Finance:IFRS 7
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IFRS 7, titled Financial Instruments: Disclosures, is an International Financial Reporting Standard (IFRS) published by the International Accounting Standards Board (IASB). It requires entities to provide certain disclosures regarding financial instruments in their financial statements.[1] The standard was originally issued in August 2005 and became applicable on 1 January 2007, superseding the earlier standard IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and replacing the disclosure requirements of IAS 32, previously titled Financial Instruments: Disclosure and Presentation.[2][3]
Disclosure requirements
IFRS 7 requires entities to provide disclosures about:
- The significance of financial instruments for the entity's financial position and performance.[4]
- The carrying amount of each class of financial instrument on the statement of financial position or within the notes.[5]
- Items of income, expense, gains and losses for each class of financial instrument, either in the statement of profit or loss and other comprehensive income or within the notes.[6]
- The nature and extent of risks (credit risk, liquidity risk, market risk) faced by the entity due to the financial instruments.[7]
According to accounting expert David Grünberger, qualitative disclosures are essential to explain how management perceives and manages risk.[8] Steffen Kuhn and Dirk Hachmeister emphasize that a central goal of IFRS 7 is to enable users to evaluate the entity's exposure to risk and the way those risks are managed based on the internal perspective of management.[9] This must cover management's objectives and policies for managing those risks, and any changes in the year.[10]
- Accounting policies that the entity adopts regarding financial instruments.[11]
- Qualitative and quantitative information about hedges and hedge accounting.[12][13][14]
Fair value measurement
The three-level "fair value hierarchy" is used to measure the fair values of each class of financial instruments.[15] Kuhn and Hachmeister point out that the auditing of Level 3 measurements presents significant challenges, as the valuation relies heavily on entity-internal models and non-observable parameters.[9]
- Level 1
- Unadjusted quoted prices of identical instruments in active markets.[16]
- Level 2
- Observable data from less active markets or of instruments that are similar but not the same.[17]
- Level 3
- Inputs not based on observable market data.[18]
As an illustrative disclosure for IFRS 13 requirements, Deutsche Bank categorizes its financial instruments held at fair value into a three-level hierarchy. This classification is based on whether the inputs to the valuation technique are observable or unobservable (Level 1, 2, or 3).[19]
| Financial Assets / Liabilities | Dec 31, 2024 | Dec 31, 2023 | ||||
|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |
| Financial assets held at fair value: | ||||||
| Trading assets | 52,387 | 78,237 | 9,148 | 53,095 | 62,760 | 9,420 |
| Positive market values (Derivatives) | 912 | 282,909 | 7,933 | 2,198 | 241,460 | 8,198 |
| Financial assets at FVOCI | 21,901 | 16,806 | 3,383 | 18,273 | 14,324 | 2,949 |
| Total financial assets at fair value | 78,034 | 484,008 | 26,281 | 77,193 | 398,894 | 25,599 |
| Financial liabilities held at fair value: | ||||||
| Trading liabilities | 30,765 | 12,614 | 119 | 36,361 | 7,617 | 27 |
| Negative market values (Derivatives) | 2,238 | 265,450 | 8,707 | 2,333 | 228,261 | 7,666 |
| Liabilities designated at FVTPL | 0 | 87,479 | 4,569 | 169 | 80,309 | 3,248 |
| Total financial liabilities at fair value | 33,543 | 369,113 | 13,382 | 39,349 | 317,884 | 10,856 |
Disclosure of fair value is not required if the carrying amount is a reasonable approximation of fair value.[12] Kuhn and Hachmeister further note that the depth of disclosure must correspond to the risk relevance of the respective financial instruments.[9]
Illustrative Accounting Examples
1. Credit Risk: Expected Credit Loss (ECL) Disclosure
Scenario: An entity calculates an impairment for trade receivables.
| Event | Debit | Credit | Amount | Rationale |
|---|---|---|---|---|
| Recognition of ECL | Impairment Loss (P&L) | $12,000 | Required disclosure of the reconciliation of changes in the loss allowance.[20] | |
| Allowance for ECL (SoFP) | $12,000 | Net credit exposure must be disclosed clearly. |
2. Market Risk: Interest Rate Sensitivity
Scenario: An entity has a floating-rate bank loan of $1,000,000.
