not measure the potential for gain. Such an entity might comply with the disclosure
requirements above by detailing the type of value-at-risk model used (e.g. whether the
model relies on Monte Carlo simulations), an explanation about how the model works
and the main assumptions (e.g. the holding period and confidence level). Entities might
also disclose the historical observation period and weightings applied to observations
within that period, an explanation of how options are dealt with in the calculations, and
which volatilities and correlations (or, alternatively, Monte Carlo probability
distribution simulations) are used. [IFRS 7.B20].
The basic sensitivity analysis considered at 5.5.1 above incorporates only the effects of
financial instruments and other contracts within the scope of IFRS 7. In contrast, value-
at-risk and similar analyses can incorporate the effects of items outside the scope of
IFRS 7, for example trading inventories, own use contracts and insurance contracts.
This is because the standard requires entities to disclose the analysis actually used in
the management of the business which will often include such items.
It has been suggested that disclosure of potential losses due to stress conditions would
be of greater use than the disclosure requirements for value-at-risk and similar
methodologies that do not contemplate extraordinary market movements. However, in
December 2008, the IASB noted this would be inconsistent with the ‘basic’ sensitivity
analysis (see 5.5.1 above) and decided not to add such a requirement to IFRS 7.16
BP provides the following market risk disclosures which includes the value-at-risk limit
it uses to manage that risk.
Extract 50.9: BP p.l.c. (2014)
Notes on financial statements [extract]
27 Financial
instruments
and financial risk factors [extract]
(a) Market
risk [extract]
Market risk is the risk or uncertainty arising from possible market price movements and their impact on the future
performance of a business. The primary commodity price risks that the group is exposed to include oil, natural gas and power prices that could adversely affect the value of the group’s financial assets, liabilities or expected future cash flows. The group enters into derivatives in a well-established entrepreneurial trading operation. In addition, the group has developed a control framework aimed at managing the volatility inherent in certain of its natural business exposures. In accordance with the
control framework the group enters into various transactions using derivatives for risk management purposes.
The major components of market risk are commodity price risk, foreign currency exchange risk and interest rate risk,
each of which is discussed below.
(i)
Commodity price risk
The group’s integrated supply and trading function uses conventional financial and commodity instruments and
physical cargoes and pipeline positions available in the related commodity markets. Oil and natural gas swaps, options
and futures are used to mitigate price risk. Power trading is undertaken using a combination of over-the-counter
forward contracts and other derivative contracts, including options and futures. This activity is on both a standalone
basis and in conjunction with gas derivatives in relation to gas-generated power margin. In addition, NGLs are traded
around certain US inventory locations using over-the-counter forward contracts in conjunction with over-the-counter
swaps, options and physical inventories.
Financial
instruments:
Presentation and disclosure 4229
The group measures market risk exposure arising from its trading positions in liquid periods using value-at-risk
techniques. These techniques make a statistical assessment of the market risk arising from possible future changes in
market prices over a one-day holding period. The value-at-risk measure is supplemented by stress testing. Trading activity occurring in liquid periods is subject to value-at-risk limits for each trading activity and for this trading activity in total.
The board has delegated a limit of $100 million value at risk in support of this trading activity. Alternative measures are used to monitor exposures which are outside liquid periods and which cannot be actively risk managed.
BP applied IAS 39 in these financial statements but the disclosure requirements in
respect of such sensitivity analyses are unchanged under IFRS 9.
5.5.3
Other market risk disclosures
When the sensitivity analyses discussed at 5.5.1 and 5.5.2 above are unrepresentative of
a risk inherent in a financial instrument, that fact should be disclosed together with the
reason for believing the sensitivity analyses are unrepresentative. [IFRS 7.42].
This can occur when the year-end exposure does not reflect the exposure during the
year [IFRS 7.42] or a financial instrument contains terms and conditions whose effects are
not apparent from the sensitivity analysis, e.g. options that remain out of (or in) the
money for the chosen change in the risk variable. [IFRS 7.IG37(a)]. Additional disclosures
in this second case might include:
• the terms and conditions of the financial instrument (e.g. the options);
• the effect on profit or loss if the term or condition were met (i.e. if the options were
exercised); and
• a description of how the risk is hedged.
