PFRS 7 Financial Instruments: Disclosures

Introduction- It requires disclosure of information about the significance of financial instruments to an entity,
and the nature and extent of risks arising from those financial instruments, both in qualitative and quantitative
terms. Specific disclosures are required in relation to transferred financial assets and a number of other matters.
The standard was published in August 2005 and is effective from 1 January 2007.
It requires certain disclosures to be presented by category of instrument based on the IAS 39 measurement
categories. Certain other disclosures are required by class of financial instrument. For those disclosures an entity
must group its financial instruments into classes of similar instruments as appropriate to the nature of the
information presented.
The objectives are to enable the users of financial statements of an entity to realize the significance of the
financial instruments and the nature and extend of risks arising from such instruments and how such risks are
managed. The principles in this IFRS compliment the IAS 32 & 39.This IFRS is applicable by all entities to all types
Financial Instruments.
The two main categories of disclosures required by IFRS 7 are:
■ The significance of financial instruments for the entity’s financial position and performance.
■ information about the nature and extent of risks arising from financial instruments to which the entity
is exposed during the period and at the end of the reporting period, and how the entity manages those
risks. The qualitative disclosures describe management’s objectives, policies and processes for managing
those risks. The quantitative disclosures provide information about the extent to which the entity is
exposed to risk, based on information provided internally to the entity’s key management personnel.
Together, these disclosures provide an overview of the entity’s use of financial instruments and the
exposures to risks they create.
If an entity designates a financial asset to be measured at FVPL, it shall disclose the financial assets exposure to
credit risks and the change in fair value attributable to changes in credit risks.
If an entity designates a financial liability to be measured at FVPL, it shall disclose the change in fair value that
is attributable to credit risk.
If an entity elected to measure investments in equity securities at FVOCI, it shall disclose those investments, the
reason for the election, any dividends recognized during the period, and any transfers of cumulative gain or loss
within equity.
If an entity reclassified financial assets, it shall disclose the date of reclassification, an explanation of the change
in business model, and the amount between categories.
If an entity has offset financial assets and financial liabilities, shall disclose the gross amount of those assets and
liabilities, the amount that were set off, the net amount presented in the statement of financial position.
An entity shall disclose the carrying amounts of financial asset pledged as collateral for liabilities, including the
terms and condition of the pledge.
The carrying amount of financial asset that is mandatorily measured at FVOCI is not reduced by a loss allowance.
However, the loss allowance is disclosed on the notes.
The entity shall disclose any defaults and breaches relating to loans payable, including the carrying amount of
those loans payable, the principal, interest, sinking fund or redemption terms.
PFRS 7 requires the disclosure of the following risks: Credit risk, Liquidity risk, Market risk and other price risk.
The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based
on information provided internally to the entity's key management personnel. These disclosures include:
summary quantitative data about exposure to each risk at the reporting date, disclosures about credit risk,
liquidity risk, and market risk and how these risks are managed as further described below and concentrations
of risk.
PFRS 12 DISCLOSURE OF INTEREST IN OTHER ENTITIES
The objective of PFRS 12 is to prescribe the minimum disclosure requirements for an entity’s interests in other
entities, particularly (a) the nature of, and risks associated with, those interest and (b) the effects of those
interests on the entity’s financial statements. An entity considers the level of detail and emphasis placed on
the disclosure requirements necessary to meet the objective of PFRS 12 and provides additional information
whenever the minimum disclosures are insufficient to meet the objective.
Interest in other entity- refers to involvement that exposes an entity to variability of returns from the
performance of another entity. It includes the means by which an entity obtains control, joint control, or
significant influence over another entity.
PFRS 12 applies to entities that have an interest in: subsidiary, joint arrangements, associate, or
unconsolidated structured entity.
Disclosures:
Significant judgements and assumptions- PFRS 12 requires disclosure of information about significant
judgements and assumptions that an entity has made in determining the existence of control, joint control or
significant influence over an investee. And also the type of determining the joint arrangement when the
arrangement has been structured through separate vehicle.
