IFRS 7 and common errors - icaz.org.zw · IFRS 7 –Objective and Scope • contains prescriptive guidance on required disclosures that are meant to assist users in assessing: 1

IFRS 7 and common errorsIFRS 7 and common errors

ICAZ CPD 06.11.12

Overview

• FI Disclosures• FI Disclosures

▫ Overview of IFRS 7

▫ Current year developments

• Common errors in fin reporting

IFRS 7 Disclosures

Overview

• Related standards

• Timelines

• Overview of key features

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• Overview of key features

• Amendments

• Q&A

IFRS 7 – Overview• Objective and scope

• Classes of financial instruments and level of disclosure

• Significance of financial instruments for

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• Significance of financial instruments for financial position and performance

• Nature and extent of risks arising from financial instruments

Related StandardsComplements RMP principles

• IAS 32

• IAS39

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• IFRS 9

Timeline of changes in IFRS7

August 2005

• IASB issues IFRS 7, revised in 2007 for IAS 1 terminology

2009/10

• Enhanced FV and liquidity risk disclosures • Classification of FA and FL (IFRS 9)• Supplementary disclosures for all transferred FA not derecognised where

continuing involvement in a transferred asset

2011

• FVM disclosures relocated to IFRS13• Improved disclosures in netting arrangements btwn FA and FL

IFRS 7 – Objective and Scope• contains prescriptive guidance on required disclosures that are

meant to assist users in assessing:

1. The significance of financial instruments, in terms of financial performance and position, and

2. The nature and extent of risks related to FI

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2. The nature and extent of risks related to FI

• IFRS 7 applies to all entities and all financial instruments except the following:

• Interests in subsidiaries, associates, and joint ventures accounted for

under standards other than IAS 32 and IFRS9

• Employers’ rights and obligations

• Insurance contracts, etc

NB. Extent of disclosure depends on the extent of the entity’s use of financial instruments and of its exposure to risk

IFRS 7 – Classes of Financial Instruments and Level

of Disclosure

• IFRS 7 groups financial instruments into classes for some disclosure requirements

• Instruments should be grouped taking into account their

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• Instruments should be grouped taking into account their nature and characteristics

IFRS 7 – Significance of Financial Instruments for

Financial Position and Performance

Statement of Financial Position

• Carrying amounts for each of the following categories should be disclosed on the face or the notes:

• Financial assets and liabilities classified as FVTPL

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• Financial assets and liabilities classified as FVTPL

� Designated upon IR

� Mandatorily measured at FV

• Financial assets and liabilities measured at amortized cost

• Financial assets at FVOCI



FVTPL

For loans and receivables (at Amortised Cost) classified as FVTPL, the following should be disclosed:

• The maximum exposure to credit risk (the maximum exposure may be seen to be the cash loss that is the amount owed), without taking collateral into account

• The amount by which a derivative or other instrument mitigates credit risk

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• The amount by which a derivative or other instrument mitigates credit risk

• The change in fair value during the period (and cumulatively) attributable to changes in

credit risk, and

• The change in fair value during the period (and cumulatively) of related credit derivatives or other instruments that mitigate credit risk

For financial liabilities designated as FVTPL, the following should be disclosed:

• The change in fair value during the period (and cumulatively) attributable to credit risk, and

• The difference between the carrying amount and the amount of contractual obligation at maturity



Reclassification

• If an entity has reclassified an instrument between categories measured at fair value and amortized costs, respectively, the amount, date and detailed reasons for reclassification need to be disclosed

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• The classification of instruments is based on management intent and so it is important to show the reasons why instruments are reclassified



Collateral

• Where an entity has pledged assets as collateral, the following should be disclosed:

• The carrying amounts, and

• Conditions and terms

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• Where it holds collateral and is able to sell or repledge it, the entity should disclose:

• The fair value of the collateral

• The fair value of the collateral sold or repledged, and

• The terms associated with the use of the collateral

Allowance Account for Credit Losses

• When assets are impaired due to credit losses and the amounts are recorded in an allowance account, a reconciliation between the opening and closing balances should be disclosed



Defaults and Breaches

• Where an entity has loans payable at the end of the period, it should disclose the following:

• Details of the defaults

• Carrying amounts of loans in default, and

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• Carrying amounts of loans in default, and

• Whether the defaults were remedied

• The same information should be disclosed for a breach of a loan agreement during the period if the breach allows the lender to accelerate repayment



• Fair value disclosures are not required:

• When the carrying amount is a reasonable approximation of the fair value

• In other situations (IFRS 4) where the fair value cannot be measured reliably

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Statement of Comprehensive Income

Items of Income, Expense, Gains, or Losses• The following should be disclosed:

▫ Net gains/losses on

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▫ Net gains/losses on� financial assets/liabilities at FVTPL� FL/FA at AC� FA at FVOCI

▫ Interest income and expenses▫ Fee income and expenses▫ Interest income on impaired financial assets and▫ Impairment loss.



