Quantitative Disclosures

4.2 Quantitative Disclosures

4.2.0.1 For each type of risk arising from financial instruments, IFRS 7 requires an entity to dis- close

• Summary quantitative data about its exposure to that risk at the reporting date • Concentrations of risk

4.2.0.2 IFRS 7 requires the disclosure about an entity’s exposure to risks to be based on how the entity views and manages its risks (i.e., the information that it uses internally to assess risks).

4.2.0.3 If the quantitative data disclosed as of the reporting date are unrepresentative of an en- tity’s exposure to risk during the period, an entity shall provide further information that is repre-

sentative.

4.2.1 Credit Risk

4.2.1.1 IFRS 7 defines “credit risk” as the risk that one party to a financial instrument will cause

a financial loss for the other party by failing to discharge an obligation.

4.2.1.2 IFRS 7 requires these credit risk–related disclosures by class of financial instrument: • The amount that best represents its maximum exposure to credit risk at the reporting date

without taking account of any collateral held or other credit enhancements (i.e., in many cases, the carrying amount)

• A description of collateral held as security and other credit enhancements • Information about the credit quality of financial assets that are neither past due nor impaired • The carrying amount of financial assets that would otherwise be past due or impaired whose

terms have been renegotiated

4.2.1.3 To complement the above information, IFRS 7 also requires disclosure of • An analysis of the age of financial assets that are past due as of the reporting date but not

impaired • An analysis of financial assets that are individually determined to be impaired as of the reporting date • A description of collateral held by the entity as security and other credit enhancements associated with past due or impaired assets • The nature and carrying amount of financial or nonfinancial assets obtained during the period by taking possession of collateral or through guarantees or other credit enhancements as well as policies for disposing of or using such assets that are not readily convertible to cash

4.2.1.4 Credit risk information helps users of financial statements assess the credit quality of the entity’s financial assets and level and sources of impairment losses.

4.2.2 Liquidity Risk

4.2.2.1 IFRS 7 defines “liquidity risk” as the risk that an entity will encounter difficulty in meet- ing obligations associated with financial liabilities.

4.2.2.2 IFRS 7 requires an entity to disclose both • A maturity analysis for financial liabilities that shows the remaining contractual maturities

• A description of how it manages the liquidity risk inherent in those liabilities

Chapter 39 / Financial Instruments: Disclosures, (IFRS 7) 455

4.2.3 Market Risk

4.2.3.1 IFRS 7 defines “market risk” as the risk that the fair value or future cash flows of a finan- cial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk, and other price risk.

4.2.3.2 IFRS 7 requires an entity to disclose a sensitivity analysis to market risk. Sensitivity analyses help users of financial statements evaluate what are reasonably possible changes in the

entity’s financial position and financial performance due to changes in market risk factors.

4.2.3.3 Unless the entity uses a sensitivity analysis that reflects interdependencies between risk variables to manage financial risks, the sensitivity analysis should be broken down by type of mar- ket risk to which the entity is exposed at the reporting date, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date. The entity is also required to disclose the methods and assumptions used in preparing the sensitivity analysis. When the sensitivity analyses disclosed are unrepresentative (e.g., because the year-end exposure does not reflect the exposure during the year), the entity shall disclose that fact and the reason it believes the sensitivity analyses are unrepresentative.

Practical Insight

In managing financial risks (in particular market risks), banks and securities firms often use value at risk (VAR) as a measure of risk. VAR is a statistical measure of downside risk that reflects interdependencies between risk variables. The VAR of a portfolio of financial instruments is the maximum loss that the portfolio is expected to suffer over a specified holding period horizon (such as one or ten days) with a given level of confidence (such as 95% or 99%). For example, if the 1-day VAR of an entity’s trading portfolio is $10,000,000 at the 99% confidence level, this suggests that the entity will lose more than $10,000,000 in only one out of 100 days.