Investment entity status- PFRS 12 requires the disclosure for an investment entity: significant judgements and
assumptions that an entity has made in determining whether the entity is an investment entity. Changes in
the entity’s status as an investment entity. An entity that becomes an investment entity discloses the total fair
value as of the date of change of status, of the subsidiaries that cease to be consolidated and the total gain or
loss and the line item in which that gain or loss is recognized, if not presented separately.
Interest in subsidiaries- PFRS 12 requires for the disclosure of an entity’s interest on subsidiary such as: the
composition of the group, the nature and extent of significant restrictions on the entity’s ability to access
assets and settle liabilities of the group, the effects of changes in ownership interest that do not result in a loss
of control and result in a loss of control, if a subsidiary uses a different reporting period, the entity discloses
that fact and the reason thereof.
Interest in joint arrangements and associates- PFRS 12 requires the following disclosures for an entity’s
interest in a joint arrangement or associate that is material: (a) name of the joint arrangement or associate, its
principal place of business and country of incorporation. (b) Nature of the entity’s relationship with the joint
arrangement or associate. (c) Ownership interest, participating share, or voting rights held by the entity. (d)
Measurement of the investment. (e) If the equity method is used, the entity shall disclose the fair value of the
investment, if there is quoted market price for the investment. (f) Dividends received from the joint venture or
associate. (g) Summarized the financial information about the joint venture or associate. (h) For a material
joint venture, the entity discloses the amounts of cash and cash equivalent, current and noncurrent financial
liabilities, depreciation and amortization, interest income and interest expense and income tax benefit. (i) The
entity discloses the following in aggregate separately for all investments in joint ventures and associates that
are not individually material.
Interest in unconsolidated structural entities- a structured entity is an entity that has been designed so that
voting or similar rights are not the dominant factor in deciding who controls the entity. PFRS 12 requires an
entity to disclose the entity’s interest in an unconsolidated structured entity: (a) qualitative and quantitative
information about the interest in an unconsolidated structured entity, including the nature, purpose, size and
activities of the structured entity and how the structured entity is financed. (b) Summary in a tabular form
unless other format is appropriate. (c) If during the reporting period the entity has, without having a
contractual obligation to do so, provided financial or other support to an unconsolidated structured entity, the
entity discloses: the type and amount of support provided, including situations in which the entity assisted the
structured entity in obtaining financial support and reasons for providing support. (d) Any current intentions
to provide financial or other support to an unconsolidated structured entity, including intentions to assist the
structured entity in obtaining financial support.
PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
Objectives- PFRS 15 sets the principles to apply when reporting about the nature, the amount, the timing,
and the uncertainty of revenue and cash flows from a contract with a customer.
Recognition of revenues- the main aim of PFRS 15 is to recognized revenue in a way that shows the transfer of
goods/services promised to customers in an amount reflecting the expected consideration in return for those
goods or services. To make it systematic, PFRS 15 requires application of 5 step model for revenue
recognition.
Step 1: identifying the contract with the customer- a contract is an agreement between two parties that
creates enforceable rights and obligations. The PFRS is need to apply to the contracts that have the following
attributes: (a) parties to the contract has approved it and are committed to perform. (b) Each party’s rights to
the goods/services transferred identified. (c) The payment terms are identified. (d) The contract has a
commercial substance, and. (e) it is probable that an entity will collect the consideration.
Step 2: identify the performance obligations in the contract- performance obligation is any good or service
that contract promises to transfer to the customer.
Step 3: determine the transaction price- the transaction price is the amount of consideration that an entity
expects to be entitled in exchange for transferring promised goods or services to a customer, excluding
amounts collected on behalf of the third parties.
Step 4: allocate the transaction price to the performance obligations- once there is identified contract
performance obligations and determined the transaction price, it needs to split the transaction price and
allocate it to the individual performance obligations. The general rule is to do it based on their relative stand-
alone selling prices, but there are 2 exceptions when allocating in a different way: when allocating discounts
and when allocating considerations with variable amounts.
Step 5: recognized revenue when or as the entity satisfies a performance obligation- a performance
obligation is satisfied (and revenue is recognized) when a promised good or service is transferred to a
customer. This happens when control is passed.
Contract cost
1. Cost to obtain a contract- those that are incremental costs to obtain a contract. In other words, these
costs would not have been incurred without an effort to obtain a contract. These cost are not
expensed but they are recognized as an asset if they are expected to be recovered.
