International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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the relevant risk variable, there is no requirement to determine what the profit or loss
for the period would have been if the relevant risk variables had been different during
the reporting period. The requirement is subtly different because the effect that is
disclosed assumes that a reasonably possible change in the relevant risk variable had
occurred at the reporting date and had been applied to the risk exposures in existence
at that date. For example, if an entity has a floating rate liability at the reporting date,
the entity would disclose the effect on profit or loss (i.e. interest expense) for the current
year if interest rates had varied by reasonably possible amounts. Further, this disclosure
is not required for each change within a range of reasonably possible changes, only at
the limits of the reasonably possible range. [IFRS 7.B18].
The following example illustrates how the amounts to be included in these disclosures
in respect of a number of different instruments might be determined – for simplicity,
tax effects are ignored.
Example 50.10: Illustration of how sensitivity disclosures can be determined
Company X, which has the euro as its functional currency, is party to the following instruments at
31 December 2019, X’s reporting date:
• a €100m floating rate borrowing;
• a forward contract to sell US$10m in July 2020 that is designated in an effective hedge of a highly
probable forecast sale that is denominated in US dollars;
• a short-term loan of £10m made to a related party;
• an interest rate swap that is not designated as a hedge;
• investments in fixed rate debt securities that are classified as financial assets measured at amortised cost;
4224 Chapter 50
• investments in similar securities that are classified as debt instruments measured at fair value through
other comprehensive income; and
• investments in a portfolio of US equities with a fair value of US$50m.
Floating rate borrowing
Changes in interest rates will result in this instrument impacting on X’s profit or loss. If X concludes that a
reasonably possible change in interest rates is 50 basis points (0.5%), €0.5m [€100m × 0.5%] would be
included in the amount disclosed as the impact on profit or loss of this reasonably possible change.
Forward contract
Changes in exchange rates will have an impact on the fair value (and carrying value) of this instrument, but this
would be recognised in other comprehensive income, not profit or loss (assuming ineffectiveness is
insignificant). If a reasonably possibly change in exchange rates would change the value of the contract by
€0.3m, this would be included in the amount disclosed as the impact on equity of this reasonably possible change.
Foreign currency loan
Changes in spot exchange rates will have an impact on the carrying amount of this asset with changes recognised
in profit or loss as a result of the application of IAS 21 – The Effects of Changes in Foreign Exchange Rates. If
a reasonably possible change in the exchange rate would alter the carrying value of the contract by €1.0m, this
would be included in the amount disclosed as the impact on profit or loss of this reasonably possible change.
If the loan were made to a subsidiary of X that had sterling as its functional currency, the loan itself would
eliminate on consolidation but the impact of retranslating it into euros in X’s own financial statements would
remain in consolidated profit or loss. Therefore, in these circumstances, the loan would still be included in
the sensitivity analysis for X’s consolidated financial statements.
Interest rate swap
Changes in interest rates will have an impact on the fair value (and carrying value) of this instrument and
such changes would be recognised in profit or loss. If a reasonably possible change of 50 basis points in
interest rates would change the value of the contract by €0.4m, this would be included in the amount disclosed
as the impact on profit or loss of this reasonably possible change.
Fixed rate debt securities
Changes in interest rates will have an impact on the fair value of all these instruments. However, because
those classified as measured at amortised cost are not measured at fair value, the carrying amount only of
those that are classified as debt instruments measured at fair value through other comprehensive income will
change as interest rates move and such change will normally be recognised in other comprehensive income.
Therefore, if a reasonably possible 50 basis point change in interest rates would change the fair value of each
group of instruments by €0.5m, only the amount in respect of the debt instruments measured at fair value
through other comprehensive income would be included in the sensitivity disclosure as an impact on equity.
Of course there would be nothing to preclude disclosure, as additional information (if considered relevant),
of the sensitivity of the fair value of those classified as measured at amortised cost to changes in interest rates.
US equity securities
The impact of a reasonably possible change in the market prices of these securities should be included in the
amount disclosed as X’s sensitivity to equity price risk. Changes in exchange rates might be considered to impact
the fair value of these investments. However, as noted at (c)(i) at 5 above, financial instruments that are non-
monetary items do not give rise to foreign currency risk for the purposes of IFRS 7 – essentially the foreign
currency risk is seen as part of the market price risk associated with such instruments. Therefore, X should take
no account of these investments when disclosing its sensitivity to changes in the euro/US dollar exchange rate.
Nevertheless, this information may be provided as additional disclosure where it is considered relevant.
