• Project carried over from IASC
• Discussed at June 2001 IASB Meeting
• Discussed with SAC: July 2001
• Discussed and added to Agenda at July 2001 IASB Meeting
• Discussed at November 2001 IASB Meeting
• Discussed at July 2002 IASB Meeting
• Discussed at December 2002 IASB Meeting
• Discussed at May 2003 IASB Meeting
• Discussed at July 2003 IASB Meeting
• Discussed at May 2004 IASB Meeting
• Exposure Draft ED 7 Financial Instruments: Disclosures
• Discussed at December 2004 IASB Meeting
• Discussed at January 2005 IASB Meeting
• Discussed at February 2005 IASB Meeting
• Discussed at March 2005 IASB Meeting
• Discussed at May 2005 IASB Meeting
• 18 August 2005 – IFRS 7 Financial Instruments: Disclosures issued
  Click for IASB Press Release (PDF 57k).

Timetable

• Click for IASB Project Timetable

Background

This project had started out to develop a Standard on presentation and disclosure in the financial statements of entities that carry out deposit-taking, lending, or securities business activities. The Standard would replace IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions. Reconsideration of IAS 30 is necessary particularly in light of developments in the industry and the issuance of IAS 1 (revised 1997), Presentation of Financial Statements, and IAS 39, Financial Instruments: Recognition and Measurement.

However, in late 2002, the IASB made a fundamental change in the direction of this project. The project is now, more broadly, a project on disclosure of:

• qualitative information about risk exposures arising from financial instruments;
• quantitative data based on management's risk management system; and
• minimum disclosures about credit risk, liquidity risk, and market risk (including interest rate risk).

As the approach to the project has shifted, so has the name of the project. It has progressed through the following:

• Disclosure and Presentation by Banks and Similar Financial Institutions
• Financial Activities (Deposit-Taking, Lending, and Securities Activities): Disclosure and Presentation
• Disclosures of Risks Arising from and Other Disclosures Relating to Financial Instruments

Discussion at the Board's December 2002 Meeting

The IASB's advisory committee on disclosure of financial activities has recommended:

• a financial risk disclosure principle and requirements applicable to all entities
• three balance sheet and income statement disclosure requirements
• a plan for moving the project forward.

Financial risk disclosure principle and requirements

Qualitative and quantitative information would be required about:

• credit risk
• quality of assets – past due and impaired financial assets
• liquidity risk
• market risk.

Operational risk disclosure

The advisory committee had recommended certain operational risk disclosures that the Board concluded would better be addressed in the Board's planned narrative reporting (MD&A).

Balance sheet and income statement disclosures

The Board discussed the following proposed disclosures:

• balance sheet amounts based on the measurement basis of the financial asset and/or financial liability;
• income statement amounts based on the measurement basis of the financial asset and/or financial liability; and
• information about the loan loss allowance account

Project plan

The Board concluded that it is not likely that these proposals can be adopted in time for application in 2005 (when Europe, Australia, and perhaps other jurisdictions will be adopting IFRS for the first time). The plan, therefore, is to develop an Exposure Draft that would be effective after 2005, perhaps with earlier adoption permitted or encouraged. Eventually, the principles and requirements in the Exposure Draft could be merged with IAS 32 and IAS 39 into a single financial instruments standard.

Discussion at the Board's May 2003 Meeting

The Staff updated the Board on the work of the Financial Activities Advisory Group from December 2002 to date, focusing on the area of capital risk disclosures. Following, the Board discussed specific issues and agreed on the following:

• The standard should not require disclosure of capital requirements imposed by external parties (regulators). However, entity-specific targets and industry standard targets would need to be disclosed. The entity would also be required to disclose the fact (if applicable) that a breach has occurred at any point during the reporting period and the quantitative steps taken to correct that breach. The entity would be required to disclose the existence of forbearance, if one occurs.
• There is a need for a final standard by 2005, as it simplifies and improves the capital risk disclosures from those in IAS 30 and 32. The staff will work to complete an ED that the Board can expose in 2004, so that entities would be able to voluntarily adopt the standard for 2005. However, the Board's agenda is extremely full, and the effective date of a final Standard may have to be delayed until after 2005. If this project is not in place by 2005, IAS 30 and 32 will still apply to capital risk disclosures.
• This project will not address improvements to IAS 14, Segment Reporting.

