Accordingly, for any loans payable recognised at the reporting date, an entity is required
to disclose: [IFRS 7.18]
• details of any defaults during the period of principal, interest, sinking fund, or
redemption terms;
• the carrying amount of the loans payable in default at the reporting date; and
• whether the default was remedied, or the terms of the loans payable were
renegotiated, before the financial statements were authorised for issue.
If, during the period, there were breaches of loan agreement terms other than those
described above, the same information should be disclosed if those breaches permitted
the lender to demand accelerated repayment (unless the breaches were remedied, or
the terms of the loan were renegotiated, on or before the reporting date). [IFRS 7.19].
It is noted that any defaults or breaches may affect the classification of the liability as
current or non-current in accordance with IAS 1 (see Chapter 3 at 3.1.4). [IFRS 7.IG12].
4.4.9
Interests in associates and joint ventures accounted for in accordance
with IFRS 9
IAS 28 – Investments in Associates and Joint Ventures – allows an interest in an
associate or a joint venture held by a venture capital or similar organisation to be
measured at fair value through profit or loss in accordance with IFRS 9 (see Chapter 11
at 5.3). In these circumstances, IFRS 12 – Disclosure of Interests in Other Entities –
contains additional disclosure requirements, over and above those in IFRS 7, which are
dealt with in Chapter 13 at 2.2.3.D and 5.
4188 Chapter 50
4.5 Fair
values
4.5.1
General disclosure requirements
The IASB sees the disclosure of information about the fair value of financial assets and
liabilities as being an important requirement. It is explained in the following terms:
‘Many entities use fair value information internally in determining their overall
financial position and in making decisions about individual financial instruments. It
is also relevant to many decisions made by users of financial statements because, in
many circumstances, it reflects the judgement of the financial markets about the
present value of expected future cash flows relating to an instrument. Fair value
information permits comparisons of financial instruments having substantially the
same economic characteristics, regardless of why they are held and when and by
whom they were issued or acquired. Fair values provide a neutral basis for assessing
management’s stewardship by indicating the effects of its decisions to buy, sell or
hold financial assets and to incur, maintain or discharge financial liabilities.’
Therefore, when financial assets or liabilities are not measured on a fair value basis,
information on fair values should be given by way of supplementary disclosures to assist
users in comparing entities on a consistent basis. [IFRS 7.BC36].
More specifically, except as set out below, the fair value of each class of financial assets
and liabilities should be disclosed in a way that permits comparison with the
corresponding carrying amounts. [IFRS 7.25]. In providing this disclosure, instruments
should be offset only to the extent that their related carrying amounts are also offset in
the statement of financial position. [IFRS 7.26]. IFRS 13 contains guidance on determining
fair values and includes more extensive disclosure requirements about the fair values
disclosed. These are discussed in Chapter 14 at 20.
Pragmatically, disclosure of fair values is not required for instruments whose carrying
amount reasonably approximates their fair value, for example short-term trade receivables
and payables. [IFRS 7.29(a)]. Where an entity has material amounts of longer term receivables
or payables the carrying amount will often not represent a reasonable approximation of
fair value and in such cases use of this concession will not be appropriate.
As set out in Chapter 41 at 3.3.2 some instruments within the scope of IFRS 4 (normally
life insurance policies) contain a discretionary participation feature. If the fair value of
that feature cannot be reliably measured, disclosures of fair value are not required.
[IFRS 7.29(c)]. However, additional disclosures should be given to assist users of the
financial statements in making their own judgements about the extent of possible
differences between the carrying amount of such contracts and their fair value. In
particular, the following should be disclosed: [IFRS 7.30]
• the fact that fair value has not been disclosed because it cannot be reliably measured;
• a description of the instruments, their carrying amount, and an explanation of why
fair value cannot be measured reliably;
• information about the market for the instruments;
• information about whether and how the entity intends to dispose of the
instruments; and
Financial
instruments:
Presentation and disclosure 4189
• for instruments whose fair value previously could not be reliably measured that
are derecognised:
• that fact;
• their carrying amount at the time of derecognition; and
• the amount of gain or loss recognised.
When IFRS 17 is applied such contracts would only rarely be within the scope of IFRS 7
(see Chapter 41 at 3.3.2) and consequently these requirements are deleted from the
standard.