| Market Shift | Impact on Profit | Impact on Equity | Rationale |
|---|---|---|---|
| Interest Rate +1% | ($10,000) | ($10,000) | Required sensitivity analysis showing impact on profit or loss.[21] |
| Interest Rate -1% | $10,000 | $10,000 | Sensitivity analysis must reflect reasonably possible changes. |
Illustrative disclosure
As an illustrative disclosure for IFRS 7 requirements regarding credit risk concentrations, Deutsche Bank provides a granular industry breakdown of its loan book in its notes. This presentation includes all assets classified under IFRS 9—specifically those at amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit and loss (FVTPL)—using the European NACE system for counterparty classification.[22]
Credit risk concentration
| Industry Classification (NACE Code) | Dec 31, 2024 (€ m) | Dec 31, 2023 (€ m) |
|---|---|---|
| Agriculture, forestry and fishing | 336 | 386 |
| Mining and quarrying | 4,342 | 3,130 |
| Manufacturing | 28,359 | 30,564 |
| Electricity, gas, steam and air conditioning | 5,017 | 4,734 |
| Water supply, sewerage, waste management | 598 | 486 |
| Construction | 4,604 | 4,494 |
| Wholesale and retail trade; repair of motor vehicles | 22,481 | 22,127 |
| Transport and storage | 5,347 | 5,617 |
| Accommodation and food service activities | 2,749 | 1,865 |
| Information and communication | 9,940 | 8,082 |
| Financial and insurance activities | 133,350 | 116,298 |
| Real estate activities | 51,535 | 50,793 |
| Professional, scientific and technical activities | 6,623 | 6,958 |
| Administrative and support service activities | 9,496 | 9,385 |
| Public administration and defense | 6,235 | 6,131 |
| Education | 313 | 281 |
| Human health services and social work activities | 4,170 | 4,432 |
| Arts, entertainment and recreation | 840 | 1,072 |
| Other service activities | 6,835 | 5,050 |
| Activities of households as employers | 199,812 | 210,982 |
| Activities of extraterritorial organizations | 22 | 0 |
| Gross loans | 503,005 | 492,868 |
| (Deferred expense)/unearned income | 1,352 | 1,675 |
| Loans less (deferred expense)/unearned income | 501,653 | 491,192 |
| Less: Allowance for loan losses | 5,697 | 5,208 |
| Total loans | 495,955 | 485,984 |
Allowance for credit losses
To satisfy the requirements of IFRS 7.35H, Deutsche Bank provides a reconciliation of the allowance for credit losses in its notes, showing the movement between Stage 1 (12-month ECL), Stage 2 (Lifetime ECL – non-impaired), and Stage 3 (Lifetime ECL – credit-impaired) for financial assets at amortized cost.[23]
| Movement in Allowance (€ m) | Stage 1 | Stage 2 | Stage 3 | Stage 3 POCI | Total |
|---|---|---|---|---|---|
| Balance, beginning of year (2024) | 447 | 680 | 3,960 | 198 | 5,285 |
| Movements (new business and credit extensions) | (150) | 194 | 1,814 | 3 | 1,861 |
| Transfers due to changes in creditworthiness | 128 | (128) | 0 | N/M | 0 |
| Changes in models | (2) | (7) | 0 | 0 | (9) |
| Financial assets derecognized (incl. charge-offs) | 0 | 0 | (1,229) | 0 | (1,229) |
| Recovery of written off amounts | 0 | 0 | 157 | 0 | 157 |
| Foreign exchange and other changes | 15 | (3) | (290) | 11 | (267) |
| Balance, end of reporting period | 438 | 736 | 4,412 | 213 | 5,799 |
| Provision for Credit Losses (excl. country risk) | (24) | 59 | 1,814 | 3 | 1,852 |
Disclosure Requirements (IFRS 7)
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 the nature and extent of risks arising from those instruments.[24]
| Paragraph | Category | Disclosure Requirement | Description / Examples |
|---|---|---|---|
