International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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ineffectiveness)
Interest rate risk
xx
Line item XX
Foreign exchange risk
xx
Line item XX
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IAS 1 requires the presentation of a reconciliation of each component of equity and an
analysis of other comprehensive income (see 7.2 and 7.3 below). The level of
information given in the reconciliation and analysis should: [IFRS 7.24E]
• differentiate between hedging gains or losses recognised in other comprehensive
income and amounts reclassified to profit or loss, separately for:
• cash flow hedges for which the hedged future cash flows are no longer
expected to occur;
• those hedges for which the hedged item has affected profit or loss; and
• amounts related to hedged forecast transactions that subsequently result in
the recognition of a non-financial asset or liability, or a hedged forecast
transaction for a non-financial asset or liability becomes a firm commitment
for which fair value hedge accounting is applied, that are included directly in
the initial cost or other carrying amount of the asset or the liability.
As noted at 7.2 and at 7.3 below, this adjustment should not be included within
other comprehensive income. [IFRS 9.BC6.380]. Instead it should be presented
within the statement of changes of equity, albeit separately from other
comprehensive income;
• differentiate between amounts associated with the time value of options that hedge
transaction related hedged items and those that hedge time-period related hedged
items where the time value of the option is recognised initially in other
comprehensive income; and
• differentiate between amounts associated with forward elements of forward
contracts and the foreign currency basis spreads of financial instruments that hedge
transaction related hedged items and those that hedge time-period related hedged
items where those amounts are recognised initially in other comprehensive income.
The information in the bullets above should be disclosed separately by risk category,
although this disaggregation may be provided in the notes to the financial statements.
[IFRS 7.24F].
Further examples of how these disclosures might be provided are set out in Chapter 49 at 10.
4.3.4
Option to designate a credit exposure as measured at fair value
through profit or loss
If a financial instrument, or a proportion of it, has been designated as measured at fair
value through profit or loss because a credit derivative is used to manage the credit risk
of that financial instrument, the following should be disclosed: [IFRS 7.24G]
• a reconciliation of each of the nominal amount and the fair value of the credit
derivative at the beginning and end of the period;
• the gain or loss recognised in profit or loss on initial designation; and
• on discontinuation of measuring a financial instrument, or a proportion of it, at fair
value through profit or loss, the fair value of that financial instrument that becomes
the new carrying amount and the related nominal or principal amount.
Except for providing comparative information in accordance with IAS 1, this
information need not be given in subsequent periods.
Financial
instruments:
Presentation and disclosure 4183
4.4
Statement of financial position
4.4.1
Categories of financial assets and financial liabilities
The carrying amounts of each of the following categories of financial instrument should be
disclosed, either on the face of the statement of financial position or in the notes: [IFRS 7.8]
• financial assets measured at fair value through profit or loss, showing separately:
• those designated as such upon initial recognition; and
• those mandatorily measured at fair value in accordance with IFRS 9;
• financial liabilities at fair value through profit or loss, showing separately:
• those designated as such upon initial recognition; and
• those that meet the definition of held for trading in IFRS 9;
• financial assets measured at amortised cost;
• financial liabilities measured at amortised cost; and
• financial assets measured at fair value through other comprehensive income,
showing separately:
• debt instruments held within a business model to both collect contractual
cash flows from, and to sell, the assets; and
• investments in equity instruments designated to be measured as such upon
initial recognition.
The IASB concluded that such disclosure would assist users in understanding the extent
to which accounting policies affect the amounts at which financial assets and financial
liabilities are recognised. [IFRS 7.BC14].
Although accounted for identically, the carrying amounts of financial instruments that
are classified as held for trading and those designated at fair value through profit or loss
are shown separately because designation is at the discretion of the entity. [IFRS 7.BC15].
A derivative that is designated as a hedging instrument in an effective hedge relationship
does not fall within any of the above categories and, strictly, is not required to be included
in these disclosures. Disclosure requirements for hedges are set out at 4.3 above.