2. Cost to fulfill a contract- if these costs are within the scope of PAS 2, PAS 16, PAS 38, then it should
treat them in line with the appropriate standard. If not, then it should capitalize them only if certain
criteria are met.
Implementation of PFRS 15- the application of PFRS 15 is mandatorily for all periods starting on January 1
2018 or later. As the requirements of PFRS 15 are very extensive and demanding. PFRS 15 permits 2 methods
of adoption:
1. Full retrospective adoption- under this approach, needs to apply PFRS 15 fully to all prior reporting
periods, with some exceptions.
2. Modified retrospective adoption- under this approach, comparative figures remain as they were
reported under the previous standards and recognized the cumulative effect of PFRS 155 adoption as
one-off adjustment to the opening equity at the initial application date.
PFRS 16 LEASES
PFRS 16 prescribes the accounting and disclosure requirements for leases. The objective is to provide
information that is faithfully represented, necessary for financial statements users to assess the effect of
leases on the financial position, financial performance and cash flows of an entity. PFRS 16 applies to all leases
including subleases.
Identified a lease- “a contract is, or contains, a lease if the contract conveys the right to control the use of an
identified asset for a period of time in exchange for consideration.” An entity has the right to control the use
of an identified asset if it has both of the following throughout the period of use: the right to obtain
substantially all of the economic benefits from the use of the identified asset and the right to direct the use
of the identified asset.
Identified asset- is essential in the definition of a lease. An asset can be identified by being explicitly stated in
the contract or by being implicitly specified at the time the asset is made available for use by the customer.
Portions of Assets- a portion of an asset is an identified asset if it is physically distinct. If not physically distinct,
the portion is not identified asset, unless it represents substantially all of the capacity of the asset thereby
providing the customer the right to obtain substantially all of the economic benefits from the asset.
Right to obtain economic benefits from use- a customer controls the use of an identified asset if it has the
right to obtain substantially all of the economic benefits from the asset throughout the period of use.
Right to direct use- a customer has the right to direct the use of an identified asset throughout the period of
use if: the customer has the right to direct how and for what purpose the asset is used throughout the period
of use, or the asset’s use is predetermined and the supplier is precluded from changing the predetermined
use.
Protective rights-it includes contractual restrictions designed to protect the supplier’s interest in the asset or
its personnel, or to ensure compliance with laws or regulations.
Accounting for leases by lessee
Recognition - a lessee recognizes a lease liability and a right-of-use asset at the commencement date.
Initial measurement of lease liability- the lease initially measured at the present value of the lease payments
that are not yet paid as at the commencement date.
Discount rate- the lease payments are discounted using the interest rate implicit in the lease. If that rate is not
readily determinable, the lessee’s incremental borrowing rate is used.
Initial measurement of right of use asset- the right-of-use is initially measured at cost.
Subsequent measurement of lease liability- the lease liability is subsequently measured similar to an
amortized cost financial liability.
Subsequent measurement of the right-of-use asset- the right-of-use asset is subsequently measured similar
to a purchased asset. Accordingly, the asset is subsequently measured under the cost model.
Cost model- under the cost model, the right-of-use asset is measured at cost less any accumulated
depreciation and any accumulated impairment losses and adjusted for any remeasurement of the lease
liability.
Depreciation- the lessee depreciates the underlying asset over its useful life if the contract provides for the
transfer of ownership to the lessee by the end of the lease term or there is a reasonable certainty that the
lessee by the end of the lease term, or there is a reasonable certainty that the lessee will exercise a purchase
option.
Lease of multiple assets - for a contract that contains rights to use multiple assets, the right to use each asset
is considered a separate lease component.
Non lease elements- a non-lease element is considered a separate element if it transfers goods or services
to the lessee.
Practical expedient- PFRS 16 allows an entity to elect, by class of underlying asset, not to separate the lease
and non-lease components of a contract and instead account for them as a single lease component.
Presentation
Statement of financial position
Right-of-use assets are presented either separately from other assets, or together with other assets as if they
were owned, with disclosure of the line items that include the right-of-use assets.

