ifrs 7:financial instruments:disclosures

OVERVIEW


IFRS 7 requires entities to make disclosures regarding the financial instruments and the entities shall disclose the information about the financial instruments as per IFRS 7. The purpose of this standard is to enable the users of the financial statements to evaluate the two things:


=> The significance of the financial instruments for the financial position and financial position of an entity.

=> The risks associated with the financial instruments to which the entity is exposed and the way in which the risks are managed.

=> The above two factors are discussed in detail below.

Key Takeaway Points


=> IFRS 7 requires the information to be disclosed with regard to the financial instruments and all the information regarding the financial instruments that are necessary for the understanding of the users of the financial statements.


=> IFRS 7 states that each category of the financial statements shall be either disclosed in the statement of financial position or in notes to the financial statements.


=> The fair value of the financial assets and liabilities shall be compared with the carrying amount. If the carrying value is recorded at a higher amount than the recoverable amount then there is impairment loss and such impairment loss shall be recorded in the statement of profit or loss.


=> An entity shall adopt the accounting policy for the recognition and measurement of the financial instruments that provide a clear understanding to the users of the financial statements regarding the financial instruments.


=> IFRS 7 requires that an entity shall disclose all the risks associated with the financial instruments and such risks are includes credit risk, liquidity risk, and market risk.


SIGNIFICANCE OF FINANCIAL INSTRUMENTS


The main objective of the IFRS 7 is to provide extensive disclosures about the financial instruments to enable the users of the financial statements to evaluate the entity’s financial position and financial position in respect of the financial instruments as follows:


CARRYING AMOUNT


As per IFRS 7 each category of the financial liabilities or financial liabilities shall be disclosed either in the statement of financial position or in notes as follows:


=> Financial assets measured at the fair value through profit or loss

=> Financial assets are measured through the statement of profit or loss

=> Financial assets measured through other comprehensive income

=> Financial liabilities measured at the fair value through profit or loss

=> Financial liabilities are measured at the amortized cost.


For each of the above categories, an entity shall disclose the category of each financial asset or liability in detail in the financial statements or in notes to the financial statements.


FAIR VALUE


The fair value of each class of financial assets and financial liabilities shall be disclosed in a manner to compare it with the carrying amount. However, if the carrying amount of the financial assets and financial liabilities are approximately equal to the fair value then such comparison is not required.


ITEMS OF INCOME AND EXPENSES AND GAINS AND LOSSES


The entity shall disclose the items of income and expenses and gains and losses either in the statement of profit or loss and other comprehensive income or in notes in the following manner:


=> The details of the net gains or losses on each class of the financial assets and liabilities.

=> The details of the total interest expense and interest income for the financial assets and financial liabilities which is measured at the amortized cost.


ACCOUNTING POLICIES


An entity shall disclose the accounting policies adopted for the recognition and measurement of the financial assets and financial assets which is necessary for the understanding of the users of the financial statements regarding the financial instruments.


NATURE OF THE RISKS ASSOCIATED WITH THE FINANCIAL INSTRUMENTS


IFRS 7 defines the main types of risks associated with financial instruments. These risks are discussed as below:


Credit risk is a risk in which one party fails to discharge its obligations to another party of the financial instruments.


Liquidity risk is a risk that an entity will find it difficult to pay for the obligations which are associated with the financial instruments.


Market risk is a risk that the future cash flows of the financial instruments are affected and fluctuate because of the change in the market prices of exchange rates and interest rates. The change in market prices is occurred because of the change in the exchange rates (Currency risk), or change in the market interest rates (interest-rate risk), or due to any other reasons.


Generally, IFRS 7 requires entities to disclose the information that is necessary for the understanding of the users of the financial statements to understand the risks associated with the financial assets and financial liabilities at the end of the accounting period. For each type of risk, this information shall include:


=> The exposure to risk and the description that how such risks are arises.

=> The methods that are in place to measure the risks associated with the financial instruments.

=> The entity's policies and processes to measure and mitigate such risks.

=> Quantitative data about the exposure to risks at the end of the reporting period.


In addition to the above, the following additional disclosures are also required in relation to the credit risk, liquidity risk, and market risk.


Credit risk


For each class of financial instrument the entity shall disclose credit risk in the following manners:


=> The amount of maximum exposure to the credit risk

=> The detailed description of any collateral held as security.

=> Quantification of the extent to which the collateral can mitigate such credit risks.


Liquidity risk


An entity is required to present the maturity analysis in respect of the financial liabilities and the description that how the inherent liquidity risk is managed.


Market Risk


An entity shall disclose the sensitivity analysis for each type of market risk to which an entity is exposed at the end of the accounting period. This analysis should show the profit or loss and also the effect on the equity due to the change in such variables (exchange rates and interest rates).