August 2005
Financial Instruments: Disclosures
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COPYRIGHT
© 2005 Commonwealth of Australia
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ISSN 1036-4803
AASB 71COPYRIGHT
CONTENTS
Preface
Comparison With International Pronouncements
Accounting Standard
AASB 7 Financial Instruments: Disclosures
Paragraphs
Objective1 – 2
ApplicationAus2.1 – Aus2.7
Scope3 – 5
Classes of Financial Instruments and Level of Disclosures6
Significance of Financial Instruments for Financial Position
and Performance7
Balance Sheet
Categories of Financial Assets and Financial Liabilities8
Financial Assets or Financial Liabilities at Fair Value through Profit or Loss 9 – 11
Reclassification12
Derecognition13
Collateral14 – 15
Allowance Account for Credit Losses16
Compound Financial Instruments with Multiple Embedded Derivatives 17
Defaults and Breaches18 – 19
Income Statement and Equity
Items of Income, Expense, Gains or Losses20
Other Disclosures
Accounting Policies21
Hedge Accounting22 – 24
Fair Value25 – 30
Nature and Extend of Risks Arising from Financial Instruments31 – 32
Qualitative Disclosures33
Quantitative Disclosures34 – 35
Credit Risk36 – 38
Liquidity Risk39
Market Risk40 – 42
Appendices
A. Defined TermsPage 25 – 26
B. Application GuidancePage 27 – 36
C. Amendments to other Australian Accounting StandardsPage 37 – 44
D. Amendments to AASB 7 if AASB 2005-4 Amendments
to Australian Accounting Standards (relating to the fair
value option) has not been appliedPage 45 – 46
IMPLEMENTATION GUIDANCE
(available to AASB online subscribers or through the IASB)
BASIS FOR CONCLUSIONS ON IFRS 7
(available to AASB online subscribers or through the IASB)
Australian Accounting Standard AASB 7 Financial Instruments: Disclosures is set out in paragraphs 1 – 45 and Appendices A – D. All the paragraphs have equal authority. Paragraphs in boldtype state the main principles. Terms defined in this Standard are in italics the first time they appear in the Standard. AASB7 is to be read in the context of other Australian Accounting Standards, including AASB1048 Interpretation and Application of Standards, which identifies the UIG Interpretations. In the absence of explicit guidance, AASB108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies.
Preface
Reasons for Issuing AASB 7
The Australian Accounting Standards Board (AASB) is implementing the Financial Reporting Council’s policy of adopting the Standards of the International Accounting Standards Board (IASB) for application to reporting periods beginning on or after 1January 2005. The AASB has decided it will continue to issue sector-neutral Standards, that is, Standards applicable to both for-profit and not-for-profit entities, including public sector entities. Except for Standards that are specific to the not-for-profit or public sectors or that are of a purely domestic nature, the AASB is using the IASB Standards as the “foundation” Standards to which it adds material detailing the scope and applicability of a Standard in the Australian environment. Additions are made, where necessary, to broaden the content to cover sectors not addressed by an IASB Standard and domestic, regulatory or other issues.
The IASB defines International Financial Reporting Standards (IFRSs) as comprising:
(a)International Financial Reporting Standards;
(b)International Accounting Standards; and
(c)Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).
The Australian equivalents to IFRSs are:
(a)Accounting Standards issued by the AASB that are equivalent to Standards issued by the IASB, being AASBs1–99 corresponding to the IFRS series and AASBs101–199 corresponding to the IAS series;
(b)UIG Interpretations issued by the AASB corresponding to the Interpretations adopted by the IASB, as listed in AASB1048 Interpretation and Application of Standards.
Main Features of this Standard
Application Date
This Standard is applicable to annual reporting periods beginning on or after 1January2007 with early adoption permitted for annual reporting periods beginning on or after 1 January 2005.
First-time Application and Comparatives
An entity that adopts Australian-equivalents-to-IFRSs before 1 January 2006 and chooses to adopt AASB 7 Financial Instruments: Disclosures in its first Australian-equivalents-to-IFRSs financial report need not present the comparative disclosures required by AASB 7 in those financial report.
Main Requirements
This Standard applies to all risks arising from all financial instruments, except those instruments listed in paragraph 3. This Standard applies to all entities, including entities that have few financial instruments (e.g. a manufacturer whose only financial instruments are accounts receivable and accounts payable) and those that have many financial instruments (e.g. a financial institution). However, the extent of disclosure required depends on the extent of the entity’s use of financial instruments and on its exposure to risks arising from financial instruments.
This Standard requires disclosure of:
(a)the significance of financial instruments for an entity’s financial position and performance. These disclosures incorporate many of the requirements previously in AASB 132 Financial Instruments: Disclosure and Presentation; and
(b)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 related risk.
