IFRS 7 Financial Instruments. An Overview


Term Paper, 2020

18 Pages, Grade: 1,3


Excerpt

Table of Contents

List of Abbreviations

List of Figures

List of Tables

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

Bibliography

List of Abbreviations

BPV Basis Point Value

EU European Union

GAAP Generally accepted accounting principle

HGB Handelsgesetzbuch engl. Commercial code

IAS International Accounting Standards

IASB International Accounting Standards Board

IFRIC International Financial Reporting Interpretations Committee

IFRS International Financial Reporting Standard

NIBC NIBC Bank N.V.

SIC Standing Interpretation Committee

SMEs small and medium-sized enterprises

VaR Value-at-Risk

List of Figures

Figure 1: Structure of the IFRS

Figure 2: Overview IFRS based the summary of IFRS

Figure 3: NIBC´s funding and liability overview

List of Tables

Table 1: Overview of NIBC´s risk types

Table 2: NIBC´s credit risk exposure by category

1 Introduction

This assignment will give a general overview of IFRS 7 Financial Instruments: Disclosures and will briefly touch additional IFRS standards if necessary. Therefore, the following will be a short introduction on IFRS in general:

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.1

IFRS Standards are set by the IASB and are used primarily by publicly accountable companies - those listed on a stock exchange and by financial institutions, such as banks. These companies / financial institutions are obliged to issue their consolidated financial statements in accordance with IFRS if they are governed by the law of an EU state.2

The IFRS rules have a three-tiered structure: The base contains the framework and forms the conceptual basis for IFRS. While the individual standards are numbered consecutively and contain rules on recognition, measurement, presentation and explanation of accounting items. The interpretations concretise and supplement the standards and originate from the former SIC and the current IFRIC.3 The standards and interpretations are hierarchically subordinate to the framework, as they regulate specific issues, but the framework only provides the general basis of the IFRS.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Structure of the IFRS4

The following figure outlines the structure of IFRS 7, which is the starting point for the standard. As an example, for all other IFRS standards, it starts with the objective and scope and ends with the effective date and, if applicable, the withdrawal of a previous IAS Standard, an IFRS Standard or an interpretation.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Overview IFRS based the summary of IFRS 75

2 Objective and Scope

IFRS 7 requires entities to provide disclosures in their financial statements that enable users to evaluate the significance of financial instruments for the entity’s financial position and performance.6

Next to that IFRS 7 requires entities to disclose the nature and extent of risks arising from financial instruments. Following this Standard, the entity has not only to disclose these risks, it also hast to disclose how those risks are managed.7

The principles in this IFRS complement the principles for recognising, measuring and presenting financial assets and financial liabilities in IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments.8

IFRS 7 applies to all recognised and unrecognised financial instruments, including contracts to buy or sell non-financial assets, except:

- Interests in subsidiaries, associates or joint ventures, where IAS 27/28 or IFRS 10 permit accounting in accordance with IFRS 9
- Assets and liabilities resulting from IAS 19
- Insurance contracts in accordance with IFRS 4 (excluding embedded derivatives in these contracts if IFRS 9 require separate accounting)
- Financial instruments, contracts and obligations under IFRS 2, except contracts within the scope of IFRS 9
- Puttable instruments (IAS 32.16A-D)9

IFRS 7 largely replaced the standard I AS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions.10 While IAS 30 applied only for banks and financial institutions, IFRS 7 applies to every entity. It includes entities that have few or many financial instruments. This means a manufacturer whose only financial instruments are cash, accounts receivable and accounts payable shall apply IFRS 7 in the same way as a financial institution which most of whose assets and liabilities are financial instruments.11

3 Significance of financial instruments for financial positions and performance

The entity shall disclose all relevant information to understand whether the financial instruments are significant for entity’s financial position and performance.12 They are divided into subgroups:

Statement of financial position:

The total carrying value of financial assets and liabilities shall be disclosed in the statement of financial position or in the notes. Each by the category are specified in IFRS 9.13

- Information on fair value of loans and receivables
- Financial liabilities designated as at fair value through profit and loss
- Financial assets reclassified
- Financial assets that do not qualify for derecognition
- Details of financial assets pledged as collateral and collateral held
- Reconciliation of allowance account for credit losses.
- Compound financial instruments with embedded derivatives
- Details of defaults and breaches of loans payable.14

Statement of comprehensive income :

