To require entities to provide disclosures in their financial statements that enable users to evaluate:
The significance of financial instruments for the entityā€™s financial position and performance; AND
The nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks.
IFRS 7 applies to all entities and to all types of financial instruments, with limited exceptions. This includes:
Financial assets (e.g., cash, trade receivables, loans receivable, investments in debt/equity).
Financial liabilities (e.g., trade payables, loans payable, bonds issued).
Equity instruments issued by the entity (certain disclosures).
Derivative financial instruments (e.g., forwards, futures, options, swaps).
The standard does NOT apply to certain items, even if they have characteristics of financial instruments, such as:
Interests in subsidiaries, associates, and joint ventures accounted for under IFRS 10, IAS 27, or IAS 28 (but IFRS 7 applies to derivatives on these interests).
Employersā€™ rights and obligations under employee benefit plans (IAS 19).
Insurance contracts (IFRS 17).
Financial instruments, contracts and obligations under share-based payment transactions (IFRS 2), except for certain contracts.
Certain rights and obligations under leases (IFRS 16).
IFRS 7 complements IAS 32 (Presentation) and IFRS 9 (Recognition & Measurement).
1. Significance of Financial Instruments
Disclosures to enable users to evaluate the significance for financial position and performance. Includes:
Carrying amounts of each category of financial assets and liabilities as defined in IFRS 9 (e.g., Amortised Cost, FVOCI, FVTPL).
Information about financial instruments measured at fair value:
Methods and significant assumptions used in determining fair value (see Fair Value Hierarchy below).
Whether fair values are based on observable market inputs or unobservable inputs.
Details of any reclassification of financial instruments between categories.
Information about offsetting of financial assets and liabilities (gross amounts, amounts offset, net amounts).
Nature and carrying amount of collateral held and pledged.
Reconciliation of the allowance account for credit losses (expected credit losses under IFRS 9).
Terms of compound financial instruments with multiple embedded derivatives.
Details of defaults and breaches of loans payable during the period.
Items of income, expense, gains or losses (e.g., net gains/losses by IFRS 9 category, total interest income/expense using effective interest method).
2. Nature and Extent of Risks Arising from Financial Instruments
Disclosures to enable users to evaluate the nature and extent of risks (credit, liquidity, market) at the reporting date.
Qualitative Disclosures (for each type of risk):
Exposures to risk and how they arise.
Entityā€™s objectives, policies, and processes for managing the risk and methods used to measure risk.
Any changes in the above from the previous period.
Quantitative Disclosures (for each type of risk):
Summary quantitative data about exposure to risk at reporting date (based on internal information provided to key management).
Credit Risk: Maximum exposure to credit risk (without taking collateral into account); description of collateral; credit quality of financial assets not past due nor impaired; information about financial assets past due or impaired; analysis of collateral held as security. Concentrations of credit risk.
Liquidity Risk: Maturity analysis for non-derivative financial liabilities (showing remaining contractual maturities); maturity analysis for derivative financial liabilities. Description of how liquidity risk is managed.
Market Risk: Sensitivity analysis for each type of market risk (currency, interest rate, other price) showing effect on P&L and equity of reasonably possible changes in relevant risk variable. Methods and assumptions used.
IFRS 7 requires disclosure of fair value measurements using a three-level hierarchy, reflecting the observability of inputs used:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. (Most reliable).
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). (E.g., quoted prices for similar assets/liabilities in active markets; interest rates; yield curves).
Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs). (E.g., entity's own data, discounted cash flow models using unobservable inputs). (Least reliable, requires more disclosure).
Disclosures include fair value measurements at end of period by level, significant transfers between Level 1 and 2, and reconciliations for Level 3 measurements.
For entities applying hedge accounting (under IFRS 9), IFRS 7 requires specific disclosures grouped by risk category (not by type of hedge), enabling users to understand:
The entityā€™s risk management strategy and how it is applied to manage risk.
How the entityā€™s hedging activities may affect the amount, timing, and uncertainty of its future cash flows.
The effect that hedge accounting has had on the entityā€™s statement of financial position, statement of comprehensive income, and statement of changes in equity.
This includes details on hedging instruments, hedged items, nature of risks hedged, and effectiveness.
Determining the appropriate categories for classifying financial instruments for disclosure.
Assessing the significance of financial instruments to the entityā€™s financial position and performance to determine level of detail.
Estimating fair values, especially for Level 2 and Level 3 measurements where valuation techniques and unobservable inputs are used.
Evaluating the nature and extent of risks arising from financial instruments and selecting appropriate methods for measuring and disclosing these risks (e.g., sensitivity analysis parameters).
Applying hedge accounting criteria and assessing hedge effectiveness for disclosure purposes.
Determining appropriate time bands for liquidity risk maturity analysis.
Assessing credit quality and concentrations of credit risk.