Differences between this Standard and AASB 130 & AASB 132
This Standard supersedes AASB 130 Disclosures in the Financial Statements of Banks and Similar Financial Institutions and the disclosure requirements of AASB 132. The presentation requirements of AASB 132 remain unchanged.
The primary differences between this Standard and AASB 130 are:
(a)this Standard applies to all types of financial instruments of all entities except for those financial instruments listed in paragraph 3; and
(b)unlike AASB 130 that prescribes both presentation and disclosure requirements in the financial reports of banks and similar financial institutions, this Standard prescribes disclosure requirements only.
The principle differences between this Standard and the superseded disclosure requirements of AASB 132 are:
(a)this Standard broadens the scope of financial instruments covered under the Standard to include financial instruments originally covered by AASB 130;
(b)this Standard requires enhanced balance sheet and income statement disclosures; and
(c)this Standard prescribes both quantitative and qualitative disclosures about entities’ exposures to risks arising from financial instruments, and minimum disclosures about credit risks, liquidity risks and market risks.
Further, this Standard does not retain the relief from making parent disclosures previously available under AASB 130 and AASB 132.
AASB 71PREFACE
Comparison with International Pronouncements
AASB 7 and IFRS 7
AASB 7 is equivalent to IFRS 7 Financial Instruments: Disclosures issued by the IASB. Paragraphs that have been added to this Standard (and do not appear in the text of the equivalent IASB Standard) are identified with the prefix “Aus”, followed by the number of the relevant IASB paragraph and decimal numbering.
Compliance with IFRS 7
Entities that comply with AASB7 will simultaneously be in compliance with IFRS7.
AASB 7 and IPSAS 15
International Public Sector Accounting Standards (IPSASs) are issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants.
IPSAS15 Financial Instruments: Disclosure and Presentation (December2001) is drawn primarily from the 2000 version of IAS 32Financial Instruments: Disclosure and Presentation. The main differences between IPSAS15 and AASB7 include the differences between AASB 7 and AASB 130 and AASB 132 noted above. Additional main differences are:
(a)the inclusion in AASB 7 of additional guidance on the componentisation of a compound instrument on initial recognition;
(b)the requirement in AASB 7 to classify derivatives based on an entity’s own shares; and
(c)IPSAS 15 has fewer disclosure requirements than AASB 7.
AASB 71COMPARISON
aCCOUNTING STANDARD AASB 7
The Australian Accounting Standards Board makes Accounting Standard AASB7 Financial Instruments: Disclosures under section334 of the Corporations Act 2001.
D.G. BoymalDated 31 August 2005 / Chair – AASB
aCCOUNTING STANDARD AASB 7
Financial Instruments: Disclosures
Objective
1The objective of this Standard is to require entities to provide disclosures in their financial report that enable users to evaluate:
(a)the significance of financial instruments for the entity’s financial position and performance; and
(b)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.
2The principles in this Standard complement the principles for recognising, measuring and presenting financial assets and financial liabilities in AASB 132 Financial Instruments: Presentation and AASB 139 Financial Instruments: Recognition and Measurement.
Application
Aus2.1This Standard applies to:
(a)each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b)general purpose financial reports of each other reporting entity; and
(c)financial reports that are, or are held out to be, general purpose financial reports.
Aus2.2This Standard applies to annual reporting periods beginning on or after 1January2007.
Aus2.3This Standard may be applied to annual reporting periods beginning on or after 1January2005 but before 1 January 2007. An entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act may apply this Standard to such annual reporting periods, when an election has been made in accordance with
subsection 334(5) of the Corporations Act. When an entity applies this Standard to such an annual reporting period, it shall disclose that fact.
Aus2.4The requirements specified in this Standard apply to the financial report where information resulting from their application is material in accordance with AASB1031 Materiality.
Aus2.5When applied or operative, this Standard supersedes:
(a)AASB130Disclosures in the Financial Statements of Banks and Similar Financial Institutions as notified in the Commonwealth of Australia Gazette NoS 204, 22 July 2004; and
(b)paragraphs 51-95 of AASB132 Financial Instruments: Disclosure and Presentation as notified in the Commonwealth of Australia Gazette NoS 204, 22 July 2004.
Aus2.6Both AASB130 and the disclosure requirements of AASB132 remain applicable until superseded by this Standard.
Aus2.7This Standard will be registered on the Federal Register of Legislative Instruments in accordance with the Legislative Instruments Act 2003.
Aus2.8Notwithstanding paragraph Aus2.3, if an entity applies this Standard to annual reporting periods beginning before 1 January 2006 and it does not apply AASB 139 as amended by
AASB 2005-4 it shall for that period apply this Standard as amended by Appendix D to this Standard.
