In August 2005, the International Accounting Standards Board issued IFRS 7, Financial Instruments Disclosures ("IFRS 7"). IFRS is applicable to all entities reporting in accordance with IFRS for financial periods beginning on or after January 1, 2007. it requires entities to provide disclosures in their financial statements that enable users to evaluate: a) the significance of financial instruments for the entity's financial position and performance, and b) the nature and extent of the credit, market and liquidity risks arising from financial instruments during the period and at the reporting date, and how the entity manages those risks. The disclosure principles of IFRS 7 complement the principles for recognizing, measuring and presenting financial assets and financial liabilities in IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement.
IRFS 7 incorporates the disclosure requirements relating to financial instruments in IAS 32 (" Financial Instruments: Disclosure and Presentation" and replaces IAS 30 (Disclosures in the Financial Statements of Banks and Similar Institutions). Consequently all financial instruments are located in a single Standard for all types of entities. IFRS introduces the following improvements:
• Requirements for enhanced balance sheet and income statement disclosure ’by category’ (available for sales instruments, held to maturity instruments, hedging instruments)
• Information about any provision against impaired assets
Additional disclosure relating to fair value of collateral and other credit enhancements used to manage credit risk
• Market risk sensitivity analysis
• Companies can present the require disclosure on the face of the balance sheet or in the note to the financial statements
• The disclosure are identical for all entities irrespective of the quantity of financial instruments they use. This means that manufacturers whose only financial instruments may be account receivable and payable disclose in a similar way as banks or insurance companies whose assets and liabilities are made of many types of financial instruments.
Market Risk
IFRS 7 requires reporting entities to disclose the sensitivity of their results to movements in market risks as a consequence of their financial instruments. This means presenting a sensitivity analysis for each type of market risk (currency, interest rate and other price risk) to which the reporting firm is exposed at reporting date. This analysis should show and illustrate how profit or loss and equity would have been affected by ‘reasonably possible’ changes in the relevant risk variable, as well as the methods and assumptions used in preparing such an analysis. Any changes in methods and assumptions from the previous period and reasons for such a change. The standard requires entities to report in their external financial statements the metrics they use internally to manage and measure financial risks.Credit risk
A reporting firm must present the maximum exposure to credit risk and any related collateral held and all information on credit quality of assets that are neither past due or impaired. IFRS 7 requires an analysis of the age of financial assets that are past due but not impaired as well as an analysis of financial assets that are individually determined to be impaired.Liquidity risk
A maturity analysis for financial liabilities showing the remaining contractual maturities and a description of the approach to managing the inherent liquidity risk.Fair Value
Where financial assets or liabilities are carried at fair value through profit and loss, IFRS 7 requires disclosure of the detailed change in the fair value of these items. This would include, for example, showing the split between changes due to benchmark market rate movements and credit (e.g., LIBOR) and any changes in the credit worthiness of the issuing corporate. Where applicable firms should disclose the impact that movements in their own credit quality on the value of instruments such as bonds.
For some transactions, fair value is determined using valuation models for which not all inputs are market–observable prices or rates. In the past, such financial instruments were initially recognized in companies' financial statements at the transaction price, which is generally the best indicator of fair value, although the value obtained from the relevant valuation model may differ. Where such differences arise, the company is required by IFRS 7 to disclose: a) its accounting policy for recognizing that difference in profit or loss to reflect a change in factors (including time) that market participants would consider in setting a price, and b) the aggregate difference to be recognized in profit or loss at the beginning and end of the period and a reconciliation of changes in the balance of this difference.