Discussion at the Board's July 2003 Meeting

The Board was presented with:

• A draft IFRS: Financial Risk Disclosures.
• A draft Basis for Conclusions for the draft IFRS.
• Draft Implementation Guidance for the draft IFRS.
• A draft Amendment to IAS 1 that contains a capital disclosure requirement.
• Draft Amendments to IAS 32 that includes additional balance sheet and income statement disclosure requirements.
• A draft memo summarising suggested changes to IAS 30 as part of IAS 32.

IFRS on financial risk disclosures

The Board agreed that a preparer could not apply the draft interpretation without reference to the draft implementation guidance and basis for conclusions. Therefore, the Board requested sections of these to be included in the Standard.

The Board agreed that the scope should be the same than IAS 32.

The Board agreed with the following decisions FAAC made and to include them in the Standard:

(1) There should be a disclosure requirement for information about 'other' risks (eg residual value risk) that underlie financial instruments. By including this requirement the FAAC acknowledged that there are instances when an entity is exposed to other risks associated with financial instruments that warrant disclosure.

(2) For credit risk - To include a requirement for disclosing information about collateral taken. Ie this information is useful because it provides information about the frequency of such activities and the entity's ability to obtain and dispose of the collateral.

(3) For interest rate risk - To add 'Interest Rate Risk' as a risk disclosure category and to include in this disclosure requirement both (1) cash flow interest rate risk and (2) fair value interest rate risk. The FAAC concluded, that unlike IAS 32, it would not distinguish between the two because this distinction is an accounting convention. In practice, for the purpose of financial risk management no distinction is made.

(4) For market risk - There should be a minimum requirement to disclose further information, such as significant terms and conditions, when the sensitivity analysis disclosure is unrepresentative of the risk inherent in a financial instrument. An example may be where an instrument contains significant optionality that is not revealed by the sensitivity analysis.

(5) For market risk - There should be a requirement to disclose asset quality as it relates to market risk. For example, the size of an entity's holding of a specific equity security impacts the quality of the financial asset (ie the value of the entity's equity holdings, its ability to dispose of them quickly).

Draft implementation guidance

The Board agreed with the recommendation not to add supplementary implementation guidance.

Draft amendment to IAS 1 that incorporates a capital disclosure requirement

The Board asked the Staff to find another term than "industry-wide capital requirements"

The Board decided not to add 'shall be provided to the extent it is not prohibited by law' to the capital disclosure requirement.

The Board agreed to add an illustrative example of capital disclosure requirements.

Draft amendments to IAS 32 that includes additional balance sheet and income statement disclosure requirements

The Board agreed with the following balance sheet and income statement disclosure principle: "An entity shall disclose information that enables users of its financial statements to evaluate the significance of financial instruments to an entity's financial position and performance."

Timetable

The Board agreed on the proposed timetable.

Discussion at the IASB Meeting May 2004

The Board discussed its project on financial risk disclosures and other amendments to financial instrument disclosures. The likely effect of this project will be to withdraw IAS 30 and move some (if not all) of the IAS 32 disclosures to a new standard.

The Board asked the staff to review the disclosures in IAS 32 and determine which disclosures should be retained. The Board intends to issue an Exposure Draft in the third quarter of 2004, with a final standard in 2005. Early adoption will be encouraged, and therefore this standard may be applied by 2005 first time adopters. If early adoption is not elected, applying the standard would be mandatory for financial periods beginning on or after 1 January 2007.

