The International Accounting Standards Board issued the International Financial Reporting Standards (IFRS) 7, also known as Financial Instruments. It mandates corporations to set forth specific financial apparatus to enforce disclosures in accounting records. IFRS 7 came into force in August 2005 and it is applicable to yearly periods commencing from or after January 1, 2007. IFRS 7 applies to both financial and non-financial organizations, thus, financial assets, venture capital funds, real estate funds, and investment managers fall under its cognizance.
An Overview of Financial Reporting Standards (IFRS) 7
Organizations ought to include disclosures on accounting records which allows the users to evaluate:
- The importance of financial instruments to the entity’s performance and financial status.
- The type and scope of financial instrument risk insight the entity acquires during accounting sessions, as well as, how the entity handles such risks. The qualitative disclosures outline the goals, regulations, and procedures used by the administration to address those risks. The quantitative disclosures give insight into the extent to which the entity is vulnerable to risk.
- IFRS 7 adds more financial instrument disclosures to those conferred by the IAS (32) Financial Instruments: Disclosure and Display
- IFRS 7 creates a new guideline on Financial Instruments: Disclosures that combine all of the financial instrument disclosures. IAS 32’s subsequent sections only address issues related to the presentation of the financial instruments.
Financial Reporting Standards (IFRS) 7’s Disclosure Obligations
According to the International Financial Reporting Standards 7, specific disclosures must be reported by an instrument type based on the IAS 39 measurement types. The specified type of financial instrument may demand further disclosures. A company must classify its financial instruments into related instrument classes for these disclosures in accordance with the type of information being disclosed.
According to IFRS 7, the Following Two Kinds of Disclosures Must Be Made:
- Details on the importance of financial instruments should be set forth.
- Details about the types and sizes of financial instrument risks should be put forward.
Detailed Information On the Importance of Financial Instruments
Financial Position Disclosure
It indicates the importance of financial instruments in line with the performance of an entity’s finances. This contains disclosures for each of the categories listed below:
- Financial assets are valued at market value through profit and loss, separating those that are retained for trade from those that are recognized.
- Receivables and loans.
- Assets that are to be sold.
- Financial liabilities listed at reasonable value through profit and loss, displaying those held for trade and those specified at original recognition
- Financial liabilities are assessed at amortized cost
Other Disclosures Pertaining to the Income Statement
- Special disclosures regarding financial assets and liabilities that are slated to be evaluated at market value through profit and loss, such as those relating to credit risk and market risk, variations in fair values related to these risks, and evaluation methods.
- Financial instrument reassessments, such as going from fair value to principal amount or the other way around.
- Details on financial and non-financial assets held as collateral as well as financial assets provided as collateral.
Comprehensive Income Statement
Financial assets assessed at market value through profit and loss, indicating independently those that are traded and those specified at initial recognition, are elements of income, expense, gains, and losses with independent disclosure of gains and losses from:
- Investments are retained till maturity
- Receivables and loans
- Assets that are for sale
Additional Disclosures Pertaining to the Income Statement
- Total interest earnings and expenses for financial assets not evaluated at fair value using profit and loss
- Fees generated and expense
- Quantity of impairment losses by financial asset class
- Interest received from financially troubled assets
Areas of Concern Addressed in the IFRS 7
There are four quantifiable concerns that are addressed in IFRS 7, which are conferred as follows:
Companies are prone to miss scheduled payments when there is a credit risk present. Planned payments are crucial to quantify.
It’s important to allude to whether companies are exposed to specific countries, businesses and currencies.
It is a thorough analysis of how potential modifications to the corporate environment and market conditions will impact assets.
Auditor evaluation of the liquidity risk includes determining when cash flow obligations from illiquid assets are due.
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Umapathy Anuruthan, is a Senior Auditor at the firm, holds a Business Management Degree and carries with him an experience of 6+ Years, having worked in two of the Big 4 audit firms. He has a ‘hands-on’ understanding of external audits and financial reporting and is well-known for his approach to ensuring the highest quality and accuracy in audits for clients of numerous industries.