IFRS 7 Financial Instruments: Disclosures sets out the requirements for disclosing information about financial instruments in the financial statements of an entity. The objective of the standard is to provide users of financial statements with a clear and comprehensive understanding of an entity’s exposure to financial instruments and the nature and extent of risks arising from those instruments. In this article, we will explore the rules, descriptions, examples, case studies, and new developments related to IFRS 7.
IFRS 7 requires entities to provide disclosures about their financial instruments that enable users of financial statements to evaluate the significance of those instruments for the entity’s financial position and performance. The standard requires disclosures about the following:
The significance of financial instruments for an entity’s financial position and performance.
The nature and extent of an entity’s exposure to risks arising from financial instruments.
The accounting policies an entity uses for financial instruments.
The fair values of financial instruments.
The amounts, timing, and uncertainty of cash flows arising from financial instruments.
Collateral and other credit enhancements for financial instruments.
The terms and conditions of financial instruments.
IFRS 7 requires entities to provide descriptions of their financial instruments, including their classification, measurement, and recognition criteria. Entities must also describe the basis for determining fair values, including the use of valuation techniques and the inputs to those techniques. Entities must describe any changes in their accounting policies for financial instruments and the reasons for those changes.
Examples of disclosures that an entity might provide under IFRS 7 include:
The fair value of financial assets and liabilities by category, such as loans and receivables, held-to-maturity investments, available-for-sale investments, and financial assets and liabilities at fair value through profit or loss.
The amount and nature of an entity’s credit risk, including the credit quality of its counterparties and the maximum exposure to credit risk.
The amount and nature of an entity’s liquidity risk, including the maturity profile of its financial assets and liabilities.
The sensitivity of an entity’s financial position to changes in interest rates, foreign exchange rates, and other market risks.
The amounts and nature of collateral held as security for financial instruments.
The nature and extent of any concentrations of risk, including concentrations of credit risk and concentrations of exposure to specific industries or geographic regions.
IFRS 7 applies to all entities that prepare financial statements in accordance with International Financial Reporting Standards (IFRS). The standard has been applied by a wide range of entities, including banks, insurance companies, and non-financial entities that use financial instruments to manage their risks or to fund their operations.
One case study involves a bank that uses financial instruments extensively to manage its liquidity risk. The bank provides disclosures under IFRS 7 that describe the maturity profile of its financial assets and liabilities and the sources of its funding. The bank also provides sensitivity analyses that show the impact of changes in interest rates and other market risks on its financial position.
Another case study involves a non-financial entity that uses financial instruments to hedge its exposure to foreign exchange rate risk. The entity provides disclosures under IFRS 7 that describe the nature and extent of its exposure to foreign exchange rate risk and the instruments it uses to hedge that risk. The entity also provides sensitivity analyses that show the impact of changes in foreign exchange rates on its financial position.