The IASB noted the FASB has a project that will likely require disclosures of similar items and that comments related to the differences in the IASB and FASB proposals should be requested in the ED.

The Board agreed that implementation guidance giving examples should be provided. However, IAS 1 will likely be amended to incorporate an example of a non-financial institution. In addition, the disclosure requirements in IFRS 4 will likely be changed to ensure that companies do not have to follow two different disclosure regimes.

IASB Exposure Draft ED 7

On 22 July 2004, the IASB issued exposure draft ED 7 Financial Instruments: Disclosures. ED 7 would:

• add certain new disclosures about financial instruments to those currently required by IAS 32,
• replace the disclosures now required by IAS 30, and
• put all of those financial instruments disclosures together in a new standard on Financial Instruments: Disclosures. IAS 32 would then deal only with financial instruments presentation matters.

Proposed effective date is annual periods beginning on or after 1 January 2007, with earlier application encouraged. Details about ED 7 may be found Here.

Discussion at the December 2004 IASB Meeting

The Board considered responses to ED 7. It was noted that there were a large number of minor comments raised by different respondents, and that it would be most expedient for the Board to form a small group to identify which of these issues justify further Board discussion.

Respondents generally agreed that the Board should issue a standard containing the disclosure requirements in relation to financial instruments. Some Board members questioned whether it would be best to combine these requirements into IAS 32 to minimise the number of financial instruments related standards on issue. However, the Board agreed that as the liability/equity distinction is to be reconsidered in the future, it is easier to split the disclosures out into a separate standard at this juncture.

Board members considered whether the standard should try and separate the disclosure requirements into different categories - one for all IFRS preparers and one for financial institutions. However, the Board confirmed its earlier decision that it would not be possible to operationalise such a proposal, particular in trying to define the distinguishing features of the different types of entity. The Board agreed to keep a watching brief - the objective is that the disclosures made under ED 7 should fit the circumstances of the entity - if, for example, it appeared financial institutions were making insufficiently detailed disclosures to comply with the disclosure principles the requirement for a separate set of more detailed requirements will be reconsidered.

The Board confirmed its intention that the standard will require:

• Disclosure of financial assets and financial liabilities by classification.
• Net gains or net losses by classification.
• Fee income and expense.

The Board agreed to reconsider at a later meeting the appropriateness of the proposed disclosures of information about any allowance account.

Respondents expressed significant concerns about the disclosure of the fair value of collateral and other credit enhancements. The range of concerns included that the information was difficult to obtain, may be misleading, and is potentially not worth having. The Board agreed that there was a need to disclose the relationship between collateral and the related liabilities for performing assets. A view was expressed that the requirement to disclose collateral was adequately dealt with by the impairment requirements where impairments had been recognised, and therefore the key disclosure issue rests with assets that are not performing but not yet impaired.

A large number of constituents objected to the proposed disclosure of a sensitivity analysis, citing concerns such as cost/benefit, comparability, and commercial sensitivity. It was noted that comparability should not be considered to mean that all the entities had completed their sensitivity analysis in exactly the same manner. Some constituents supported exemptions to this requirement for certain entities. The Board noted that it was inappropriate for SMEs to be excluded as this was a decision to be taken in the course of the SME process. The Board will further consider the appropriateness of the sensitivity analysis disclosure at a future meeting.

There was strong disagreement with the proposed disclosures relating to capital. Many constituents opposed the disclosure of external capital requirements, and an overwhelming number opposed the disclosure of internal capital requirements. Constituents felt that they may be penalised by the market if they disclosed breaches of internal capital requirements, and staff acknowledged a risk that as a response entities would set their requirements such that they would never be breached, and would therefore be meaningless. It was noted that the regulators involved in the development of the exposure draft had initially indicated their acceptance of these disclosures but some regulators had subsequently expressed doubts as to the appropriateness of the disclosures.

