International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards

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  • any loan default or breach of a loan agreement that has not been remedied on or

  before the end of the reporting period;

  • transfers between levels of the fair value hierarchy used in the measurement of the

  fair value of financial instruments; and

  • changes in the classification of financial assets as a result of a change in the purpose

  or use of those assets.

  In considering the extent of disclosures necessary to meet the requirements above, IAS 34

  refers to the guidance included in other IFRSs, [IAS 34.15C], which would include IFRS 7,

  but does not ordinarily require compliance with all the requirements in those standards.

  IAS 34 also specifies additional disclosures to be given (normally on a financial year-to-

  date basis) about the fair value of financial instruments, including those discussed at 4.5

  below and a number required by IFRS 13. [IAS 34.16A(j)]. This requirement is not subject to

  the qualifications noted above and so, as discussed in further detail in Chapter 37 at 4.5,

  these disclosures should always be given unless the information is not material.

  The disclosures about offsetting of financial assets and financial liabilities (see 7.4.2

  below) need not be provided in condensed interim financial statements unless required

  by the more general requirements of IAS 34. [IFRS 7.BC72B, BC72C].

  If an entity changes its accounting policies in its interim financial statements compared

  with those applied in its most recent annual financial statements, it should provide a

  description of the nature and effect of the change. [IAS 34.16A(a)]. This applies on adoption

  of IFRS 9 and entities should consider the extent of information necessary to meet this

  requirement, taking account of the impact of the change. Where the impact of applying

  IFRS 9 is significant, as is likely for most banks, the disclosure requirements set out at 8.2

  below applying to an entity’s first annual financial statements in which the standard is

  applied provide a useful starting point for determining the information required in the

  interim reports for that annual period.

  3

  STRUCTURING THE DISCLOSURES

  The main text of IFRS 7 is supplemented by application guidance, which is an integral

  part of the standard,1 and by implementation guidance, which accompanies, but is not

  part of, the standard.2 The implementation guidance suggests possible ways of applying

  some of the requirements of the standard but, it is emphasised, does not create

  additional requirements. [IFRS 7.IG1].

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  Although the implementation guidance discusses each disclosure requirement in IFRS 7

  separately, disclosures would normally be presented as an integrated package and

  individual disclosures might satisfy more than one requirement. For example,

  information about concentrations of risk might also convey information about exposure

  to credit or other risk. [IFRS 7.IG2]. This chapter follows a similar approach whereby each

  topic is considered individually in the context of the requirements of the standard as

  well as related application and implementation guidance.

  3.1

  Level of detail

  Entities need to decide, in the light of their circumstances, how much detail to provide

  to satisfy the requirements of IFRS 7, how much emphasis to place on different aspects

  of the requirements and how information is aggregated to display the overall picture

  without combining information with different characteristics. It is necessary to strike a

  balance between overburdening financial statements with excessive detail that may not

  assist users of financial statements and obscuring important information as a result of

  too much aggregation. For example, important information should not be obscured by

  including it among a large amount of insignificant detail. Similarly, information should

  not be aggregated so that it obscures important differences between individual

  transactions or associated risks. [IFRS 7.B3].

  This means that not all of the information suggested, say, in the implementation

  guidance is necessarily required. [IFRS 7.IG5]. On the other hand, there is a reminder that

  IAS 1 – Presentation of Financial Statements – requires additional disclosures when

  compliance with the specific requirements in IFRSs is insufficient to enable users to

  understand the impact of particular transactions, other events and conditions on the

  entity’s financial position and financial performance (see Chapter 3 at 4.1.1.A). [IFRS 7.IG6].

  3.2 Materiality

  The implementation guidance to the original version of IFRS 7 drew attention to the

  definition of materiality in IAS 1 (see Chapter 3 at 4.1.5.A): [IFRS 7(2010).IG3]

  ‘Omissions or misstatements of items are material if they could, individually or

  collectively, influence the economic decisions that users make on the basis of the

  financial statements. Materiality depends on the size and nature of the omission or

  misstatement judged in the surrounding circumstances. The size or nature of the

  item, or a combination of both, could be the determining factor.’ [IAS 1.7].

  It then noted that a specific disclosure requirement need not be satisfied if the

  information is not material, [IFRS 7(2010).IG3], and drew attention to the following

  explanation in IAS 1: [IFRS 7(2010).IG4]

  ‘Assessing whether an omission or misstatement could influence economic

  decisions of users, and so be material, requires consideration of the characteristics

  of those users. The Framework for the Preparation and Presentation of Financial

  Statements states that “users are assumed to have a reasonable knowledge of

  business and economic activities and accounting and a willingness to study the

  information with reasonable diligence.”3 Therefore, the assessment needs to take

  into account how users with such attributes could reasonably be expected to be

  influenced in making economic decisions.’ [IAS 1.7].

