IFRS 7 – Financial Instruments: Disclosures
IFRS 7 requires entities to provide disclosures that enable users to evaluate the significance of financial instruments for the entity’s financial position and performance, and to assess the nature and extent of risks arising from those financial instruments.
Objectives of IFRS 7
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To provide transparency regarding financial instruments held by an entity.
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To give users information about credit risk, liquidity risk, and market risk.
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To enhance comparability among entities.
Scope
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Applies to all financial instruments except:
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Investments in subsidiaries, associates, joint ventures (covered by IAS 27, IAS 28, IFRS 10).
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Insurance contracts (IFRS 17).
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Presentation vs Disclosure
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IAS 32 → presentation of financial instruments (classification: liability/equity).
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IFRS 9 → recognition & measurement.
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IFRS 7 → disclosures only.
1. Significance of Financial Instruments to Financial Position and Performance
Statement of Financial Position Disclosures
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Categories of financial assets and financial liabilities.
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Loan balances, trade receivables, derivatives, investments, borrowings.
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Information about allowance for expected credit losses (ECL) under IFRS 9.
Example:
Company A holds:
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Trade receivables: $500,000
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Derivative asset: $20,000
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Bank loan: $800,000
Under IFRS 7, Company A must disclose:
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Measurement category (e.g., amortised cost, FVPL).
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ECL provision on trade receivables (e.g., $10,000).
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Fair value information.
Statement of Profit or Loss Disclosures
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Gains/losses on financial assets (FVPL, FVOCI).
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Interest income and interest expense.
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Impairment losses (ECL).
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Fee income from financial instruments.
Example:
A company measures an investment at FVPL and records a $30,000 gain.
→ IFRS 7 requires disclosure of this gain and the valuation method.
2. Nature and Extent of Risks From Financial Instruments
Entities must disclose qualitative and quantitative information about:
Credit Risk
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Maximum exposure to credit risk.
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Collateral held.
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Aging of receivables.
Example:
Trade receivables aging schedule:
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Current: $300,000
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30 days overdue: $100,000
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60+ days overdue: $50,000
Must disclose ECL methods and assumptions.
Liquidity Risk
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Maturity analysis for financial liabilities.
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How liquidity risk is managed.
Example:
Bank loan payments due:
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< 1 year: $200,000
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1–5 years: $600,000
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5 years: $0
Market Risk
Includes:
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Currency risk
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Interest rate risk
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Price risk
Requires sensitivity analysis.
Example:
If interest rates increase by 1%, interest expense increases by $15,000.
→ Must disclose this sensitivity.
3. Fair Value Disclosures
Fair Value Hierarchy (Level 1, 2, 3)
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Level 1: Quoted prices (e.g., listed shares).
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Level 2: Observable inputs (e.g., interest rate swaps).
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Level 3: Unobservable inputs (e.g., private equity).
Example:
An unlisted investment valued using discounted cash flows → Level 3.
IFRS 7 requires:
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Reconciliation of opening & closing balances.
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Key assumptions used.
4. Offsetting Information
Entities must disclose:
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Gross amounts
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Offsetting amounts
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Net amounts
For financial instruments subject to master netting arrangements.
Example:
Derivative assets: $100,000
Derivative liabilities offsettable: $60,000
→ Net: $40,000 (disclose all 3 figures).
5. Transfers of Financial Assets
If an entity transfers financial assets (e.g., factoring receivables), it must disclose whether risks/rewards are retained.
Example:
Company sells receivables of $200,000 but retains credit risk.
→ Not derecognised under IFRS 9 → IFRS 7 requires explaining the transfer and risks retained.
6. Disclosures for Hedge Accounting
If an entity applies hedge accounting (IFRS 9):
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Hedging instruments
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Hedged items
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Gains/losses
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Effectiveness of hedge relationship
Example:
A company hedges foreign currency risk using a forward contract.
→ Must disclose contract details, fair value changes, and hedge effectiveness results.