The Board confirmed the effective date and transitional provisions would be as exposed, with one change. An existing IFRS user that early adopts ED 7 will not be required to provide comparative information in respect of those disclosures not already required by IAS 32. It was noted that some of the new disclosures proposed by ED 7 – for example, the sensitivity analysis – are of limited value in historical information, and therefore granting an exemption did not detract greatly from information provided to users.

Many respondents did not agree that risk management type disclosures should be required in the financial report. Some noted that this seems unusual given that they are also in many jurisdictions required in the MD&A. The Board noted that they only have jurisdiction over the financial statements themselves, and entities could choose to incorporate information by cross reference rather than by duplication, providing that information would be subject to the audit requirements applying to the financial statements.

Many respondents supported the proposal that the disclosure requirements of IFRS 4 be changed for consistency with those proposed in the ED. However many insurance entities objected to this proposal, preferring instead to wait until Phase 2 of the insurance project is completed before making further comprehensive changes. The Board agreed that it would determine the requirements to be contained in the final standard and would then decide in conjunction with the insurance team how, if at all, these should be introduced into the requirements for accounting for insurance activities.

In general respondents felt that the implementation guidance was insufficient. Respondents requested more guidance, more examples and more illustrative disclosures. The Board discussed releasing the standard prior to the implementation guidance but agreed that this was not acceptable, as the implementation guidance is a good way of road testing the standard before release. The Board agreed to consider the extent of disclosures appropriate a t a future meeting after this has been considered by a smaller group and the advisory group.

A majority of respondents agreed that the additional disclosures proposed by the FASB's recent exposure draft should not be incorporated into the final standard. The Board agreed that inclusion of the additional requirements should not be required, and that as the requirements are in exposure draft format only, the Board should note that the FASB's thinking is still evolving. The Board agreed to advise the FASB that it would not include the additional requirements in the final standard and its reasons for choosing not to do so.

The Board noted that many respondents did not appear to have considered the issue of materiality in relation to disclosure – if a disclosure is not material it is not required. The Board agreed that the term 'minimum disclosure' had contributed to this confusion. The Board agreed to include in the basis for conclusions a statement regarding the impact of materiality considerations on the disclosures made and referring readers to IAS 1.

The Board will further debate the issues raised above that were not cleared at the meeting at a future meeting, as well as considering issues identified by the small group as needing Board consideration.

Discussion at the January 2005 Meeting

Capital disclosures

The proposed requirements in ED 7 would result in entities providing disclosures that are intended to enable users to evaluate the entity's capital. Those provisions in ED 7 attracted the most criticism of any of the proposals in the ED. Of the 95 respondents that commented on the capital disclosures, 85 (89%) disagreed with some aspect of them.

The staff recommended that the Board:

a. confirms its proposal to require disclosure of a description of what the entity regards as capital;

The Board agreed but asked the Staff to clarify that this disclosure requirement pertains to capital that an entity manages as opposed to what that entity 'regards' as capital. In addition, clarification should be made that capital and equity are not references to the concept.

b. does not require the proposed disclosure of whether the entity has complied with the capital targets set by management, or the consequences of any non-compliance.

The Board agreed, after much debate, to remove the requirement (consistent with the Staff proposal) on the basis that it would not be operational. The original intention of this requirement was to act as an early warning mechanism of possible breaches in the future.

c. confirms the proposals in ED 7 to require disclosure of qualitative information about the entity's objectives, policies and processes for managing capital;

The Board agreed.

d. does not make a distinction between the disclosures required from regulated entities compared to non-regulated entities;

It was not clear whether the Board agreed or disagreed with this recommendation.

e. confirms the proposals in ED 7 not to require disclosure of the actual level of any externally imposed capital requirements; and

The Board agreed.

f. confirms the proposals in ED 7 to disclose compliance with externally imposed capital requirements.

The Board agreed.

The Board considered the above recommendations as a package and agreed that the proposals achieved their intention.

Overall, the Staff recommended that any disclosure requirements about capital should be in the form of an amendment to IAS 1, rather than within the new IFRS. The Board agreed.