  Financial

  instruments:

  Presentation and disclosure 4173

  The inclusion of such guidance could have been seen as curious given that it is no more

  or less applicable to IFRS 7 than any other standard. What it amounted to was a degree

  of reassurance that entities with few financial instruments and few risks (for example a

  manufacturer whose only financial instruments are accounts receivable and accounts

  payable) will give few disclosures, something that was borne out in other references

  within the standard and accompanying material. [IFRS 7.BC10].

  However, in May 2010, the IASB removed all references to materiality from IFRS 7

  because they thought that some of these references could imply that other disclosures

  in IFRS 7 are required even if those disclosures are not material, which was not the

  intention. [IFRS 7.BC47A]. Accordingly the above guidance continues to be relevant even

  though it has been removed from the standard.

  3.3

  Classes of financial instrument

  Certain disclosures required by IFRS 7 should be provided by class of financial

  instrument (see 4.5.1, 4.5.2, 5.3 and 6 below). For these, entities should group financial

  instruments into classes that are appropriate to the nature of the information disclosed

  and take into account the characteristics
of those instruments. [IFRS 7.6]. It is clear from

  this requirement that the classes used need not be the same for each disclosure

  provided, e.g. one set of classes may be used to present information about credit risk

  (see 5.3 below) and another for information about day 1 profits (see 4.5.2 below).

  It is emphasised that these classes should be determined by the entity and are, thus,

  distinct from the categories of financial instruments specified in IFRS 9 which

  determine how financial instruments are measured and where changes in fair value are

  recognised. [IFRS 7.B1]. However, in determining classes of financial instrument an entity

  should, as a minimum, distinguish instruments measured at amortised cost from those

  measured at fair value and treat as a separate class or classes those financial instruments

  outside the scope of IFRS 7. [IFRS 7.B2].

  For disclosures given by class of instrument, sufficient information should be provided

  to permit the information to be reconciled to the line items presented in the statement

  of financial position. [IFRS 7.6].

  4

  SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR AN

  ENTITY’S FINANCIAL POSITION AND PERFORMANCE

  The IASB decided that the disclosure requirements in this area should result from the

  following disclosure 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.’

  Further, they concluded that this principle could not be satisfied unless other specified

  disclosures (which are dealt with at 4.1 to 4.5 below) are also provided. [IFRS 7.7, BC13].

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  4.1 Accounting

  policies

  The main body of IFRS 7 contains a reminder of IAS 1’s requirement for an entity to

  disclose its significant accounting policies, comprising the measurement basis (or bases)

  used in preparing the financial statements and the other accounting policies used that

  are relevant to an understanding of the financial statements. [IFRS 7.21].

  For financial assets and financial liabilities designated as measured at fair value through

  profit or loss (see Chapter 44 at 7), such disclosure may include: [IFRS 7.B5(a), B5(aa)]

  • the nature of the financial assets or financial liabilities designated as measured at

  fair value through profit or loss;

  • the criteria for so designating financial liabilities on initial recognition; and

  • how the conditions or criteria in IFRS 9 for such designation have been satisfied.

  Other policies that might be appropriate include: [IFRS 7.B5(c), (e), (f), (g)]

  • whether regular way purchases and sales of financial assets are accounted for at

  trade date or at settlement date (see Chapter 45 at 2.2); and

  • how net gains or net losses on each category of financial instrument are determined

  (see 4.2.1 below), for example whether the net gains or net losses on items

  measured at fair value through profit or loss include interest or dividend income.

  In our view, interest income and interest expense (including, for example, that

  arising on short positions) should be treated consistently, i.e. both included or both

  excluded from the net gains and losses disclosed.

  Although related, different considerations will apply to the requirement to present

  separately on the face of the statement of comprehensive income (or income

  statement) interest revenue calculated using the effective interest method –

  see 7.1.1 below.

  The application guidance also contains a reminder that IAS 1 requires entities to disclose

  the judgements, apart from those involving estimations, that management has made in

  the process of applying the entity’s accounting policies and that have the most

  significant effect on the amounts recognised in the financial statements (see Chapter 3

  at 5.1.1.B). [IFRS 7.B5].

  4.2

  Income, expenses, gains and losses

  Under IFRS 7, entities are required to disclose various items of income, expense, gains

  and losses. The disclosures below may be provided either on the face of the financial

  statements or in the notes. [IFRS 7.20].