For example, an entity may acquire a zero-cost interest rate collar that includes an out-
of-the-money leveraged written option (e.g. the entity pays ten times the amount of the
difference between a specified interest rate floor and the current market interest rate if
that current rate is below the floor). The entity may regard the collar as an inexpensive
economic hedge against a reasonably possible increase in interest rates. However, an
unexpectedly large decrease in interest rates might trigger payments under the written
option that, because of the leverage, might be significantly larger than the benefit of
lower interest rates. Neither the fair value of the collar nor a sensitivity analysis based
on reasonably possible changes in market variables would indicate this exposure. In this
case, the entity might provide the additional information described above. [IFRS 7.IG38].
Where financial assets are illiquid, e.g. when there is a low volume of transactions in
similar assets and it is difficult to find a counterparty, additional disclosures might be
required, [IFRS 7.IG37(b)], for example the reasons for the lack of liquidity and how the risk
is hedged. [IFRS 7.IG39].
A large holding of a financial asset that, if sold in its entirety, would be sold at a discount
or premium to the quoted market price for a smaller holding could also require
additional disclosure. [IFRS 7.IG37(c)]. This might include: [IFRS 7.IG40]
• the nature of the security (e.g. entity name);
• the extent of holding (e.g. 15 percent of the issued shares);
• the effect on profit or loss; and
• how the entity hedges the risk.
4230 Chapter 50
5.6
Quantitative disclosures: other matters
5.6.1
Concentrations of risk
Concentrations of risk should be disclosed if not otherwise apparent from the
disclosures made to comply with the requirements set out at 5.2 to 5.5 above.
[IFRS
7.34(c)]. This should include:
• a description of how management determines concentrations;
• a description of the shared characteristic that identifies each concentration (for
example, counterparty, geographical area, currency or market).
For example, the shared characteristic may refer to geographical distribution of
counterparties by groups of countries, individual countries or regions within
countries; [IFRS 7.IG19] and
• the amount of the risk exposure associated with all financial instruments sharing
that characteristic.
Concentrations of risk arise from financial instruments that have similar characteristics
and are affected similarly by changes in economic or other conditions. It is emphasised
that the identification of concentrations of risk requires judgement taking into account
the circumstances of the entity. [IFRS 7.B8]. For example, they may arise from:
• Industry sectors.
If an entity’s counterparties are concentrated in one or more industry sectors (such
as retail or wholesale), it would disclose separately exposure to risks arising from
each concentration of counterparties;
• Credit rating or other measure of credit quality.
If an entity’s counterparties are concentrated in one or more credit qualities (such
as secured loans or unsecured loans) or in one or more credit ratings (such as
investment grade or speculative grade), it would disclose separately exposure to
risks arising from each concentration of counterparties;
• Geographical distribution.
If an entity’s counterparties are concentrated in one or more geographical markets
(such as Asia or Europe), it would disclose separately exposure to risks arising from
each concentration of counterparties; and
• A limited number of individual counterparties or groups of closely related
counterparties.
Similar principles apply to identifying concentrations of other risks, including liquidity
risk and market risk. For example, concentrations of liquidity risk may arise from the
repayment terms of financial liabilities, sources of borrowing facilities or reliance on a
particular market in which to realise liquid assets. Concentrations of foreign exchange
risk may arise if an entity has a significant net open position in a single foreign currency,
or aggregate net open positions in several currencies that tend to move together.
[IFRS 7.IG18].
Financial
instruments:
Presentation and disclosure 4231
5.6.2 Operational
risk
In developing IFRS 7, the IASB considered whether disclosure of information about
operational risk should be required by the standard. However, the definition and
measurement of operational risk were considered to be in their infancy and were not
necessarily related to financial instruments. Also, such disclosures were believed to be
more appropriately located outside the financial statements. Consequently, this issue
was deferred for consideration in the management commentary project. [IFRS 7.BC65].
5.6.3 Capital
disclosures
The IASB considers that the level of an entity’s capital and how it is managed are
important factors for users of financial statements to consider in assessing the risk
profile of an entity and its ability to withstand unexpected adverse events. It might also
affect an entity’s ability to pay dividends. Consequently, ED 7 contained proposed
disclosures about capital. [IAS 1.BC86].
However, some commentators questioned the relevance of the capital disclosures in a
standard dealing with disclosures relating to financial instruments and the IASB noted
that an entity’s capital does not relate solely to financial instruments and, thus, they have
more general relevance. Accordingly, whilst these disclosures were retained, they were
included in IAS 1, rather than IFRS 7. [IAS 1.BC88]. Those disclosures required by IAS 1 are
dealt with in Chapter 3 at 5.4.
