The International Accounting Standards Board has released IFRS 7, also known as Financial Instruments: Disclosures, as an international financial reporting standard. It mandates that organizations include specific financial instrument disclosures in their accounting records.
IFRS 7 was first released in August 2005 and is applicable to yearly periods starting on or after January 1, 2007.
IFRS 7 applies to both financial and non-financial organizations and therefore financial assets, venture capital funds, real estate funds, and investment managers all fall under its jurisdictions. The amount of information that must be disclosed depends on how heavily the fund uses financial instruments and how exposed it is to risk.
Overview of IFRS 7:
According to IFRS 7, organizations must include disclosures in their accounting records that allow users to evaluate:
- The importance of financial instruments to the entity's performance and financial status.
- The type and scope of financial instrument risk exposure the entity has both during the accounting periods and at its conclusion, 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.
Based upon the information given internally to the firm's senior management employees, the quantitative disclosures give insight into the extent to which the entity is vulnerable to risk. Financial instruments used by the entity and the consequences of those uses are outlined in these disclosures.
- IFRS 7 introduces several additional financial instrument disclosures to those already mandated by IAS 32 Financial Instruments: Disclosure and Display
- IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions has been replaced with this requirement.
- IFRS 7 creates a new guideline on Financial Instruments: Disclosures that combines all of the financial instrument disclosures. IAS 32's subsequent sections only address issues related to the presentation of the financial instruments.
IFRS 7's disclosure obligations:
According to IFRS, specific disclosures must be reported by instrument type based on the IAS 39 measurement types. The 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.
IFRS 7 stipulates that the following two kinds of disclosures be made:
- Details on the importance of financial instruments
- Details about the types and sizes of financial instrument risks
Detailed information on the importance of financial instruments
Financial position disclosure
Indicate the importance of financial instruments to the health and 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 were initially 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 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 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:
There are four quantifiable concerns that are addressed in IFRS 7, which is notable:
Credit Risk:
Companies are likely to miss scheduled payments when there is a credit risk present. Planned payments are crucial to quantify.
Concentration Risk:
It's important to explain whether or not we are exposed to specific countries, businesses, currencies, etc.
Market Risk:
A thorough analysis of how potential modifications to the corporate environment and market conditions will impact assets.
Liquidity risk:
Auditor evaluation of the liquidity risk includes determining when cash flow obligations from illiquid assets are due.
Putting it all together:
Due to the constantly changing business environment, businesses need a simple and clear financial reporting system. This situation calls for the use of IFRS standards. The top audit firms in Dubai are always available if you decide to start a business in the UAE. Financial guidance and excellent audit services are offered by every audit firm in Dubai & UAE.
To conduct value audits smoothly, external and internal auditors must be familiar with IFRS 7. Internal audit processes are also made easier with its aid.
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