  4.2.1

  Gains and losses by measurement category

  The IASB concluded that information about the gains and losses arising on the various

  measurement categories of instrument is necessary to understand the financial

  performance of an entity’s financial instruments given the different measurement bases

  used. Consequently, disclosure should be given of net gains or net losses arising on the

  following categories of instrument: [IFRS 7.20]

  • financial assets or financial liabilities measured at fair value through profit or loss,

  showing separately those on financial assets or liabilities:

  Financial

  instruments:

  Presentation and disclosure 4175

  • designated as such upon initial recognition (or subsequently when the credit

  risk of a financial asset is managed using a credit derivative); and

  • mandatorily measured at fair value in accordance with IFRS 9, e.g. liabilities

  held for trading.

  In our view, these amounts should not be shown net of funding costs if the

  associated financial liabilities are not classified at fair value through profit or loss.

  For financial liabilities designated at fair value through profit or loss, the amount

  of gain or loss recognised in other comprehensive income, i.e. relating to changes

  in fair value attributable to changes in credit risk (see Chapter 46 at 2.4.1), should

  be shown separately;

  • financial assets measured at amortised cost.

  IFRS 7 requires disclosure of an analysis of the gain or loss arising from

  derecognition of such assets showing separately gains and losses. The reasons for

  derecognition should also be given. [IFRS 7.20A]. These gains and losses should also

  be shown separately on the face of the income statement or statement of

  comprehensive income (see 7.1.1 below); [IAS 1.82(aa)]

  • financial liabilities measured at amortised cost;

  • investments in equity instruments designated at fair value through other

  comprehensive income; and

  • debt instruments measured at fair value through other comprehensive income,

  showing separately:

  • the amount of gain or loss recognised in other comprehensive income during

  the period; and

  • the amount reclassified upon derecognition from accumulated other

  comprehensive income to profit or loss for the period.

  These disclosures are designed to complement the statement of financial position

  disclosure requirement described at 4.4.1 below. [IFRS 7.BC33].

  Some entities include interest and dividend income in gains and losses on financial assets

  and financial liabilities held for trading and others do not. To assist users in comparing

  income arising from financial instruments across different entities, entities are required to

  disclose how the income statement amounts are determined. For example, an entity

  should disclose whether net gains and losses on financial assets or financial liabilities held

  for trading include interest and dividend income (see 4.1 above). [IFRS 7.BC34].

  4.2.2
>
  Interest income and expense

  For financial assets or financial liabilities that are not measured at fair value through

  profit or loss, total interest income and total interest expense (calculated using the

  effective interest method) should be disclosed. Interest revenue for financial assets

  measured at amortised cost should be shown separately from interest revenue on debt

  instruments measured at fair value through other comprehensive income. [IFRS 7.20(b)].

  This disclosure requirement is similar, but different, to the requirement to present

  separately on the face of the statement of comprehensive income (or income statement)

  interest revenue calculated using the effective interest method – see 7.1.1 below.

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  Financial instruments containing discretionary participation features fall within the

  scope of IFRS 4 – Insurance Contracts – rather than IFRS 9 (see Chapter 41 at 3.3.2

  and Chapter 51 at 6) or IAS 39 for those insurers continuing to apply that standard (see

  Chapter 51 at 10.1). However, IFRS 7 does apply to such instruments and IFRS 4

  acknowledges that the interest expense disclosed need not be calculated using the

  effective interest method. [IFRS 4.35(d)]. When IFRS 17 – Insurance Contracts – is

  applied, such contracts would only rarely be within the scope of IFRS 7 (see

  Chapter 41 at 3.3.2).

  Similarly, lease liabilities and finance lease receivables are within the scope of

  IFRS 7 (see Chapter 41 at 3.2) but are not accounted for using the effective interest

  method. There is no equivalent acknowledgement in IAS 17 – Leases, IFRS 16 –

  Leases, or IFRS 9 that the disclosure of interest income and interest expense should

  be made on the basis of the finance cost and finance revenue recognised under the

  relevant standard for leases. However, this seems little more than an oversight and

  we consider it appropriate to include in the disclosure the amounts actually

  recognised rather than amounts calculated in accordance with the effective

  interest method.

  4.2.3

  Fee income and expense

  Entities should disclose fee income and expense (excluding amounts included in the

  effective interest rate calculation) arising from: [IFRS 7.20(c)]

  • financial assets or financial liabilities that are not measured at fair value through

  profit or loss; and