The income, the expense and the gains or losses for each category of financial assets and liabilities shall be disclosed in the statement of comprehensive income or in the notes for the following items15:

- Total interest income and interest expense (effective interest method)
- Fee income and expense
- Interest on impaired financial assets
- Amount of impairment loss for each financial asset.16

An entity shall present a statement of gains or losses arising from derecognition of financial assets carried at amortised cost, showing separately the gains and losses arising from derecognition of those financial assets. The aim is not only the disclosure, the reasons for derecognition those financial assets shall be disclosed as well.17

Other disclosures:

Accounting policies:

All relevant accounting policies incorporating the measurement basis or bases which were used while preparing the financial statements or the notes shall be disclosed. These regulations follow paragraph 117 of IAS 1 Presentation of Financial Statements. The purpose is always to ensure a good understanding.18

Hedge accounting:

The risk management strategy shall describe if an entity applies hedge accounting. Future cash flows shall be described in detail - this means the amount and the timing of the future cash flows. Also, uncertainties of future cash flows shall be described. Next to that the effect of hedge accounting on the financial statements shall be disclosed.19

Fair value:

Following IFRS 7.25 the entities shall disclose the fair value of all financial assets and financial liabilities by classes – if no exceptions (IFRS 7.29) apply.20 It shall be disclosed how the fair value was determined, how the assumptions were made, and which information was used. If no fair value can be set for an instrument the entity has to explanation why the fair value cannot be determined.21

All financial instruments measured at fair value shall be classified into the levels below:

Level 1: Quoted prices, in active markets

Level 2: Level 1 quoted prices are not available but fair value is based on observable market data

Level 3: Inputs that are not based on observable market data. A financial Instrument will be categorised based on the lowest level of any one of the inputs used for its valuation.22 23

[...]


1 See: Jörg Wöltje, IFRS, 6th ed. (Freiburg: Haufe Lexware Verlag, 2012), p. 7.

2 See: “IFRS - Issued Standards,” 2020, https://www.ifrs.org/issued-standards/, accessed June 2020.

3 See: Jörg Wöltje, IFRS, 6th ed. (Freiburg: Haufe Lexware Verlag, 2012), pp. 8–9.

4 See: ibid., p. 9.

5 See: International Financial Accounting Standard: IFRS, IFRS 7 Summary.

6 See: International Financial Accounting Standard: IFRS, IFRS 7.1(a).

7 Ibid., IFRS 7.1(b).

8 See: ibid., IFRS 7.2.

9 See: ibid., IFRS 7.3.

10 See: ibid., IFRS 7.45.

11 See: “IFRS - IFRS 7 Financial Instruments: Disclosures,” 2020, https://www.ifrs.org/issued-standards/list-of-standards/ifrs-7-financial-instruments-disclosures/, accessed June 2020.

12 See: International Financial Accounting Standard: IFRS, IFRS 7.7.

13 See: ibid., IFRS 7.8.

14 See: ibid., IFRS 7.8-19.

15 See: ibid., IFRS 7.20.

16 Ibid., IFRS 7.20-20A.

17 Ibid., IFRS 7.20A.

18 See: International Financial Accounting Standard: IFRS, IFRS 7.21

19 Ibid., IFRS 7.21A-24G.

20 See: International Financial Accounting Standard: IFRS, IFRS 7.25.

21 See: ibid., IFRS 7.28.

22 See: Emanuel Camilleri and Roxanne Camilleri, Accounting for Financial Instruments: A Guide to Valuation and Risk Management (London: Taylor and Francis, 2017), p. 75.

23 See: International Financial Accounting Standard: IFRS, IFRS 13.72-75.

Excerpt out of 18 pages

Details

Title
IFRS 7 Financial Instruments. An Overview
College
University of applied sciences Frankfurt a. M.
Course
MBA
Grade
1,3
Author
Year
2020
Pages
18
Catalog Number
V919357
ISBN (eBook)
9783346242457
ISBN (Book)
9783346242464
Language
English
Notes
Comment of the Professor: The paper gives a very good overview of the topic. 1,3 is the best available grade in class.
Tags
MBA, IFRS 7, Practical Example, IFRS, 2020
Quote paper
Samantha Kim Schönhaber (Author), 2020, IFRS 7 Financial Instruments. An Overview, Munich, GRIN Verlag, https://www.grin.com/document/919357

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