> cial Instruments: Disclosures 521 PFRS 7 Financial Instruments: Disclosures (Zearning Objectives |1, State the two. main’ categories of disclosures under PFRS 7. | 2, State the types of risks required by PFRS 7 to be disclosed. Introduction PERS 7 prescribes the disclosure requirements for financial instruments. The disclosures are broadly classified into the following two main categories: a. significance of financial instruments to the entity’s financial position and performance; and b. the nature and extent of risks arising from financial instruments to which the entity is exposed, and how the entity manages those risks. (PFRS7.1) PERS 7 complements the presentation principles in PAS 32 Financial Instruments: Presentation and the recognition and measurement principles in PERS 9 Financial Instruments. PERS 7 applies to financial instruments that are within the scope of PERS 9. PFRS 7 does not apply to financial instruments that are dealt with under other Standards, such as interests in subsidiaries (PFRS 10 Consolidated Financial Statements), associates and joint ventures (PAS 28), those arising from employee benefit plans (PAS 19) and share-based payment transactions (PFRS 2), and those that are required to be classified as equity instruments. Significance of financial instruments + Statement of financial position 7 Carrying amounts of ‘financial assets and. financial liabilities An entity is required to disclose the carrying amounts of each of the following categories of financial instruments under PFRS 9:522 PERS 7 6a ieee a. Financial assets measured at fair value through Profit or loss (EVPL), showing separately (i) those that are designated and (ii those that are mandatorily measured at FVPL. . Financial assets measured at amortized cost. c. Financial assets measured at fair value through othe comprehensive income (FVOCI), showing separately (i) those that are mandatorily classified as such and (ii) those that are elected to be classified as such. d. Financial liabilities at amortized cost. e, Financial liabilities at fair value through profit or loss (FVPL), showing separately (i) those that are designated and (ii) those that meet the definition of held for trading. Financial assets and financial liabilities measured at FVPL If an entity designates a financial asset to be measured at FVPL, it shall disclose the financial asset's exposure to credit risk and the change in fair value attributable to changes in credit risk. If an entity designates a financial liability to be measured at FVPL, it shall disclose the change in fair value that is attributable to changes in credit risk, the difference between the carrying amount and maturity value, and, if the entity is required to present the effects of changes in the liability’s credit risk in OCI, any cumulative gain or loss that were transferred within equity or were realized. Financial assets measured at FVOCI , If an entity elected to measure investments in equity securities at FVOCI, it shall disclose those investments, the reason for the election, any dividends recognized during the period, and any transfers of cumulative gain or loss within equity. If any of those investments were disposed of, the entity shall disclose the reason for the disposal, the fair value on derecognition date, and the cumulative gain or loss on disposal.a | amici Instrumente: Disclosures nancial — 523 eclassification an entity has reclassified financial assets, it shall discl th date of reclassification, an explanation of the change in best as model, and the amount reclassified between cate; . “_— If the entity reclassifies financial ial from FVOCI or FPL to amortized cost or from FVPL to FVOCI or amortized cost, inehall disclose the fait value gain or lose that would have been recognized in profit or loss or OCI if the financial asset had not | been reclassified. Offsetting financial assets and financial liabilities If an entity has offset financial assets and financial liabilities, it shall disclose the gross amounts of those assets and liabilities, the amounts that were set-off, the net amounts presented in the statement of financial position and a description of the related legal right of set-off. : Collateral ‘An entity shall disclose the carrying amounts of financial assets pledged as collateral for liabilities, including the terms and conditions of the pledge. If the entity holds collateral that it is permitted to sell or repledge, the entity shall disclose the fair value of such collateral and, if it has been sold or repledged, whether the entity has an obligation to return it, and the terms and conditions associated with the entity’s use of the collateral. Allowance account for credit losses The carrying amount of a financial asset that is mandatorily measured at FVOCT is not reduced by a loss allowance. However, the loss allowance is disclosed in the notes. Defaults and breaches . The entity shall disclose any defaults and breaches relating to loans payable, including the carrying amount of those loans Payable, the principal, interes’ sinking fund, or redemption terms,524 PERS 7 eRe and whether the default was remedied, oF fhe terms of the lang payable were renegotiated, before the financial statements were authorized for issue. Statement of comprehensive income Items of income, expense, gains or losses An entity shall disclose the following: a. Net gains or net losses on: i. financial assets and financial liabilities measured at FVPL, showing separately those relating to designated and mandatorily measured at FVPL financial assets measured at amortized cost financial liabilities measured at amortized cost iv. financial assets measured at FVOCI, showing separately those relating to elected and mandatorily measured at FVOCL b. Total interest revenue and total interest expense, computed using the effective interest method, for financial instruments measured at amortized cost or mandatory FVOCI (showing these amounts separately). c. Fee income and expense Other disclosures Fair value The entity shall disclose the fair value of each class of financial assets and financial liabilities in a way that the fair value can be compared with the carrying amount, However, fair value disclosure is not required when the carrying amount approximates fair value, such as for short-term trade receivables and payables, and for lease liabilities.