6
TRANSFERS OF FINANCIAL ASSETS
The objective of these requirements, which were introduced into IFRS 7 in October
2010, is that entities should disclose information that enables users of its financial
statements: [IFRS 7.42B]
(a) to understand the relationship between transferred financial assets that are not
derecognised in their entirety and the associated liabilities; and
(b) to evaluate the nature of, and risks associated with, the entity’s continuing
involvement in derecognised financial assets.
The standard specifies detailed disclosure requirements to support objectives (a) and (b)
which are discussed below at 6.2 and 6.3 respectively. However, an entity should
disclose any additional information, over and above that specified by IFRS 7, that it
considers necessary to meet these objectives. [IFRS 7.42H].
Rather unusually, the standard specifies that these disclosures should be presented in a single
note to the financial statements. [IFRS 7.42A]. Presumably this is to prevent entities ‘hiding’
these disclosures by having the detailed information scattered across a number of notes.
These requirements supplement the other requirements of IFRS 7 and apply when an
entity transfers financial assets. They apply for all transferred financial assets that are
not derecognised, and for any continuing involvement in a transferred asset, that exist
at the reporting date, irrespective of when the related transfer occurred. [IFRS 7.42A].
4232 Chapter 50
6.1
The meaning of ‘transfer’
For the purposes of applying the disclosure requirements in this section, an entity
transfers all or a part of a financial asset (the transferred financial asset) if, and only if, it
either: [IFRS 7.42A]
(a) transfers the contractual rights to receive the cash flows of that financial asset; or
(b) retains the contractual rights to receive the cash flows of that financial asset, but
assumes a contractual obligation to pay the cash flows to one or more recipients in
an arrangement.
The transactions encompassed by (a) should be the same ones that would be regarded
as transfers under the derecognition requirements of IFRS 9 (see Chapter 48 at 3.5.1).
However, the transactions falling within (b) represent a larger group than those which
would be regarded as ‘pass-through arrangements’ for the purposes of those
requirements (see Chapter 48 at 3.5.2).
6.2
Transferred financial assets that are not derecognised in their
entirety
Financial assets may have been transferred in such a way that part or all of the financial
assets do not qualify for derecognition. This might occur if:
• the contractual rights to the cash flows have been transferred but substantially all
risks and rewards are retained, e.g. a sale and repurchase agreement, so that the
assets are not derecognised;
• the rights to the cash flows have been transferred, the risks and rewards partially
transferred and control of the assets has been retained so that the assets continue
to be recognised to the extent of the entity’s continuing involvement; or
• an obligation has been assumed to pay the cash flows from the asset to other parties but
in
a way that does not meet the ‘pass-through’ requirements (see Chapter 48 at 3.5.2).
Where securitisations and similar arrangements do not meet the pass-through
requirements, careful analysis will be required to determine whether they are
within the scope of these disclosures. If such a transaction is not considered to be
within the scope of these requirements, the disclosures about collateral discussed
at 4.4.6 above are likely to be applicable.
The following disclosures should be given for each class of transferred financial assets
that are not derecognised in their entirety: [IFRS 7.42D]
(a) the nature of the transferred assets;
(b) the nature of the risks and rewards of ownership to which the reporting entity
is exposed;
(c) a description of the nature of the relationship between the transferred assets and
the associated liabilities, including restrictions arising from the transfer on the
reporting entity’s use of the transferred assets;
Financial
instruments:
Presentation and disclosure 4233
(d) when the counterparty (counterparties) to the associated liabilities has (have)
recourse only to the transferred assets, a schedule that sets out the fair value of the
transferred assets, the fair value of the associated liabilities and the net position,
i.e. the difference between the fair value of the transferred assets and the
associated liabilities;
(e) when the reporting entity continues to recognise all of the transferred assets, the
carrying amounts of the transferred assets and the associated liabilities; and
(f) when the reporting entity continues to recognise the assets to the extent of its
continuing involvement, the total carrying amount of the original assets before the
transfer, the carrying amount of the assets that the entity continues to recognise,
and the carrying amount of the associated liabilities.
These disclosures should be given at each reporting date at which the entity continues
to recognise the transferred financial assets, regardless of when the transfers occurred.
[IFRS 7.B32].
The above requirements clearly apply to transfers of entire financial assets where the
transferred assets continue to be recognised in their entirety. They also apply to
transfers of entire assets where the transferred assets are recognised to the extent of the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 838