Disclosure of the fair value of collateral and other credit enhancements

Regarding the disclosure of the fair value of collateral and other credit enhancements, the Staff recommended that the Board:

a. replace the disclosure of fair value of collateral pledged as security and other credit enhancements proposed in paragraph 39(b) of ED 7 with the requirement to disclose, by class of financial instrument with credit risk, the amount of exposure to credit risk at the reporting date after taking into account any collateral or other credit enhancements, unless such disclosures would be impracticable, in which case the entity shall state that fact.

The Board agreed.

b. clarify that 'other credit enhancements' include master netting agreements.

The Board agreed but asked the Staff to delete the word 'master' and refer to 'netting agreements'.

c. retain the 'impracticable' exemption. Thus, where an entity has financial instruments with credit risk that are mitigated by collateral whose fair value cannot be practicably determined, the entity shall disclose the maximum exposure to credit risk without taking account of any collateral pledged, describe any collateral pledged as security and state that it is not practicable to determine the fair value of this collateral.

Concerns were expressed regarding the 'impracticable' notion and the Board discussed this issue at length.

Proposals to amend paragraph 39 of the ED as depicted below (credit risk) were rejected by the Board, other than the insertion to 39(a) except that the word 'master' would be deleted to leave a reference to 'netting agreements':

Credit risk 39. An entity shall disclose by class of financial instrument with credit risk: a. the amount that best represents its maximum exposure to credit risk at the reporting date without taking account of any collateral pledged or other credit enhancements (eg master netting agreements); b. in respect of the amount disclosed in (a), a description of collateral pledged as security and other credit enhancements and, unless impracticable, their fair value; and c. the amount of exposure to credit risk at the reporting date after taking into account any collateral or other credit enhancements, unless such disclosures would be impracticable, in which case the entity shall state that fact; and d. information about the credit quality of financial assets with credit risk that are neither past due nor impaired.

Disclosures regarding the allowance account

The staff recommended that the Board retain the requirement to disclose a reconciliation of changes in the allowance account, and not to extend the requirement to the provision of equivalent information if an allowance account is not used.

The Board made the point that IAS 39 requires an allowance account due to the collective impairment test and that any requirement in this area should be for all entities and not just financial institutions. Regarding the situation where an allowance account is not used, Board members appeared to support the disclosure of similar information as in the situation where an allowance account is in use, as this provides useful information regarding losses.

Discussion at the February 2005 IASB Meeting

Amendments related to insurance contracts

The Board agreed to amend IFRS 4 Insurance Contracts to be consistent with the new IFRS, with modifications to reflect the Board's temporary special treatment in phase I of the insurance project for insurance contracts.

The Board agreed to permit a choice of sensitivity analysis disclosures for insurance risk only. However, the staff was asked to consider this issue further and will come back to the March Board meeting.

Proxy disclosure

The Board agreed that the IFRS should require disclosure of the amount of change in the fair value attributable to changes in the instrument's creditworthiness. The requirement will provide that entities may use a surrogate or proxy suggested by the Board or a better number, if an entity can develop one. There would be examples provided to explain the Board's intention.

'Day 1' profit recognition

The Board agreed to amend ED 7 paragraph 23 to require disclosure of the accounting policy for determining when any difference between the transaction price and any valuation based not solely on observable market data ('mark-to-model') is recognised in profit or loss.

The Board agreed to require, for financial instruments within the scope of IAS 39, (a) the difference between transaction prices at initial recognition and valuations made at the time of the transactions that were not based solely on data from observable markets; and (b) a reconciliation of changes to the amount disclosed in (a) from the previous period. There would be an example of the application of this requirement.

Other issues

The Board agreed a number of minor changes (not detailed in the Observer materials) without significant debate.

Timetable for completion of the IFRS

The staff estimated that the IFRS would be available late in Q2 or early in Q3 2005.