4.4.2
Financial liabilities designated at fair value through profit or loss
Where a (non-derivative) financial liability has been designated at fair value through
profit or loss, i.e. it is not classified as trading, the amount of change during the period
and cumulatively (i.e. since initial recognition) in its fair value that is attributable to
changes in credit risk should be disclosed. This disclosure should be provided for
financial liabilities where the change is recognised in other comprehensive income (see
Chapter 46 at 2.4.1) and it should also be provided for financial liabilities where the
change is recognised in profit or loss because recognising it in other comprehensive
income would create or enlarge an accounting mismatch within profit or loss (see
Chapter 46 at 2.4.2). [IFRS 7.10(a), 10A(a)].
Further, if the disclosure is not considered to represent faithfully the change in the fair
value of the financial liability attributable to changes in credit risk, the reasons for
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reaching this conclusion and the factors believed to be relevant should also be disclosed.
[IFRS 7.11(b)].
The IASB concluded that the difference between the carrying amount of such a liability
and the amount the entity would be contractually required to pay at maturity to the holder
of the obligation should also be disclosed. This disclosure is also required for liabilities
where the change in fair value attributable to credit risk is recognised in other
comprehensive income and for those where the change is recognised in profit or loss.
[IFRS 7.10(b), 10A(b)]. The fair value may differ significantly from the settlement amount,
particularly for liabilities with a long duration when the entity has experienced a
significant deterioration in creditworthiness subsequent to issuance and the IASB
concluded that knowledge of this difference would be useful. Also, the se
ttlement amount
is important to some financial statement users, particularly creditors. [IFRS 7.BC22].
Where changes in the fair value of a financial liability attributable to credit risk are
recognised in other comprehensive income, any transfers of the cumulative gain or loss
within equity should be disclosed, including the reason for such transfers. [IFRS 7.10(c)].
Also, if such a financial liability is derecognised during the period, the amount (if any)
presented in other comprehensive income that was realised at derecognition should be
disclosed. [IFRS 7.10(d)].
A detailed description of the methods used to calculate the changes in fair value
attributable to changes in credit risk should be given, including an explanation of why
the method is appropriate. This disclosure is required irrespective of whether those
changes are recognised in other comprehensive income or in profit or loss, [IFRS 7.11(a)].
Entities should also provide a detailed description of the methodology or methodologies
used to determine whether presenting changes in the fair value of a liability attributable
to credit risk in other comprehensive income would create or enlarge an accounting
mismatch in profit or loss (see Chapter 46 at 2.4.2). Where an entity is required to
present such changes in profit or loss, this disclosure should include a detailed
description of the economic relationship between the financial liability and other
financial instrument(s) measured at fair value through profit or loss that are expected to
offset those changes. [IFRS 7.11(c)].
4.4.3
Financial assets designated as measured at fair value through profit
or loss
Additional disclosure requirements apply to financial assets (or groups of such assets)
that are designated at fair value through profit or loss if they would otherwise be
measured at fair value through other comprehensive income or at amortised cost,
namely: [IFRS 7.9]
• the maximum exposure to credit risk (see 5.3.3 below) at the reporting date of the
financial asset (or group of financial assets);
• the amount by which any related credit derivatives or similar instruments mitigate
that maximum exposure to credit risk;
• the amount of change during the period and cumulatively (i.e. since initial
recognition) in the fair value of the financial assets (or group of financial assets) that
is attributable to changes in credit risk (see below); and
Financial
instruments:
Presentation and disclosure 4185
• the amount of change in the fair value of any related credit derivative or similar
instrument that has occurred during the period and cumulatively since the financial
asset was designated.
Calculating the change in fair value attributable to changes in credit risk is approached
in much the same way as for financial liabilities (see 4.4.2 above). It may be determined
either as the amount of change in fair value that is not attributable to changes in market
conditions that give rise to market risk or by using an alternative method that more
faithfully represents the amount of change in its fair value that is attributable to changes
in credit risk. [IFRS 7.9].
A detailed description of the chosen method(s), including an explanation of why the
method is appropriate should be disclosed. If the disclosure is not considered to
represent faithfully the change in the fair value of the financial asset attributable to
changes in credit risk, the reasons for reaching this conclusion and the factors believed
to be relevant should be disclosed. [IFRS 7.11].
