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

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  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