Disclosure requirements are: depreciation charge on right-of-use asset, interest expense on the lease liability,
expense relating to low-value and short term leases, expense relating to variables lease payments not
included in lease liabilities, income from subleasing, total cash outflow for leases, additions to right-of-use
assets, carrying amount of right-of-use assets by class of underlying asset, additional information on right-of
use assets that are investment property or are revalued under PAS 16.
Accounting for leases by lessor- a lessor classifies each of its leases as either a finance lease or an operating
lease. Finance lease (capital lease) is a lease that transfers substantially all the risks and rewards incidental to
ownership of an underlying asset. Operating lease is a lease that does not transfer substantially all the risks
and rewards incidental to ownership of an underlying asset.
Inception and commencement of lease- inception date is the earlier of (a) the date of the lease agreement
and (b) the date of commitment by the parties to the principal provisions of lease. The commencement date is
the date on which a lessor makes an underlying asset available for use by a lessee.
Finance lease
Initial measurement-a lessor recognizes an asset from a finance lease as a receivable measured at an amount
equal to the net investment in the lease. Under a finance lease, the lessor transfer substantially all the risk and
rewards incidental to ownership over the leased asset to the lessee.
Gross investment in the lease (gross lease receivable) - “the sum of (a) the lease payments receivable by the
lessor under a finance lease, and (b) any unguaranteed residual value accruing to the lessor.
Net investment in the lease (net lease receivable) - the gross investment in the lease discounted at the
interest rate implicit in the lease.
Unearned finance income (unearned interest income) - the difference between the gross investment in the
lease and the net investment in the lease.
Discount Rate- the net investment s measured using the interest rate implicit in the lease.
Subsequent measurement- the net investment in the lease (the lease receivable) is subsequently measured
similar to the amortized cost financial asset.
Operating lease- lessor recognizes lease payments as lease income over the lease term using the straight line
basis, or another more appropriate basis. Lessor continues to depreciate the leased asset.
Disclosure
Finance lease
1. Selling profit or loss
2. Finance income on the net investment in the lease
3. Income relating to variable lease payments not included in the measurement of the net investment in the
lease
4. Qualitative and quantitative explanation of significant changes in net investment in the lease
5. Maturity analysis of lease receivable
Operating lease
1. Lease income, separately disclosing income for variable lease payments that do not depend on an index or
rate
2. As applicable for underlying asset, relevant disclosures in PAS 16 for leases of PPE, disaggregated by class
PAS 36, Impairment of asset, PAS 38 Intangible Asset, PAS 40 Investment Property and PAS 41 Agriculture
3. Maturity analysis of lease payments
PFRS 17- INSURANCE CONTRACTS
Objective- PFRS 17 Insurance Contracts establishes the principles for the recognition, measurement,
presentation and disclosure of Insurance contracts within the scope of the Standard. The objective of PFRS 17
is to ensure that an entity provides relevant information that faithfully represents those contracts. This
information gives a basis for users of financial statements to assess the effect that insurance contracts have on
the entity's financial position, financial per-for-mance and cash flows.
Scope- An entity shall apply PFRS 17 Insurance Contracts to: Insurance contracts, including reinsurance
contracts, it issues; Reinsurance contracts it holds; and Investment contracts with discretionary participation
features it issues, provided the entity also issues insurance contracts. Some contracts meet the definition of an
insurance contract but have as their primary purpose the provision of services for a fixed fee. Such issued
contracts are in the scope of the standard, unless an entity chooses to apply to them PFRS 15 Revenue from
Contracts with Customers and provided the following conditions are met: (a) the entity does not reflect an
assessment of the risk associated with an individual customer in setting the price of the contract with that
customer; (b) the contract compensates the customer by providing a service, rather than by making cash
payments to the customer; and (c) the insurance risk transferred by the contract arises primarily from the
customer’s use of services rather than from uncertainty over the cost of those services.
The standard provides the criteria to determine when a non-in-sur-ance component is distinct from the host
insurance contract. An entity shall: (a) Apply PFRS 9 Financial Instruments to determine whether there is an
embedded derivative to be separated and, if there is, how to account for such a derivative. (b) Separate from a
host insurance contract an investment component if, and only if, that investment component is distinct. The
entity shall apply PFRS 9 to account for the separated investment component. (c) After performing the above
steps, separate any promises to transfer distinct non-insurance goods or services. Such promises are
accounted under PFRS 15 Revenue from Contracts with Customers.