Scope
3This Standard shall be applied by all entities to all types of financial instruments, except:
(a)those interests in subsidiaries, associates and joint ventures that are accounted for in accordance with AASB 127 Consolidated and Separate Financial Statements, AASB 128 Investments in Associates or AASB 131 Interests in Joint Ventures. However, in some cases, AASB 127, AASB 128 or AASB 131 permits an entity to account for an interest in a subsidiary, associate or joint venture using AASB 139; in those cases, entities shall apply the disclosure requirements in AASB 127, AASB 128 or AASB 131 in addition to those in this Standard. Entities shall also apply this Standard to all derivatives linked to interests in subsidiaries, associates or joint ventures unless the derivative meets the definition of an equity instrument in AASB 132;
(b)employers’ rights and obligations arising from employee benefit plans, to which AASB 119 Employee Benefits applies;
(c)contracts for contingent consideration in a business combination (see AASB 3 Business Combinations). This exemption applies only to the acquirer;
(d)insurance contracts as defined in AASB 4Insurance Contracts. However, this Standard applies to derivatives that are embedded in insurance contracts if AASB 139 Financial Instruments: Measurement and Recognition requires the entity to account for them separately. Moreover, an issuer shall apply this Standard to financial guarantee contracts if the issuer applies AASB 139 in recognising and measuring the contracts, but shall apply AASB 1023 General Insurance Contracts if the issuer elects, in accordance with paragraph 2.2(f) of AASB 1023, to apply AASB 1023 in recognising and measuring them; and
(e)financial instruments, contracts and obligations under share-based payment transactions to which AASB 2 Share-based Payment applies, except that this Standard applies to contracts within the scope of paragraphs 5-7 of AASB 139.
4This Standard applies to recognised and unrecognised financial instruments. Recognised financial instruments include financial assets and financial liabilities that are within the scope of AASB 139. Unrecognised financial instruments include some financial instruments that, although outside the scope of AASB 139, are within the scope of this Standard (such as some loan commitments).
5This Standard applies to contracts to buy or sell a non-financial item that are within the scope of AASB 139 (see paragraphs 5-7 of
AASB 139).
Classes of financial instruments and level of disclosure
6When this Standard requires disclosures by class of financial instrument, an entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An entity shall provide sufficient information to permit reconciliation to the line items presented in the balance sheet.
Significance of financial instruments for financial position and performance
7An entity shall disclose information that enables users of its financial report to evaluate the significance of financial instruments for its financial position and performance.
Balance sheet
Categories of financial assets and financial liabilities
8The carrying amounts of each of the following categories, as defined in AASB 139, shall be disclosed either on the face of the balance sheet or in the notes:
(a)financial assets at fair value through profit or loss, showing separately (i) those designated as such upon initial recognition and (ii) those classified as held for trading in accordance with AASB 139;
(b)held-to-maturity investments;
(c)loans and receivables;
(d)available-for-sale financial assets;
(e)financial liabilities at fair value through profit or loss, showing separately (i) those designated as such upon initial recognition and (ii) those classified as held for trading in accordance with AASB 139; and
(f)financial liabilities measured at amortised cost.
Financial assets or financial liabilities at fair value through profit or loss
9If the entity has designated a loan or receivable (or group of loans or receivables) as at fair value through profit or loss, it shall disclose:
(a)the maximum exposure to credit risk (see paragraph 36(a)) of the loan or receivable (or group of loans or receivables) at the reporting date;
(b)the amount by which any related credit derivatives or similar instruments mitigate that maximum exposure to credit risk;
(c)the amount of change, during the period and cumulatively, in the fair value of the loan or receivable (or group of loans or receivables) that is attributable to changes in the credit risk of the financial asset determined either:
(i)as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk; or
(ii)using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the asset;
changes in market conditions that give rise to market risk include changes in an observed (benchmark) interest rate, commodity price, foreign exchange rate or index of prices or rates; and
(d)the amount of the change in the fair value of any related credit derivatives or similar instruments that has occurred during the period and cumulatively since the loan or receivable was designated.
10If the entity has designated a financial liability as at fair value through profit or loss in accordance with paragraph 9 of AASB 139, it shall disclose:
(a)the amount of change, during the period and cumulatively, in the fair value of the financial liability that is attributable to changes in the credit risk of that liability determined either:
(i)as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk (see Appendix B, paragraph B4); or
(ii)using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the liability;
changes in market conditions that give rise to market risk include changes in a benchmark interest rate, the price of another entity’s financial instrument, a commodity price, a foreign exchange rate or an index of prices or rates. For contracts that include a unit-linking feature, changes in market conditions include changes in the performance of the related internal or external investment fund; and
(b)the difference between the financial liability’s carrying amount and the amount the entity would be contractually required to pay at maturity to the holder of the obligation.
11The entity shall disclose:
(a)the methods used to comply with the requirements in
paragraphs 9(c) and 10(a); and
(b)if the entity believes that the disclosure it has given to comply with the requirements in paragraph 9(c) or 10(a) does not faithfully represent the change in the fair value of the financial asset or financial liability attributable to changes in its credit risk, the reasons for reaching this conclusion and the factors it believes are relevant.