PFRS 7 Financial Instry Disclosures '"°"ts Learning Objectives 1. State the two main categories of disclosures 2. State the types of risks required by PERS 7 Under p ‘Obe diag” Introduction PFRS 7 prescribes the disclosure te instruments. The disclosures are bri following two main categories: a. significance of financial instruments to the entity’s fina. position and performance; and nate b. the nature and extent of risks ari instruments to which the entity is expos manages those risks. (PFRS 7.1) quirements for fin Oadly Classifieg on sing from finanga ed, and how the entity PERS 7 com plements the presentation principles in PAS} Financial. Instrum ents: Presentation and the recognition and measurement principles in PFRS 9 Financial Instruments. PERS 7 applies to financial instruments that are within the Scope of PFRS 9. PERS 7 does not apply to financial instrumens that are dealt with under other Standards, such as interests" subsidiaries (PERS 10 Consolidated Financial Statements), a and joint ventures (PAS 28), those arising from employee a Plans (PAS 19) and share-based payment transactions (PF nis and those that are Tequired to be classified as equity instrume™ — Significance of financial instruments Statement of financial position a Carrying amounts of financial assets and financial liabilities An entity is required to disclose the carrying amount PERS” the following categories of financial instruments under *°°" vy sof each& ne a ig inst an : measured at fair value through profit or loss assets : ei separately (i) those that are designated and (ii) 0 ring SEP ATA . tare mandatorily measured at FVPL. "i tha pure measured at amortized cost. i pina?” agsets measured at fair value through other i ive income (FVOCI), showing separately (i) those comp aa datorily classified as such and (ii) those that are that . be classified as such. alec “Gal Jiabilities at amortized cost. . 4 Fin dal [iabilities at fair value through profit or loss (FVPL), t row separately (i) those that are designated and (ii) those that meet the definition of held for trading.” . financial liabilities measured at FVPL fan entity designates a financial asset to be measured at FVPL, it shall disclose the financial asset’s exposure to credit risk and the change in fair value attributable to changes in credit risk. If an entity designates a financial liability to be measured at PIPL, it shall disclose the change in fair value that is attributable to changes in credit risk, the difference between the carrying amount and maturity value, and, if the entity is required to present the effects of changes in the liability’s credit risk in OCI, Financial assets and any cumulative gain or loss that were transferred within equity or were realized. Financial assets measured at FVOCI ltan entity elected to measure investments in equity securities at FVOCI, it shall disclose those investments, the reason for the an any dividends recognized during the period, and any fers of cumulative gain or loss within equity. shall tee of those investments were disposed of, the entity de ee the reason for the disposal, the fair value on “Cognition date, and the cumulative gain or loss on disposal.Reclassification : Jf an entity has reclassified financial assets, it 5 date of reclassification, an explanation of the di model, and the amount reclassified between cane ree ing 4 If the entity reclassifies financial assets gi ae FVPL to amortized cost or from FVPL to FVOCI o, m Nog it shall disclose the fair value gain or logg that ve ota . recognized in profit or loss or OCI if the financial ac Me bee, been reclassified. Sset ha Offsetting financial assets and financial liabilities If an entity has offset financial assets and financial i shall disclose the gross amounts of those assets and Haba amounts that were set-off, the net amounts Presented statement of financial position and a description of i in legal right of set-off. : Telatey Collateral An entity shall disclose the carrying amounts of financial ass pledged as collateral for liabilities, including the terms and conditions of the pledge. If the entity holds collateral that it is Permitted to sell or tepledge, the entity shall disclose the fair value of such collateral and, if it has been sold or repledged, whether the entity hasan obligation to return it, and the terms and conditions associated with the entity’s use of the collateral. Allowance account ‘for credit losses The carrying amount of a financial asset that is mandate measured at FVOCI is not reduced by a loss allowance. Howev® the loss allowance is disclosed in the notes. | Defaults and breaches ing The entity shall disclose any defaults and breaches relating loans payable, including the carrying amount of ne Payable, the principal, interest, sinking fund, or redempt°the default was remedied, or 'the terms of the loans ~ _ renegoriated: before the financial statements were 10 comprehensive income en : expense, gains or losses aa disclose the following: jins oF net losses on: cial assets and financial liabilities measired at FVPL, tpowind separately those relating to designated and if atorily measured at FVPL m cial assets measured at amortized cost ii. . a cial jiabilities measured at amortized cost : financial assets measured at FVOCI, showing separately those relating to elected and mandatorily measured at Fvocl. nue and total interest expense, computed interest method, for financial instruments zed cost or mandatory FVOCI (showing, . Total jnterest reve! using the effective measured at amorti these amounts separately). . Fee income and expense Other disciosures Fair value The entity shall disclose the fair value of each class of financial assets and financial liabilities in a way that the fair value can be compared with the carrying amount. : However, fair value disclosure is not required when the such as for short-term ce as amount approximates fair value, receivables and payables, and for lease liabilities.nina Nature and extent of risks arising from fin ancia ling i ' The second category of disclosures requireq by Bn co disclosure of the nature and extent of risks arisi >. Ing: from ls the instruments to which the entity is exposed, and ho faa manages those risks. PFRS 7 requires the isos Sy following risks: i : 1, Credit risk - is “the risk that one Party to instrument will cause a financial loss for the ah a finan failing to discharge an obligation.” (PERS 7, Appendix a * Patty by Liquidity risk - is “the risk that an enti difficulty in meeting obligations associat liabilities that are settled by delivering financial asset.” (PFRS 7.Appendix A) ty will ency ed with finan cash or Noth Credit tisk and liquidity risk are Opposites, Fo, example, credit risk includes the Possibility that an eniiy cannot collect on its receivables, while liquidity risk includes the possibility that an entity cannot pay its payables. As ; guide, recall that liquidity is defined in the Conceptual Framework as the ability of the entity to Pay its short-tem liabilities. Market risk - is “the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices.” (PFRS 7.Appendix A) Market risk comprises the following three types of risk: a. Currency risk — is “the risk that the fair value or future cash flows of a financial instrument will fluctuate because changes in foreign exchange rates.” (PFRS 7.Appendix A) re b. Interest rate risk — is “the risk that the fair value or futu se cash flows of a financial instrument will fluctuate be of changes in market interest rates.” (PFRS7.Appendix) -ments Disclosures we 51 we a“, ‘ : ice risk - “the tisk that the fair value om of a financial instrument will fluctuate oe cash a jn market Prices (other than ¢t o ‘use of chan gate risk or currency risk), whether — © interes a An caused by factors specific to the individual financi . trument or its issuer, or factors affecting all’ si cial gnancial instruments traded in the market.” (prRs7 a entity shall provide both qualitative and qu antitative ih type of the foregoing risks. 430 sures for each es of qualitative disclosures: ‘ and how they arise. ae entity's tisk management objectives, policies and e rocesses, including methods used to measure risk. Any changes in (a) or (b) from the previous period. Risk exposures Examples of quantitative disclosures 2 Summary of quantitative data about the entity's risk exposure at the end of the reporting period. b. Concentrations of risk. c Other relevant disclosures not provided in (a) and (b). Disclosure of concentration of credit risk is required of most financial instruments. Disclosure of market risk (or price a normally required of financial instruments measured at ne . Disclosure of interest rate risk is normally required of oe Tuments with variable interest rates. Disclosure of fe ty risk is required of financial instruments measured in “reign currency, :