Level of aggregation- PFRS 17 requires entities to identify portfolios of insurance contracts, which comprises
contracts that are subject to similar risks and managed together. Contracts within a product line would be
expected to have similar risks and hence would be expected to be in the same portfolio if they are managed
together.
Each portfolio of insurance contracts issues shall be divided into a minimum of: A group of contracts that are
onerous at initial recog-ni-tion, if any; a group of contracts that at initial recognition have no significant
possibility of becoming onerous sub-se-quently, if any; and a group of the remaining contracts in the portfolio,
if any. An entity is not permitted to include contracts issued more than one year apart in the same group.
Recognition- An entity shall recognize a group of insurance contracts it issues from the earliest of the
following: (a) the beginning of the coverage period of the group of contracts; (b) the date when the first
payment from a policyholder in the group becomes due; and (c) for a group of onerous contracts, when the
group becomes onerous.
Measurement- On initial recog-ni-tion, an entity shall measure a group of insurance contracts at the total of:
(a) the fulfilment cash flows (“FCF”), which comprise: (i) estimates of future cash flows; (ii) an adjustment to
reflect the time value of money (“TVM”) and the financial risks associated with the future cash flows; and (iii) a
risk adjustment for non-financial risk (b) the contractual service margin (“CSM”). An entity shall include all the
future cash flows within the boundary of each contract in the group. The entity may estimate the future cash
flows at a higher level of aggregation and then allocate the resulting fulfilment cash flows to individual groups
of contracts. The estimates of future cash flows shall be current, explicit, unbiased, and reflect all the
information available to the entity without undue cost and effort about the amount, timing and uncertainty of
those future cash flows. They should reflect the perspective of the entity, provided that the estimates of any
relevant market variables are consistent with observable market prices.
Discount rates- The discount rates applied to the estimate of cash flows shall: (a) reflect the time value of
money (TVM), the characteristics of the cash flows and the liquidity characteristics of the insurance contracts;
(b) be consistent with observable current market prices (if any) of those financial instruments whose cash flow
characteristics are consistent with those of the insurance contracts; and (c) exclude the effect of factors that
influence such observable market prices but do not affect the future cash flows of the insurance contracts.
Contractual service margin- The CSM represents the unearned profit of the group of insurance contracts that
the entity will recognize as it provides services in the future. This is measured on initial recognition of a group
of insurance contracts at an amount that, unless the group of contracts is onerous, results in no income or
expenses arising from: (a) the initial recog-ni-tion of an amount for the FCF; (b) the derecognition at that date
of any asset or liability recognized for insurance ac-qui-si-tion cash flows; and (c) any cash flows arising from
the contracts in the group at that date.
Subsequent measurement- On subsequent measurement, the carrying amount of a group of insurance
contracts at the end of each reporting period shall be the sum of: (a) the liability for remaining coverage
com-pris-ing: (i) the FCF related to future services and; (ii) the CSM of the group at that date; (b) the liability
for incurred claims, comprising the FCF related to past service allocated to the group at that date.
Presentation in the statement of financial position
An entity shall present separately in the statement of financial position the carrying amount of groups of: (a)
insurance contracts issued that are assets; (b) insurance contracts issued that are liabilities; (c) reinsurance
contracts held that are assets; and (d) reinsurance contracts held that are liabilities.
Recognition and presentation in the statement(s) of financial performance- An entity shall disaggregate the
amounts recognized in the statement(s) of financial performance into: (a) an insurance service result,
comprising insurance revenue and insurance service expenses; and (b) insurance finance income or expenses.
Disclosures
An entity shall disclose qual-i-ta-tive and quan-ti-ta-tive in-for-ma-tion about: (a) the amounts recognized in its
financial state-ments that arise from insurance contracts; (b) the significant judgements, and changes in those
judgements, made when applying PFRS 17; and (c) the nature and extent of the risks that arise from insurance
contracts.
Effective date
IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2021. Earlier application is
permitted if both IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial In-stru-ments have also
been applied.