| 3. Market risk - is sinanciel Instruments: Disclosures Fingal” 525 ae pon 7 otal attsing from financial instruments . closures required by PFRS 7 is ; th disclosure of the ne and extent of risks stig from financial instruments to whic the entity is exposed, and how i n , the enti manages those tisks. PFRS 7 requires the disclosure of ee folowing risks: 1, Credit risk = is “the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.” (PFRS7.Appendix A) 2. Liquidity risk — is “the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.” (PFRS 7.Appendix A) Credit risk and liquidity risk are opposites. For example, credit risk includes the possibility that an entity cannot collect on its receivables, while liquidity risk inchides the possibility that an entity cannot pay its payables. As a guide, recall that liquidity is defined in the Conceptual Framework as the ability of the entity to pay its short-term liabilities. “the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices.” (PFRS 7.Appendix A) Market risk comprises the following three types of risk: a. Currency risk ~ is “the risk that the fair value or future cash flows of a financial instrument will fluctuate because of i i "(PERS 7.Appendix A) changes in foreign exchange rates.” (PFRS? b. Inlereat te risk _ is “the sisk that the fair value oF future cash flows of a financial instrument will fluctuate because of changes in market interest yates.” (PFRS7-Appendix A)PF 526 RS? c. Other price risk - “the risk that the fair value or future cash flows of a financial instrument will fluctuate because o¢ changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.” (PFRS 7.Appdx A) The entity shall provide both qualitative and quantitative disclosures for each type of the foregoing risks. Examples of qualitative disclosures: a, Risk exposures and how they arise. b, The entity's risk management objectives, policies and processes, including methods used to measure risk. ©. Any changes in (a) or (b) from the previous period. Examples of quantitative disclosures a. Summary of quantitative data about the entity’s risk exposure at the end of the reporting period. b. Concentrations of risk. ¢ Other relevant disclosures not provided in (a) and (b). Disclosure of concentration of credit risk is required of most financial instruments. Disclosure of market risk (or price tisk) is normally required of financial instruments measured at fair value. Disclosure of interest rate risk is normally required of debt instruments with variable interest rates, Disclosure of currency risk is required of financial instruments measured in foreign currency.| inane Instruments: Disclosures 527 pROBLEMS prOBLEM 1: MULTIPLE CHOICE 1 PERS 7 requires the disclosure of the significance of financial instruments to the citys financial position and performance. Which of the following is not included in this disclosure? a Disclosure of fair values of financial instruments in a way that the fair value can be compared with the carrying amount of the financial instrument. The carrying amounts of the various categories of financial instruments. Information on any reclassification between categories of financial instruments. Information on financial instruments arising from employee benefit plans and share-based payment transactions. 2, PERS 7 requires the disclosure of the nature and extent of risks arisi not included in this disclosure? a. b. PROBLEM 2: FOR CLASSROOM DIS! 1. PERS 7 addresses which a ing from financial instruments. Which of the following is Qualitative and quantitative information about credit risk. Qualitative and quantitative information about liquidity tisk, Qualitative and quantitative information about market risk. . Qualitative and quantitative information about operational risk. ;CUSSION of the following? financial instrument 5 or equity instruments. ment of The presentation of ts as financial assets, financial liabilities The recognition . and measur instruments. financial528 c d. 2. Which of the following prop a. PFRS7 ___ — The disclosures about the significance of financia] to the entity’s financial position ang e nature and extent of risks arising ments to which the entity is exposed, those risks. instruments performance and th from financial instru and how the entity manages All of these erly describes credit risk? The possibility that Entity ‘A will not be able to settle its financial liabilities when they become due. The possibility that Entity A will incur loss on its foreign- currency denominated financial instruments when there is an adverse change in foreign exchange rates. The possibility that Entity A cannot collect on its receivables. The possibility that Entity A will be required to pay higher interest on its variable-rate loan when market interest rates increase.