This paper will give a general overview of IFRS 7 Financial Instruments and will briefly touch additional IFRS standards if necessary.
In the course of globalisation and the associated stronger capital market orientation of companies, more and more relationships between international business partners are emerging. Decisions on investments, the conclusion of contracts and business conditions are based on the information published by the respective partners.
For example, the annual financial statements of German companies are prepared in accordance with the German Commercial Code (HGB). This practice no longer meets international information requirements. The aim of the IFRS is to create a basis for ensuring internationally valid comparability of annual financial statements and company valuations and develop standardised, uniform accounting instruments.
Table of Contents
1 Introduction
2 Objective and Scope
3 Significance of financial instruments for financial positions and performance
4 Nature and extent of risk arising from financial instruments
4.1 Qualitative disclosure
4.2 Quantitative disclosures
4.2.1 Credit risk
4.2.2 Liquidity risk
4.2.3 Market risk
5 Transfers of financial assets and initial application of IFRS 9
6 Conclusion
Objectives and Scope of the Analysis
This assignment provides a comprehensive overview of IFRS 7 Financial Instruments: Disclosures, examining how entities report the significance of financial instruments and the associated risks. The primary objective is to clarify the disclosure requirements regarding the nature, extent, and management of risks in accordance with international accounting standards, using the practical example of NIBC Bank N.V.
- Structure and conceptual framework of IFRS standards.
- Disclosure requirements for financial position and performance.
- Distinction between qualitative and quantitative risk disclosures.
- Practical application of risk management reporting at NIBC Bank N.V.
- Significance of fair value hierarchies in financial reporting.
Excerpt from the Book
4.1 Qualitative disclosure
The qualitative disclosures describe management’s objectives, policies and processes for managing those risks. Next to that the methods which were used to measure the risks shall be disclosed while following IFRS 7. Qualitative disclosures are narrative descriptions in the form of an essay without any specific numbers.28
“Within the financial industry we continue to observe the risks in the Leveraged Finance and Energy markets where NIBC has successfully reduced both portfolios ahead of targets. We remain aware of our position in the market and take a careful approach to areas where we see increased levels of risk while we continue to spot new opportunities in terms of products and markets. The deliberate decrease in certain areas is absorbed by growth in other higher margin segments and the portfolio continues to develop in the targeted direction.
Throughout 2019 we have continued to manage the asset quality of our lending book and an important aspect is the rebalancing of our portfolios, aimed at higher granularity of exposures and smaller portfolios in certain sectors and products. Although impairments are still at an elevated level, driven by credit losses on a small number of individual clients within Leveraged Finance, and Energy we see the first effects in the underlying portfolios with lower overall non-performing exposures.” 29
This quote describes quantitative data without showing the exact numbers. The numbers will follow in the later course of the annual report. The above description gives the reader a background and a storyline. It makes it easier for the reader to understand why the numbers have increased or decreased.
Summary of Chapters
1 Introduction: This chapter provides an overview of IFRS 7 and outlines the general purpose of international accounting standards in the context of globalized capital markets.
2 Objective and Scope: This section details the requirements for disclosing financial instruments and explains which types of entities and instruments fall under the scope of the standard.
3 Significance of financial instruments for financial positions and performance: The chapter focuses on the disclosure of carrying values and gains or losses in the statement of financial position and the statement of comprehensive income.
4 Nature and extent of risk arising from financial instruments: This chapter explores how entities must report on risks, covering qualitative descriptions and specific quantitative metrics regarding credit, liquidity, and market risks.
4.1 Qualitative disclosure: This sub-chapter explains how management describes its objectives, risk policies, and processes through narrative reporting.
4.2 Quantitative disclosures: This section examines the mandatory numerical data required to show an entity's exposure to various risk clusters.
4.2.1 Credit risk: This part defines credit risk and analyzes how financial institutions like NIBC mitigate potential losses through monitoring and collateral.
4.2.2 Liquidity risk: This section discusses the risk of being unable to settle financial liabilities and the importance of maintaining a liquidity buffer.
4.2.3 Market risk: This sub-chapter addresses the sensitivity of financial instruments to price changes, including currency, interest rate, and price risks.
5 Transfers of financial assets and initial application of IFRS 9: This chapter covers disclosure obligations for assets that are not derecognized and provides information on the transition to IFRS 9.
6 Conclusion: The concluding section reflects on the adoption of IFRS standards and the operational implications for companies regarding documentation and personnel training.
Keywords
IFRS 7, Financial Instruments, Disclosures, Risk Management, Credit Risk, Liquidity Risk, Market Risk, IASB, Financial Reporting, Fair Value, Hedge Accounting, NIBC Bank, Balance Sheet, Comprehensive Income, Derecognition.
Frequently Asked Questions
What is the main focus of this work?
The work provides a detailed overview of the IFRS 7 standard, focusing on how financial institutions and other entities report the significance of financial instruments and the risks they face.
Which specific areas of risk are addressed?
The core risk areas covered are credit risk, liquidity risk, and market risk, including how these are managed and reported.
What is the primary goal of IFRS 7?
The standard aims to enable users of financial statements to evaluate the significance of financial instruments for an entity's financial position and performance, as well as the nature and extent of risks arising from them.
Which scientific method is applied here?
The work uses an analytical and descriptive approach based on the IFRS regulatory framework and includes a practical case study of the 2019 Annual Report of NIBC Bank N.V.
What is the focus of the main body?
The main body examines the disclosure requirements for financial position and performance, the categorization of risks, and the practical application of qualitative and quantitative reporting standards.
Which keywords define this document?
Key terms include IFRS 7, Financial Instruments, Disclosures, Risk Management, and Fair Value.
How does NIBC manage its exposure to credit risk?
NIBC mitigates credit risk by continuously monitoring client financial performance and employing a "watchlist" procedure to identify weakening credit quality early.
What differentiates the three levels of the fair value hierarchy?
Level 1 utilizes quoted prices in active markets, Level 2 uses observable market data other than quoted prices, and Level 3 relies on unobservable inputs for valuation.
- Quote paper
- Samantha Kim Schönhaber (Author), 2020, IFRS 7 Financial Instruments. An Overview, Munich, GRIN Verlag, https://www.grin.com/document/919357