Relevant risk variables for the purpose of this disclosure might include: [IFRS 7.IG33]
• prevailing market interest rates, for interest-sensitive financial instruments such as
a variable-rate loan; or
Financial
instruments:
Presentation and disclosure 4225
• currency rates and interest rates, for foreign currency financial instruments such
as foreign currency bonds.
For interest rate risk, the sensitivity analysis might show separately the effect of a
change in market interest rates on:
• interest income and expense;
• other line items of profit or loss (such as trading gains and losses); and
• when applicable, equity.
An entity might disclose a sensitivity analysis for interest rate risk for each currency in
which the entity has material exposures to interest rate risk. [IFRS 7.IG34].
In determining what a reasonably possible change in the relevant risk variable is, the
economic environment(s) in which the entity operates and the time frame over which
it is making the assessment should be considered. A reasonably possible change should
not include remote or ‘worst case’ scenarios or ‘stress tests’. Moreover, if the rate of
change in the underlying risk variable is stable, the chosen reasonably possible change
in the risk variable need not be altered.
For example, assume that interest rates are 5 percent and an entity determines that a
fluctuation in interest rates of ±50 basis points is reasonably possib
le. It would disclose the
effect on profit or loss and equity if interest rates were to change to 4.5 percent or 5.5 percent.
In the next period, interest rates have increased to 5.5 percent. The entity continues to
believe that interest rates may fluctuate by ±50 basis points (i.e. that the rate of change in
interest rates is stable). The entity would disclose the effect on profit or loss and equity if
interest rates were to change to 5 percent or 6 percent. The entity would not be required to
revise its assessment that interest rates might reasonably fluctuate by ±50 basis points, unless
there is evidence that interest rates have become significantly more volatile. [IFRS 7.B19].
However, when market conditions change significantly, for example as occurred in
many markets in the second half of 2008, an entity’s assessment of what constitutes a
reasonably possible change should be reassessed.15
The time frame over which a reasonably possible change should be assessed is defined
by the period until these disclosures will next be presented. This will normally coincide
with the next annual reporting period, [IFRS 7.B19], although in some jurisdictions such
information may be included in interim reports.
Because the factors affecting market risk will vary according to the specific circumstances
of each entity, the appropriate range to be considered in providing a sensitivity analysis
of market risk will also vary for each entity and for each type of market risk. [IFRS 7.IG35].
Where an entity has exposure to other price risk, it might disclose the effect of a
decrease in a specified stock market index, commodity price, or other risk variable. For
example, if residual value guarantees that are financial instruments are given, the
disclosure could include an increase or decrease in the value of the assets to which the
guarantee applies. [IFRS 7.B25].
The following example from the implementation guidance illustrates the type of
disclosure that might be provided.
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Example 50.11: Illustrative disclosure of sensitivity analyses
Interest rate risk
At 31 December 2019, if interest rates at that date had been 10 basis points lower with all other variables held
constant, post-tax profit for the year would have been €1.7 million (2018: €2.4 million) higher, arising mainly
as a result of lower interest expense on variable borrowings.
If interest rates had been 10 basis points higher, with all other variables held constant, post-tax profit would
have been €1.5 million (2018: €2.1 million) lower, arising mainly as a result of higher interest expense on
variable borrowings.
Profit is more sensitive to interest rate decreases than increases because of borrowings with capped interest
rates. The sensitivity is lower in 2019 than in 2018 because of a reduction in outstanding borrowings that has
occurred as the entity’s debt has matured (see note X).
Foreign currency exchange rate risk
At 31 December 2019, if the euro had weakened 10 percent against the US dollar with all other variables held
constant, post-tax profit for the year would have been €2.8 million (2018: €6.4 million) lower, and other
comprehensive income would have been €1.2 million (2018: €1.1 million) higher.
Conversely, if the euro had strengthened 10 percent against the US dollar with all other variables held
constant, post-tax profit would have been €2.8 million (2018: €6.4 million) higher, and other comprehensive
income would have been €1.2 million (2018: €1.1 million) lower.
The lower foreign currency exchange rate sensitivity in profit in 2019 compared with 2018 is attributable to a
reduction in foreign currency denominated debt. Equity is more sensitive in 2019 than in 2018 because of the
increased use of hedges of foreign currency purchases, offset by the reduction in foreign currency debt. [IFRS 7.IG36].
The following extracts from the financial statements of Hunting illustrates how one
company has addressed this disclosure requirement in respect of certain of its interest
rate and foreign currency exposures. Extract 50.9 at 5.5.2 below contains another
example, this time for its exposure to embedded derivatives.
