► Concentrations of risk, if not apparent from above

If the quantitative data disclosed as at the reporting date are


unrepresentative of an entity's exposure to risk during the period, an
entity shall provide further information that is representative
RISK DISCLOSURES –
ALL RISKS (FIN. INST. RELATED)
-2

The Risk Disclosures can be presented:

EITHER In the Noted to the Financial Statements

OR Incorporated by reference to some other


statement (such as management report etc.)
RISK DISCLOSURES –
ALL RISKS (FIN. INST. RELATED)
-3

THREE RISKS HAVE BEEN SPECIFIED

► Credit Risk
► Liquidity Risk
► Market Risk

► …………………
► …………………
RISK DISCLOSURES –
CREDIT RISK -1

Key Disclosures for ALL financial assets:

► Amount that best represents maximum exposure to credit risk


at reporting date without taking account of any collateral held or
other credit enhancements

► Description of collateral held and other credit enhancements

► Where a collateral has been called that is not readily


convertible into cash; policy for disposing it off, or for putting it in
use

► Credit quality of financial assets neither past due nor impaired

► Concentration of Credit Risk

► Carrying amount that would otherwise be past due or impaired,


whose terms have been re-negotiated
RISK DISCLOSURES –
CREDIT RISK -2

Key Disclosures for financial assets that are


EITHER Past Due OR Impaired:

► Age analysis of financial assets that are past due but not
impaired

► Analysis of financial assets individually determined to be


impaired, including the factors considered in determining
impairment

► Description of collateral held and other credit enhancements


and an estimate of their fair value, unless impracticable

► For financial assets impaired by credit losses, if impairment is


recorded in an allowance account rather than directly reducing
the carrying amount of the asset, reconciliation of changes in that
account during the period for each class of financial assets
RISK DISCLOSURES –
CREDIT RISK -3

All Financial Assets


RISK DISCLOSURES –
CREDIT RISK -4

Overdue Balances NOT Impaired


RISK DISCLOSURES –
CREDIT RISK -5

Reconciliation of Allowance Account


RISK DISCLOSURES –
LIQUIDITY RISK -1

Broad disclosures required are:

► Maturity analysis for financial liabilities showing remaining


contractual maturities

i. Contractual Maturities are the Gross Amounts (Inclusive of Coupon Interest).


Hence, the carrying amount will be different from gross amounts. A
reconciliation is NOT required

ii. Maturity analysis for assets is NOT required

iii. For derivatives to be settled gross, the amounts to be included will be gross

► Description as to how liquidity risk inherent in maturity


profile is managed
RISK DISCLOSURES –
LIQUIDITY RISK -2

Maturity Analysis – Liabilities’ Gross Amounts


RISK DISCLOSURES –
LIQUIDITY RISK -3
Maturity Analysis – Liabilities’ Gross Amounts
(Reconciled with Carrying Values)
RISK DISCLOSURES –
LIQUIDITY RISK -4
How Liquidity Risk is managed
RISK DISCLOSURES –
MARKET RISK -1

Three Broad Elements:

I.Foreign Currency Risk


i. Transaction Risk
ii. Risk of Financing transactions
iii. Translation Risk

II.Interest Rate Risk


i. Contractual Re-Pricing
ii. Effective Interest Rates
iii. Fair Value Interest Rate Risk (Fixed Interest Instruments)
iv. Cash Flow Interest Rate Risk (Floating Interest Instruments)

III.Other Price Risk


RISK DISCLOSURES –
MARKET RISK -2
RISK DISCLOSURES –
MARKET RISK -3

If the quantitative data disclosed as at the reporting date are


unrepresentative of an entity's exposure to risk during the period, an
entity shall provide further information that is representative
RISK DISCLOSURES –
MARKET RISK -4
Transaction Risk

Transaction Risk & Risk of Financing Transactions


RISK DISCLOSURES –
MARKET RISK -5
Translation Risk
RISK DISCLOSURES –
MARKET RISK -6
Risk Management Strategy
RISK DISCLOSURES –
MARKET RISK -7
All Risks Presented - Assets
RISK DISCLOSURES –
MARKET RISK -8
All Risks Presented – Liabilities & Net
WAY FORWARD
-1

QUESTIONS TO BE KEY CONSIDERATIONS


ASKED

What financial instruments Ensure disclosures cover all financial instruments


and risks is my company and related risk management activities. Common
exposed to? financial instruments are – cash and cash
equivalents, investments, trade payables and
receivables, borrowings and derivatives.

Who are my company’s Consider who prepares the financial information;


key internal and external who is responsible for monitoring that information;
stakeholders? and who is charged with governance and oversight
of that information. Identify external stakeholders;
this will help determine the sophistication and depth
of the required level of disclosure.
WAY FORWARD
-2

QUESTIONS TO BE KEY CONSIDERATIONS


ASKED

What is ‘best practice’ Consider specific market communications strategy


reporting under IFRS 7? and strive to answer the perennial question for key
stakeholders: how does the use of financial
instruments enhances shareholders’ value?

How should my company First, review the current reporting system to identify
source the required requirement. Development of new tools such as
information from internal quantitative models may be needed to range from
systems? simple spreadsheet models to sophisticated
analyzers

Which of my staff do I Identify the staff who will be integral to the


need to train? production of the information to be disclosed
Thank You…..

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