When IFRS 16 is applied, disclosure need not be given of the fair value of lease liabilities.
[IFRS 7.29(d)]. IFRS 16 is effective for periods commencing on or after 1 January 2019
(see 8.3 below).
4.5.2
Day 1 profits
In certain situations there will be a difference between the transaction price for a
financial asset or financial liability and the fair value that would be determined at that
date in accordance with IFRS 13 (commonly known as a day 1 profit). [IFRS 7.28]. As set
out in Chapter 45 at 3.3, an entity should not recognise a day 1 profit on initial
recognition of the financial instrument if the fair value is neither evidenced by a quoted
price in an active market for an identical asset or liability (known as a Level 1 input) nor
based on a valuation technique that uses only data from observable markets. Instead,
the difference will be recognised in profit or loss in subsequent periods in accordance
with IFRS 9 and the entity’s accounting policy. [IFRS 7.IG14].
Where such a difference exists, IFRS 7 requires disclosure, by class of financial
instrument, of: [IFRS 7.28]
• the accounting policy for recognising that difference in profit or loss to reflect a
change in factors (including time) that market participants would take into account
when setting a price for the financial instrument;
• the aggregate difference yet to be recognised in profit or loss at the beginning
and end of the period and a reconciliation of changes in the amount of this
difference; and
• why it was concluded that the transaction price was not the best evidence of fair
value, including a description of the evidence that supports the fair value.
In other words, disclosure is required of the profits an entity might think it has made but
which it is prohibited from recognising, at least for the time being. This disclosure is
illustrated in the following example based on the implementation guidance. It is rather
curious in that it illustrates a day 1 loss, not profit.
Example 50.4: Disclosure of deferred day 1 profits
On 1 January 2018 Company R purchases financial assets that are not traded in an active market for
€15 million which represents their fair value at initial recognition. After initial recognition, R applies a
valuation technique to measure the fair value of the financial assets. This valuation technique uses inputs
other than data from observable markets. At initial recognition, the same valuation technique would have
resulted in an amount of €14 million, which differs from fair value by €1 million. R has only one class of
such financial assets with existing differences of €5 million at 1 January 2018. The disclosure in R’s 2019
financial statements would include the following: [IFRS 7.IG14]
4190 Chapter 50
Accounting policies
R uses the following valuation technique to measure the fair value of financial instruments that are not traded
in an active market: [insert description of technique, not included in this example] Differences may arise
between the fair value at initial recognition (which, in accordance with IFRS 13 and IFRS 9, is normally the
transaction price) and the amount determined at initial recognition using the valuation technique. Any such
differences are [description of R’s accounting policy].
In the notes to the financial statements
As discussed in note X, [insert name of valuation technique] is used to measure the fair value of the following
financial instruments that are not traded in an active market. However, in accordance with IFRS 13 and
IFRS 9, the fair value of an instrument at inception is normally the transaction price. If the transaction price
differs from the amount determined at inception using the valuation technique, that difference is [description
of R’s accounting policy].
The differences yet to be recognised in profit or loss are as follows:
2019
2018
€m
€m
Balance at beginning of year 5.3
5.0
New transactions
–
1.0
Recognised in profit or loss during the year
(0.7)
(0.8)
Other increases
–
0.2
Other decreases
(0.1)
(0.1)
Balance at end of year 4.5
5.3
UBS discloses the following information about recognition of day 1 profits.
Extract 50.1: UBS AG (2014)
Notes to the UBS AG consolidated financial statements [extract]
24
Fair value measurement [extract]
d) Valuation
adjustments
[extract]
Day-1 reserves [extract]
For new transactions where the valuation technique used to measure fair value requires significant inputs that are not
based on observable market data, the financial instrument is initially recognized at the transaction price. The
transaction price may differ from the fair value obtained using a valuation technique, and any such difference is
deferred and not recognized in the income statement. These day-1 profit or loss reserves are reflected, where
appropriate, as valuation adjustments.
The table below provides the changes in deferred day-1 profit or loss reserves during the respective period. Amounts
deferred are released and gains or losses are recorded in Net trading income when pricing of equivalent products or
the underlying parameters become observable or when the transaction is closed out.
