IFRS7 Financial Instruments:
Disclosures, issued last August, will have a widespread impact. ‘It does not
only apply to banks, as some people may think,’ says Meng Fong, a director
within PricewaterhouseCoopers’ global capital markets group.
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‘It applies to all companies as practically all companies have some form of
financial instruments. The extent of disclosure required will reflect the use of
financial instruments in those companies.’
It applies for accounting periods beginning on, or after 1 January 2007, so
companies with December year-ends will need to comply in their December 2007
reports and accounts. But it needs to be considered sooner because 2006
comparatives will be required. ‘Effectively, IFRS7 has already started,’ warns
Complying with IFRS could prove challenging, partly because many companies
are still struggling with implementing the complex financial instruments
‘IFRS7 is supposed to make the disclosures under IAS39 simpler, but it may
increase the burden because of the additional disclosure requirements,’ says
Fong gives examples of the implications and challenges facing companies when
they begin applying IFRS7. First, they may be required to disclosure data not
currently available from their company’s reporting systems. ‘They would need to
upgrade the systems and processes or put in new systems and processes to
generate that data,’ says Fong.
‘Because IFRS7 already applies [in terms of the comparatives], it is
recommended that companies start looking at such changes now, because it’s
easier to capture that data as you go along rather than trying to do it
A second challenge is that following the disclosure requirements in a
mechanical way could leave users of accounts with the wrong impression. This is
because IFRS7 is a mixed measurement model. ‘Some transactions that have the
same economic value may give different accounting results,’ explains Fong.
‘Companies may need to disclose even more than the requirements to ensure
that readers get the correct message. The minimum requirement under IFRS7 may
give the wrong impression.’ Companies need to think whether the disclosures they
prepare accurately reflect what they do.
A third challenge is that the qualitative and quantitative disclosures
required are to be made through the eyes of management. ‘It’s to improve
transparency and help investors assess how companies are managing risk,’ says
Fong. ‘There may be sensitive information that companies have to disclose. That
may force companies to move to best practice in order to improve their
Companies need to take action early to prepare for compliance with the
standard. ‘Companies should start analysing and understanding it as a first
step. The second step would be to develop pro forma disclosures that would be
required under IFRS7,’ says Fong.
Companies can then compare those pro forma disclosures with the data they
currently have available, identifying any gaps in the data. ‘The next step is
then to try to eliminate gaps by updating or putting in new systems and
processes,’ says Fong.
The amount of work will depend on each company’s circumstances. ‘It depends
on the complexity and volume of use of financial instruments,’ Fong notes. PwC’s
corporate treasury solutions group has been looking at the implications of IFRS7
for sectors outside financial services.
It identified more than 70 disclosure requirements relating to information
that was usually not directly available from the accounting systems. ‘To
generate such data will require companies to reformat or rejig their existing
data and systems,’ says Fong.
He advises looking at long-term solutions for complying with the new
standard, rather than short-term fixes and recommends embedding compliance at
the appropriate level in the organisation.
Some companies are in danger of being caught out by IFRS7. ‘Companies are
still struggling with IAS39,’ says Fong. ‘They may be tempted to think of IFRS7
as next year’s problem, without fully understanding that because of the
comparatives, it’s much more efficient to collect the information now.’
Collecting some types of information retrospectively may require considerable
resources and incur substantial costs. ‘So companies may be caught out and go
through a lot of pain if they don’t look at IFRS 7 soon,’ warns Fong.
IFRS7: the requirements
IFRS7 replaces IAS30, Disclosures in the Financial Statements of Banks and
Similar Financial Institutions, and some of the requirements in IAS32, Financial
Instruments: Disclosure and Presentation.
IFRS7 applies to all risks arising from all financial instruments, except
those covered by another more specific standards (such as post-employment
benefits, share-based payment and insurance contracts). The standard applies to
all entities but the extent of disclosure required depends on the extent of the
entity’s use of financial instruments and its exposure to risk.
Under IFRS7, companies are required to disclose: the significance of
financial instruments for an entity’s position and performance. These
disclosures incorporate many of the requirements previously in IAS32.
Qualitative and quantitative information about exposure to risks arising from
financial instruments, including specified minimum disclosures about credit
risk, liquidity risk and market risk. 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
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