4.4.4
Investments in equity instruments designated at fair value through
other comprehensive income
Where investments in equity instruments have been designated to be measured at fair
value through other comprehensive income (see Chapter 44 at 2.2 and 8), the following
should be disclosed: [IFRS 7.11A]
• which investments in equity instruments have been designated to be measured at
fair value through other comprehensive income;
• the reasons for using this presentation alternative;
• the fair value of each such investment at the end of the reporting period;
This requirement, applying as it does to each such investment, may be onerous if
an entity makes significant use of the fair value through other comprehensive
income option. However, the concept of materiality does apply to disclosures,
therefore this information could be provided separately only for those investments
that are themselves material whilst aggregated disclosures may suffice for
immaterial items;
• dividends recognised during the period, showing separately those related to
investments derecognised during the reporting period and those related to
investments held at the end of the reporting period; and
• any transfers of the cumulative gain or loss within equity during the period,
including the reason for such transfers.
Where such investments are derecognised during the reporting period, the following
should also be disclosed: [IFRS 7.11B]
• the reasons for disposing of the investments;
• the fair value of the investments at the date of derecognition; and
• the cumulative gain or loss on disposal.
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4.4.5 Reclassification
The circumstances in which financial assets should or may be reclassified from one
category to another in response to a change in an entity’s business model are discussed
in Chapter 44 at 9. If, in the current or previous reporting periods, any such
reclassifications have occurred, the following should be disclosed: [IFRS 7.12B]
• the date of reclassification;
• a detailed explanation of the change in business model and a qualitative description
of its effect on the entity’s financial statements; and
• the amount reclassified into and out of each category.
For assets previously measured at fair value through profit or loss that are reclassified
so that they are measured at amortised cost or at fair value through other
comprehensive income, the following information should be disclosed in each reporting
period following reclassification until derecognition: [IFRS 7.12C]
• the effective interest rate determined on the date of reclassification; and
• the interest income or expense recognised.
Where financial assets previously measured at fair value through other comprehensive
income have been reclassified since the last annual reporting date so that they are
measured at amortised cost, the following should be disclosed:
• the fair value of the financial assets at the end of the reporting period; and
• the fair value gain or loss that would have been recognised in profit or loss during
the reporting period if the financial assets had not been reclassified.
The same information should be given where financial assets previously measured at
fair value through profit or loss have been reclassified since the last annual reporting
date so that they are measured at amortised cost or at fair value through other
comprehensive income. [IFRS 7.12D].
4.4.6 Collateral
Where an entity has pledged financial assets as collat
eral for liabilities or contingent
liabilities it should disclose the carrying amount of those assets and the terms and
conditions relating to its pledge. This also applies to transfers of non-cash collateral
where the transferee has the right, by contract or custom, to sell or repledge the
collateral (see Chapter 48 at 5.5.2). [IFRS 7.14].
When an entity holds collateral (of financial or non-financial assets) and is permitted to
sell or repledge the collateral in the absence of default by the owner of the collateral, it
should disclose: [IFRS 7.15]
• the fair value of the collateral held;
• the fair value of any such collateral sold or repledged, and whether the entity has
an obligation to return it; and
• the terms and conditions associated with its use of the collateral.
Financial
instruments:
Presentation and disclosure 4187
Although some respondents to the exposure draft that preceded IFRS 7 (ED 7) argued
for an exemption from this disclosure in cases where it is impracticable to obtain the
fair value of the collateral held, the IASB concluded that it is reasonable to expect an
entity to know the fair value of collateral that it holds and can sell even where there is
no default. [IFRS 7.BC25].
4.4.7 Compound
financial
instruments
with multiple embedded derivatives
Where an instrument has been issued that contains both a liability and an equity
component and the instrument has multiple embedded derivatives whose values are
interdependent, such as a callable convertible debt instrument (see Chapter 43 at 6.4.2),
the existence of these features should be disclosed. [IFRS 7.17]. Accordingly, the impact
on the amounts reported as liabilities and equity will be highlighted, something the IASB
sees as important given the acknowledged arbitrary nature of the allocation under
IAS 32 of the joint value attributable to this interdependence. [IFRS 7.BC31].
4.4.8
Defaults and breaches of loans payable
Loans payable are defined as ‘financial liabilities other than short-term trade payables on
normal credit terms.’ [IFRS 7 Appendix A]. It is considered that disclosures about defaults and
breaches of loans payable and other loan agreements provide relevant information about
the entity’s creditworthiness and its prospects of obtaining future loans. [IFRS 7.BC32].