Deferred day-1 profit or loss
For the year ended
CHF million
31.12.14
31.12.13
31.12.12
Balance at the beginning of the year
486 474 433
Profit/(loss) deferred on new transactions
344 694 424
(Profit)/loss recognized in the income statement
(384)
(653)
(367)
Foreign currency translation
35
(29)
(16)
Balance at the end of the year
480 486 474
Financial
instruments:
Presentation and disclosure 4191
UBS applied IAS 39 to day 1 profits in these financial statements but the associated
disclosure requirements are unchanged under IFRS 9.
4.6 Business
combinations
IFRS 3 – Business Combinations – requires an acquirer to disclose additional
information about financial instruments arising from business combinations that occur
during the reporting period. These requirements are discussed below.
4.6.1 Acquired
receivables
Some constituents were concerned that prohibiting the use of an allowance account
when accounting for acquired receivables at fair value (see Chapter 45 at 3.3.4) could
make it impossible to determine the contractual cash flows due on those assets and the
amount of those cash flows not expected to be collected. They asked for additional
disclosure to help in assessing considerations of credit quality used in estimating those
fair values, including expectations about receivables that will be uncollectible.
[IFRS 3.BC258]. Consequently, the IASB decided to require the following disclosures to be
made about such assets acquired in a business combination:
• fair value of the receivables;
• gross contractual amounts receivable; and
• the best estimate at the acquisition date of the contractual cash flows not expected
to be collected.
This information should be provided by major class of receivable, such as loans, direct
finance leases and any other class of receivables. [IFRS 3.B64(h)].
Although these requirements will produce some of the information users need to
evaluate the credit quality of receivables acquired, the IASB acknowledged that it may
not provide all such information. However, this is seen as an interim measure and the
IASB will monitor a related FASB project with a view to improving the disclosure
requirements in the future, [IFRS 3.BC260], although it is not clear when such a project
might be completed.
4.6.2
Contingent consideration and indemnification assets
The following information about contingent consideration arrangements and
indemnification assets (see Chapter 41 at 3.7.1 and 3.12 respectively) should be given:
[IFRS 3.B64(g)]
• the amount recognised as at the acquisition date;
• a description of the arrangement and the basis for determining the amount of the
payment; and
• an estimate of the range of outcomes (undiscounted) or, if a range cannot be
estimated, that fact and the reasons why a range cannot be estimated.
If the maximum amount of the payment is unlimited, that fact should be disclosed.
These are requirements of IFRS 3 and apply irrespective of whether such items meet
the definition of a financial instrument (which they normally will).
4192 Chapter 50
5
NATURE AND EXTENT OF RISKS ARISING FROM
FINANCIAL INSTRUMEN
TS
IFRS 7 establishes a second key principle, namely:
‘An entity shall disclose information that enables users of its financial statements
to evaluate the nature and extent of risks arising from financial instruments to
which the entity is exposed at the reporting date.’ [IFRS 7.31].
Again this is supported by related disclosure requirements which focus on qualitative
and quantitative aspects of the risks arising from financial instruments and how those
risks have been managed. [IFRS 7.32].
Providing qualitative disclosures in the context of quantitative disclosures enables users
to link related disclosures and hence form an overall picture of the nature and extent of
risks arising from financial instruments. The interaction between qualitative and
quantitative disclosures contributes to disclosure of information in a way that better
enables users to evaluate an entity’s exposure to risks. [IFRS 7.32A].
These risks typically include, but are not limited to, credit risk, liquidity risk and market
risk, which are defined as follows: [IFRS 7 Appendix A]
(a) Credit risk, 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) Liquidity risk, the risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities that are settled by delivering cash or another
financial asset.
(c) Market risk, the risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market prices. It comprises three separate
types of risk:
(i) Currency risk, the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in foreign exchange rates.
Currency risk (or foreign exchange risk) arises on financial instruments that
are denominated in a foreign currency, i.e. in a currency other than the
functional currency in which they are measured. For the purpose of IFRS 7,
currency risk does not arise from financial instruments that are non-monetary
items or from financial instruments denominated in an entity’s functional
currency. [IFRS 7.B23]. Therefore if a parent with the euro as its functional and
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 830
