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15.2.6 Multiple embedded derivatives
If an entity has issued a compound financial instrument i.e. where there is both a liability and an equity component that contains multiple embedded derivatives that are interdependent,
then it should disclose the existence of such instruments.
15.3 Statement of comprehensive income
The disclosure requirements in relation to interest income and expense, gains and losses recognised on available-for-sale financial assets and impairment losses recognised on
financial assets have been included in IFRS 7. These disclosures were previously included in IAS 32.
IFRS 7 disclosures have been extended to show the net gains or losses on financial assets and liabilities by class, to complement the disclosures made in the statement of financial
position regarding movements during the period.
An entity should disclose the net gains or losses on the movement in financial assets and liabilities measured at fair value through profit or loss. These disclosures should be shown
separately for financial instruments designated as such on their initial recognition and those that are classified as held for sale.
Information should be disclosed to identify the total interest income and total interest expense for financial assets and liabilities that are not measured at fair value though profit or loss,
amounts recognised in other comprehensive income for available-for-sale financial assets and the amount of interest income accrued on impaired financial assets.
Any impairment losses recognised in profit or loss for each class of financial asset should be separately identified.
15.4 Other disclosures
An entity should fully explain the accounting policies that have been applied in recognising and measuring its financial instruments, including the entity’s policy on the use of hedge
accounting and the techniques used for measuring fair value.
The specific disclosure requirements that were originally set out in IAS 32 in relation to hedge accounting have been expanded to ensure that a full assessment can be made of the risks
associated with such activities. The expanded disclosures specifically in relation to cash flow hedges include the periods over which the cash flows are expected to arise and consequently
when they will impact profit or loss. A description of any transaction that is no longer being hedged and any ineffective proportion of a hedge that has been recognised as part of profit or
loss for the period should also be disclosed.
For fair value hedges, an entity should disclose both the gains and losses made on the hedging instrument and those on the hedged item itself.
The disclosures made by an entity should meet the overall objective of providing more transparent information about the risks that exist in relation to its financial instruments and
how it controls those risks. Although an entity should make sufficient disclosures to meet this overall objective, the IASB has included specific disclosures that are required to be made by
an entity in relation to fair value.
15.4.1 Fair value
An entity should provide information on the fair value, at the end of each reporting period, of financial assets and financial liabilities analysed over their different classes. This information
is required to be presented in a way that permits a comparison to be made between the fair values and the carrying amounts recognised in the statement of financial position.
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If the original amount at which a financial instrument has been recognised its assumed fair value is different from the amount that would have been calculated using a suitable valuation
technique, an entity should disclose the accounting policy that it uses to recognise the difference and the amount of any difference not yet recognised as part of the profit or loss for
the period.
The carrying amount of short-term trade receivables and payables is likely to be a reasonable approximation to fair value, so no fair value information is specifically required.
If an entity cannot measure reliably the fair value of unquoted investments or related derivatives and they have therefore been measured at cost under IAS 39, this fact should be
disclosed, along with the reasons why it is not possible to measure fair value reliably. A description of the financial instruments should also be disclosed, and the carrying amount for
such items. Information should also be provided about the market for such financial instruments and whether the entity intends to dispose of them, and if so, how.
Information should be disclosed about the methods and significant assumptions used by an entity in determining the fair value of financial assets and financial liabilities. These
disclosures should include whether the fair value was determined on the basis of published prices in an active market or estimated by valuation techniques. Where changes in the
assumptions used in valuation techniques would significantly impact the measurement of fair value of financial assets and liabilities, this fact should be disclosed along with the potential
impact from such changes.
An entity should also disclose the change in fair value recognised in profit or loss that resulted from estimates using valuation techniques, rather than by reference to published prices in an
active market.
15.5 Nature and extent of risks
Disclosures should be made to ensure that the nature and extent of risks arising from the use of financial instruments can be assessed by users of the financial statements. The specific
disclosures required focus on how the risks arising from financial instruments are managed by an entity. These disclosures are broken down into qualitative and quantitative in nature.
The qualitative disclosures focus on the exposure to risk, how the risk arises as well as an entity’s policy on managing those risks, including its processes for monitoring such
information.
Quantitative disclosures are included to ensure that users understand the potential impact that risks from financial instruments may have on an entity’s financial position and
performance in a period. IFRS 7 specifically states that such quantitative information should be consistent with internal management information. The quantitative information should be
split between the different risks, generally being credit risk, liquidity risk and market risk.
Credit risk is the risk that an entity has in relation to the non-recoverability of financial assets recognised in the statement of financial position. Information on credit risk will typically
include a description of any collateral held as security by an entity, details about any financial assets that have become impaired, a description of the credit quality of financial assets held
as well as information on financial assets that should have been paid by the third-party by the end of the reporting period but have been renegotiated.
Liquidity risk is the risk that an entity will not have sufficient funds available to meet its obligations as they fall due. It is usually explained by providing information on the maturity of
an entity’s financial liabilities. This usually includes information about the remaining contractual term on such instruments along with details about how an entity manages such
risk.
A sensitivity analysis, along with an explanation of how such an analysis was determined and whether it is consistent with the method used in the previous period, should be provided to
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help explain the existence of market risk. Market risk is assessed by considering how much currency and interest rates may fluctuate over a period.
16 Chapter Review
The key issues addressed in this chapter are how to define, recognise, measure and report financial instruments.
This chapter has covered: an explanation of what is meant by the term financial instruments;
the main classification of financial instruments; the main presentation requirements for financial instruments;
how financial instruments are recognised and measured in their broad categories; the implications of hedging financial instruments; and
the important disclosures which must be made in respect of financial instruments.
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17 Self Test Questions
Chapter 20
1. In accordance with IAS32 Financial instruments: presentation, which ONE of
the following types of instrument is best described as a contract that evidences a residual interest in the assets of an entity after deducting the
liabilities?
A
Financial liability
B
Guarantee
C Equity
D
Financial asset
2. In accordance with IAS39 Financial instruments: recognition and
measurement, which ONE of the following terms best describes a compound financial instrument component of a hybrid instrument that also includes a
non-derivative host contract?
A
An available-for-sale financial asset
B An embedded derivative
C A held-to-maturity investment
D
A financial asset held for trading
3. In accordance with IFRS7 Financial instruments: disclosures, which of the
following best describes the risk that an entity will encounter if it has difficulty in meeting obligations associated with its financial liabilities?
A
Liquidity risk
B
Credit risk
C Financial risk
D
Payment risk
4. In accordance with IFRS7 Financial instruments: disclosures, which of the
following best describes credit risk?
A The risk that one party to a financial instrument will cause a financial
loss for the other party by failing to discharge an obligation
B
The risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities
C
The risk that the fair value associated with an instrument will vary due to changes in the counterpartys credit rating
D The risk that an entitys credit facilities will be withdrawn due to cash
flow sensitivities
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