Discussion at the March 2005 IASB Meeting

Sensitivity analysis of market risk

At its December 2004 meeting, the Board agreed to retain the proposed requirement for a sensitivity analysis but asked the staff to develop more guidance on how to prepare such an analysis.

The Board has also confirmed that it would not provide exemptions from the sensitivity analysis for market risk for non-financial institutions, NPAEs, or wholly or substantially owned subsidiaries. The disclosures proposed in this project would be reconsidered for NPAE purposes during the deliberations on that project.

As regards the staff proposals, the IASB disagreed with the notion of a 'maximum reasonably possible change in the relevant risk variable', concluding instead that the word 'maximum' should be deleted.

In addition, the staff was asked to clarify that the sensitivity disclosure requirement would be based on the change in the relevant risk variable based on the balance sheet position at the reporting date, not an analysis of the change in the profit or loss of the prior period. The sensitivity analysis would be for the ensuing year (12-month period).

The Board also decided that the requirements should specify whether the disclosures would be of pre-or post-tax amounts.

Implementation guidance

At its December meeting, the Board noted that many respondents disagreed that the Implementation Guidance proposed in ED 7 is sufficient, but noted that respondents generally made a request for 'more guidance' or 'more detailed guidance' without specifying what that guidance should be. The Board decided that it would seek the views of its financial instruments working group. The staff made proposals as regards the status of some of the implementation guidance by making certain paragraphs mandatory and others non-mandatory but issuing both together with the IFRS when finalised. The Board agreed with these recommendations.

Fair value option disclosures

The Board agreed with the staff recommendation as regards the mechanics of the disclosure requirements on the fair value option. The effect of the requirements would be as follows:

• For those applying the unrestricted fair value option, the disclosures in the original ED 7 would be applicable together with the subsequent changes made as a result of respondent's comments and the Board's deliberations (the unrestricted fair value option would be in existence until the effective date of the restricted version).
• For those that may chose to early adopt the restricted fair value option, the new disclosures in the latest ED 7 proposals would apply.

To achieve the above, the IASB will finalise ED 7 as an IFRS on the basis of the unrestricted fair value option. When the restricted version of the fair value option is finalised, the changes to the disclosure requirements will be taken as consequential amendments to the new IFRS on financial instruments disclosures.

Insurance contracts

At its February meeting, the Board decided to amend IFRS 4 to be consistent with the new IFRS arising from ED 7, with modifications that reflect the Board's temporary special treatment in Phase I of the insurance project for insurance contracts.

In particular, the Board decided to permit a choice of whether to provide quantitative sensitivity analysis disclosures for insurance risk only. This means that, for insurance risk, entities would be able to choose to provide:

• the terms and conditions disclosures together with a qualitative sensitivity analysis presently required by IFRS 4; or
• the quantitative sensitivity analysis proposed in ED 7.

Such a choice would be a temporary solution to be eliminated in Phase II of the insurance project.

After receiving input from the Insurance Working Group, the IASB agreed with the staff recommendation to confirm its previous decisions. The Board also agreed with the staff's other recommendations and agreed to proceed subject to editorial amendments.

Transition issues

ED 7 proposed that the new IFRS would be effective for annual periods beginning on or after 1 January 2007, with earlier application encouraged.

ED 7 also proposed to amend IFRS 1 to permit entities that adopt IFRSs for the first time before 1 January 2006 and choose to adopt the new IFRS before 1 January 2006 an exemption from presenting the comparative disclosures required by the new IFRS in its first IFRS financial statements.

The staff sought to clarify certain of the Board's December 2004 decisions so the staff could commence the drafting of the final standards, as follows:

• Entities adopting IFRSs for the first time for annual periods beginning before 1 January 2006 that choose to adopt the new IFRS before 1 January 2006 would be exempt from presenting comparative disclosures about the significance of financial instruments for financial position and performance.
• All entities adopting the new IFRS for annual periods beginning before 1 January 2006 (rather than just first time adopters) would be exempt from presenting comparative disclosures about the nature and extent of risk arising from financial instruments and about capital. However, such entities that are not first time adopters would still need to present comparative disclosures about the significance of financial instruments for financial position and performance.