| IFRS 7.8 | Significance | Carrying Amounts | Disclosure of the carrying amounts of each category of financial assets and liabilities (e.g., Amortized Cost, FVTPL, FVOCI). |
| IFRS 7.25 | Fair Value | Fair Value Hierarchy | For each class of financial instrument, the fair value must be disclosed and categorized into Level 1, 2, or 3 based on the observability of inputs. |
| IFRS 7.33 | Risk Management | Qualitative Risk | For each type of risk (Credit, Liquidity, Market): the exposures to the risk and how they arise, and the objectives/policies for managing them. |
| IFRS 7.34 | Quantitative Data | Summary quantitative data about the entity's exposure to risk at the end of the reporting period based on information provided internally to key management. | |
| IFRS 7.35 | Credit Risk & ECL | Information about an entity’s credit risk management practices and how they relate to the recognition and measurement of Expected Credit Losses (ECL). | |
| IFRS 7.39 | Liquidity Risk | Maturity Analysis | A maturity analysis for financial liabilities showing the remaining contractual maturities (e.g., <1 year, 1-5 years, >5 years). |
| IFRS 7.40 | Market Risk | Sensitivity Analysis | A sensitivity analysis for each type of market risk (e.g., currency, interest rate) showing how profit/loss and equity would have been affected by "reasonably possible" changes. |
| IFRS 7.13 | Collateral | Pledged Assets | The carrying amount of financial assets the entity has pledged as collateral for liabilities and the terms and conditions relating to its pledge. |
See also
- IFRS 9, Financial Instruments
- List of International Financial Reporting Standards
References
- ↑ "PricewaterhouseCoopers: IFRS 7 – ready or not". https://www.pwc.com/gx/en/ifrs-reporting/pdf/ifrs7flyer.pdf.
- ↑ admin. "IAS 30 — Disclosures in the Financial Statements of Banks and Similar Financial Institutions" (in en). https://www.iasplus.com/en/standards/ias/ias30.
- ↑ admin. "IAS 32 — Financial Instruments: Presentation" (in en). https://www.iasplus.com/en/standards/ias/ias32.
- ↑ IASB. IFRS 7, Paragraph 7.
- ↑ IASB. IFRS 7, Paragraph 8.
- ↑ IASB. IFRS 7, Paragraph 20.
- ↑ IASB. IFRS 7, Paragraph 31.
- ↑ Grünberger, D. (2024). IFRS 2024: Ein systematischer Praxisleitfaden. Linde Verlag.
- ↑ 9.0 9.1 9.2 Kuhn, S., & Hachmeister, D. (2015). Rechnungslegung und Prüfung von Finanzinstrumenten: Handbuch nach IFRS, HGB und EMIR. Schäffer-Poeschel.
- ↑ IASB. IFRS 7, Paragraph 33.
- ↑ IASB. IFRS 7, Paragraph 21.
- ↑ 12.0 12.1 admin. "IFRS 7 — Financial Instruments: Disclosures" (in en). https://www.iasplus.com/en/standards/ifrs/ifrs7.
- ↑ "Financial assets and financial liabilities". ACCA. Applied skills. Financial reporting (FR): Study text.. Association of Chartered Certified Accountants (Great Britain). Wokingham, Berkshire: Kaplan Publishing. 2018. pp. 216. ISBN 978-1-78740-085-6. OCLC 1076711257.
- ↑ "Covering all eventualities | ACCA Global". https://www.accaglobal.com/en/member/discover/cpd-articles/corporate-reporting/all-eventualities.html.
- ↑ IASB. IFRS 13, Paragraph 72.
- ↑ IASB. IFRS 13, Paragraph 76.
- ↑ IASB. IFRS 13, Paragraph 81.
- ↑ IASB. IFRS 13, Paragraph 86.
- ↑ Deutsche Bank AG, Annual Report 2024, Note 13 – Financial Instruments held at Fair Value, p. 240.
- ↑ IASB. IFRS 7, Para 35H.
- ↑ IASB. IFRS 7, Para 40.
- ↑ Deutsche Bank AG, Annual Report 2024, Note 18 – Loans, p. 256.
- ↑ See: IFRS 7 Para 35H(a); Deutsche Bank AG, Annual Report 2024, Note 19 – Allowance for Credit Losses, p. 265.
- ↑ IASB. IFRS 7, Paragraph 7-42.
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