Fair Value

• An entity should disclose:

• The fair values of each class of financial assets/liabilities in such a way to allow them

to be compared with carrying values

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• The methods and assumptions used to calculate fair value

• Where fair values are based on published price quotations in an active market or

valuation techniques

• Where valuation techniques are used and fair value is based on assumptions that are not supported by prices from observable market transactions or observable market data; and

• Where changing assumptions will change the value significantly

IFRS 7 – Nature and Extent of Risks Arising from

Financial Instruments

Qualitative Disclosures

• An entity shall disclose for each type of risk:

• Exposures to risks and how they arise

• Objectives, policies, and processes for managing risks and methods used to

measure them and

• Any changes during the period

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• Any changes during the period

Quantitative Disclosures

• For each of the risks the entity should disclose:

• Summary quantitative data about the exposures at the end of the reporting period

(based on information provided internally to management), and

• Concentrations of risks

• If the end-of-period exposures are not representative of exposures during the period, additional disclosures should be given

IFRS 7 – Nature and Extent of Risks Arising from

Financial Instruments

Credit Risk

• An entity should disclose the following by class of financial instrument:

• The maximum exposure to credit risk

• A description of collateral held

• Information about credit quality of financial assets, and

• Carrying amounts of renegotiated financial assets that would otherwise be past due

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• Carrying amounts of renegotiated financial assets that would otherwise be past due

or impaired

Liquidity Risk

• The entity should disclose:

• A maturity analysis for financial liabilities that shows the remaining contractual

maturities, and

• A description of how it manages the liquidity risk

IFRS 7 – Nature and Extent of Risks

Arising from Financial Instruments

Market Risk

• An entity shall disclose a sensitivity analysis for each type of market risk, including methods and assumptions used to calculate the risk and any changes from the previous period

• The various market risks are defined in Appendix A to IFRS 7

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• The various market risks are defined in Appendix A to IFRS 7

▫ Currency risk is the risk that future cash flows or fair values will fluctuate due to foreign currency changes

▫ Interest rate risk is the risk that fair values or the cash flow will change due to changes in interest rates

▫ Other price risks include the risks that fair value and prices will fluctuate due to changes in other market prices, for example, share prices

IFRS 7 – Nature and Extent of Risks

Arising from Financial Instruments

Market Risk – Sensitivity Analysis

• In order to complete the sensitivity analysis, the following steps might be taken:

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1. Identify risks

2. Identify exposures at the balance sheet date

3. Determine which financial statement balances might change and why

4. Determine the appropriate level of aggregation for the analysis

5. Calculate and present the sensitivity analysis

Revisions

Clarify the following:

- meaning of currently has a legally enforceable right to set off, andright to set off, and

- that some gross settlement systems would be considered equivalent to the net settlement if they eliminate or result in insignificant process or cycle

Effective 01.01.2013



Offsetting of FA and FL

Disclose information to enable users of FS to evaluate the effect and potential effect of netting arrangements on the entity’s financial position

At end of each period, separately for recognised FA and FL,:

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At end of each period, separately for recognised FA and FL,:

- gross amounts

- amounts which are off set when determining the net amounts presented in SOFP, which meet the offsetting requirements of IAS 32

- net amounts

- amounts subject to an enforceable master netting arrangement (which do not meet IAS 32 offsetting requirements

- net amount after deducting the amounts

Preferably in a tabular format, unless more appropriate format



IAS 32 Offsetting requirement

“A FA and FL shall only be offset and the net amount presented in the SOFP, when and only when an entity;

- currently has a legally enforceable right to set off the recognised amounts, and

- intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously”

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liability simultaneously”

“In accounting for a transfer of a FA that does not qualify for de-recognition, the entity shall not offset the transferred asset and associated liability.”

Master netting arrangements, contracts subject to rights of set off that are not contingent on a future event but that do not meet the remaining criteria as illustrated above.