Extract 50.8: Hunting plc (2014)
Notes to the Financial Statements [extract]
31.
Financial Instruments: Sensitivity Analysis [extract]
The following sensitivity analysis is intended to illustrate the sensitivity to changes in market variables on the Group’s and Company’s financial instruments and show the impact on profit or loss and shareholders’ equity. Financial
instruments affected by market risk include cash and cash equivalents, borrowings, deposits and derivative financial
instruments. The sensitivity analysis relates to the position as at 31 December 2014.
The analysis excludes the impact of movements in market variables on the carrying value of pension and other post-
retirement obligations, provisions and on the non-financial assets and liabilities of foreign operations.
The following assumptions have been made in calculating the sensitivity analysis:
• Foreign exchange rate and interest rate sensitivities have an asymmetric impact on the Group’s results,
that is, an increase in rates does not result in the same amount of movement as a decrease in rates.
• For floating rate assets and liabilities, the amount of asset or liability outstanding at the balance sheet
date is assumed to be outstanding for the whole year.
• Fixed rate financial instruments that are carried at amortised cost are not subject to interest rate risk
for the purpose of this analysis.
• The carrying values of financial assets and liabilities carried at amortised cost do not change as
interest rates change.
Positive figures represent an increase in profit or equity.
Financial
instruments:
Presentation and disclosure 4227
(i) Interest Rate Sensitivity
The sensitivity rate of 0.25% (2013 – 0.25%) for US interest rates represents management’s assessment of a reasonably possible change, based on historical volatility and a review of analysts’ research and banks’ expectations of future interest rates.
Group
The post-tax impact on the income statement, with all other variables held constant, at 31 December, for an increase
of 0.25% (2013 – 0.25%) in US interest rates, is to reduce profits by $0.2m (2013 – $0.5m). If US interest rates were
to decrease by 0.25% (2013 – 0.25%), then the post-tax impact on the income statement would be to increase profits
by $0.2m (2013 – $0.5m). The movements arise on US dollar denominated borrowings. There is no impact on other
comprehensive income (“OCI”) for a change in interest rates.
(ii) Foreign Exchange Rate Sensitivity
The sensitivity rate of 10% (2013 – 10%) for Sterling and Canadian dollar exchange rates represents management’s
assessment of a reasonably possible change, based on historical volatility and a review of analysts’ research and
banks’ expectations of future foreign exchange rates.
The table below shows the post-tax impact for the year of a reasonable change in foreign exchange rates, with all
other variables held constant, at 31 December.
2014
2013
Income
Income
statement OCI
statement OCI
$m $m $m $m
Ster
ling exchange rates +10% (2013: +10%)
(0.5) 1.6 (12.6) 18.6
Sterling exchange rates –10% (2013: –10%)
0.9 (2.0) 2.1 (22.4)
Canadian dollar exchange rates +10% (2013: +10%)
(0.8) (5.1) (0.1) (1.8)
Canadian dollar exchange rates –10% (2013: –10%)
0.9 5.5 0.1 2.2
The movements in the income statement arise from cash, bank overdrafts, intra-group balances and accrued expenses
where the functional currency of the entity is different from the currency that the monetary items are denominated in.
The movements in OCI in 2014 arise from net Sterling and Canadian dollar borrowings designated in a hedge of net
investments in foreign subsidiaries and from US and Canadian dollar denominated loans that have been recognised as part
of the Group’s net investment in foreign subsidiaries. The movements in OCI in 2013 arise from Sterling and Canadian
dollar denominated loans that have been recognised as part of the Group’s net investment in foreign subsidiaries.
Hunting applied IAS 39 in these financial statements but the requirement to disclose such
a sensitivity analysis is unchanged under IFRS 9, although the accounting treatment for
certain instruments included in the sensitivity analysis could, at least in principle, change.
5.5.2
Value-at-risk and similar analyses
Where an entity prepares a sensitivity analysis, such as value-at-risk, that reflects
interdependencies between risk variables (e.g. interest rates and exchange rates) and
uses it to manage financial risks, it may disclose that analysis in place of the information
specified at 5.5.1 above. [IFRS 7.41]. If this disclosure is given, the effects on profit or loss
and equity at 5.5.1 above need not be given. [IFRS 7.BC61].
In these cases the following should also be disclosed: [IFRS 7.41]
• an explanation of the method used in preparing such a sensitivity analysis, and of
the main parameters and assumptions underlying the data provided; and
• an explanation of the objective of the method used and of limitations that may result
in the information not fully reflecting the fair value of the assets and liabilities involved.
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This applies even if such a methodology measures only the potential for loss and does