Transfers which are not de recognised

• Entity may transfer in such a way that part or all of the transferred assets do not qualify for de-recognition (has not transferred all the risks and rewards), disclose the following:

▫ Nature of transferred assets

▫ Nature of risks and rewards of ownership, to which entity is exposed

▫ Description of the nature of the relationship

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▫ Description of the nature of the relationship

▫ When the entity continues to recognise all the transferred assets, the CA of the transferred assets and related liabilities

Transfers which are de recognised

• Entity may have continuing involvement in derecognised FA, shall disclose, for each type of continuing involvement:

▫ CA of asset and liabilities recognised in SOFP and the line items where they are recognised

▫ FV of assets and liabilities which represent the entity’s continuing involvement

▫ Amount which best represents the entity’s maximum exposure to loss from

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▫ Amount which best represents the entity’s maximum exposure to loss from continuing involvement, etc

Common errors

Extracts from ROSC A&A report

• Report on Observance of Standards and Codes (“ROSC”) - Accounting and Auditing 2011

• Joint initiative World Bank/IMF• Joint initiative World Bank/IMF

• Boards and management abdicating responsibility for financial reporting and accounting policies to external auditors

Extract of ROSC A&A report – findings

• Poor application of fair value standards with over reliance on the uncorroborated work of “experts” – IAS 16 an IAS 40“experts” – IAS 16 an IAS 40

• Inadequate disclosures for some companies including listed companies (e.g. - IAS 1, IFRS 8, IAS 24)

Common errors and omissions

• Independent reviews▫ tendency to be economical with the information to

stakeholders, defeating the purpose of understandability of stakeholders, defeating the purpose of understandability of financial information

▫ “Administrative expenses – “other” eg up to $10m. No break downs

• Inconsistency between FS and other information disclosed in the financial statements ▫ (trustees, directors, management report (e.g.- going

concern).• Financial Instruments: Disclosures –

▫ generally appears to be considered to be for financial entities

Common errors and omissions (cont.)

• IFRS 8 (Operating Segments) – Segment information disclosed in the financial statements information disclosed in the financial statements is not consistent with other disclosures

• IAS 1 discussion of significant judgments and estimation uncertainties

• IAS 24 – Inadequate disclosures relating to related party transactions, which could be masking corporate governance issues

Common errors and omissions (cont.)

• Inconsistency - press statements and the annual reports that are published, with no accompanying explanations or reconciliationsaccompanying explanations or reconciliations

• SOCI - Profit from continuing operations $xx. No mention of discontinued operations, no impact on IFRS 8

Extracts of some errors

impact on IFRS 8

• CEO/Chairman’s report highlights certain operational segments, whilst different segment information is provided for in operating segments note

• Significant estimates and judgements at times doesn’t disclose the specific judgements and estimates used. e.g.

Extracts of some errors

estimates used. e.g. ▫ Impairment loss $xxx (no inputs in determining

recoverable amount)▫ Revaluation of PPE (no mention of key inputs in

determining fair values)▫ Defined benefit pension plan (actuarial valuation

assumptions, at times not clear whether the valuation has been done in the current year or otherwise)

• Subsequent events not disclosed, yet accompanying information has details after reporting date, but before issue date

Extracts of some errors - con’t

reporting date, but before issue date

• Accounting policy notes omitted

▫ IAS17

• Chairman’s statement refers to the disposal of shareholdings in Subsidiary A and Associate B but there is no further reference to these.


but there is no further reference to these.

• The disposals do not appear in the Statement of Comprehensive Income or in the Statement of Cash Flows nor in the movements in investments. It is impossible to say what has happened to the investments.

Financial instruments

“The classes of FI presented on the face of the financial statements cannot be


the financial statements cannot be reconciled to the classification of FI made in the accounting policy notes”

Sensitivity analyses/value at risk disclosures missing

• Currency sensitivity being done holistic instead of per significant currency


• Significant categories of revenue recognised during the period were not disclosed.

• Receivables disclosures are not adequate as per IFRS 7.

Recap

Umoja Phiri

21 Golden Stairs, Hendrikz Way, Mt Pleasant,21 Golden Stairs, Hendrikz Way, Mt Pleasant,

Box 3792, Harare, Zimbabwe

+263 4 2918 447

+263 773 732 437

[email protected]

http://fourcubits.webs.com

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IFRS 7 and common errors - icaz.org.zw · IFRS 7 –Objective and Scope • contains prescriptive guidance on required disclosures that are meant to assist users in assessing: 1