Specifically, the staff recommended the following to the Board:

• that the capital disclosures are issued as a stand-alone amendment to IAS 1, effective for annual periods beginning on or after 1 January 2007.
• that the Board does not require entities to present disclosures from its previous, non-IFRS compliant financial statements in place of comparative information.
• that the Board confirm that it will encourage early application of the new IFRS.

The Board agreed with those recommendations.

Sweep issue: Minimum disclosures and materiality

The Board agreed at its December meeting to clarify that the minimum disclosures proposed in the ED are subject to the materiality requirements in IAS 1. That clarification is required because some respondents were confused about whether it would be necessary to provide immaterial disclosures. Some believed that the heading 'minimum disclosures' implied that the disclosures that followed, including the sensitivity analysis, were to be provided regardless of materiality.

Although agreeing that the proposal could be read in this way, the Board disagreed with the staff's proposal since IFRSs in general only apply to material items.

Other issues

No Board member indicated an intention to dissent against the finalisation of this IFRS. The staff indicated that they would proceed to a pre-ballot draft with the goal of issuing a final IFRS in June 2005.

Discussion at the May 2005 IASB Meeting

Amendments to IFRS 4

The Board considered the best way to complete this project, in the context that significant work is still required on the Implementation Guidance to IFRS 4. The Board agreed to finalise IFRS 7 without amending the Implementation Guidance to IFRS 4. That is, the appropriate changes will be made to the text of the Standard, but not to its Implementation Guidance. This was agreed because the time taken to complete the Implementation Guidance would be significant and might seriously delay the issuance of IFRS 7, which did not seem appropriate since most insurance industry participants had indicated they do not intend to early adopt IFRS 7 (thus reducing the urgency for guidance in that industry).

The Board agreed to extend the option in paragraph 45 of IFRS 7 so that an issuer of insurance contracts may provide a sensitivity analysis based on value-based techniques (such as embedded value) if the entity's key management personnel use that technique to manage and evaluate is performance in accordance with a documented risk management or investment strategy, even where that technique does not play a part in determining the entity's profit or loss or equity. The Board agreed that this was consistent with IFRS 7 - the disclosures did not need to tie up to amounts recognised in the financial report. The Board unanimously agreed to require entities to provide sensitivity analyses covering the whole of their business, but permit entities to provide different types of sensitivity analysis for different classes of financial instruments.

The Board agreed that an entity that measures insurance liabilities using assumptions imposed by a regulator should comply with the requirement to provide a sensitivity analysis by disclosing how a reasonably possible change in the related risk variable would affect profit or loss or equity if such a change was applied to the regulator-set locked-in assumption. For example, where market rates of interest are 10% and the regulator forces the use of 3% and there is a reasonably possible change in market rates of interest to between 9 and 11%, that reasonably possible change would be applied in the context of the regulator set rate - that is the 9 - 11% would not be considered a reasonably possible change to the regulator-set assumptions but, for example, 2 to 4% might be.

The Board agreed that where a reasonably possible change in the risk variable would not trigger the liability adequacy test there may be no effect on profit or loss or equity and thus there may be no effect to disclose in the sensitivity analysis. If a reasonably possible change would trigger the liability adequacy test the entity would disclose the effect on profit or loss or equity from the resulting change in the measurement of the liability. The Board noted that in determining whether the liability adequacy test had been triggered a company might use similar methodology to that used for determining whether impairment testing requirements had been triggered.

The Board agreed that the sensitivity analysis permits, but does not require, entities to disclose the potential impact of future management actions that may offset the effect of changes in the risk variable under consideration. Such disclosure could be qualitative or quantitative, but would not exclude entities from the requirement to disclose the impact of the factor on sensitivity analysis without consideration of the effect of future management actions.

Certain industry representatives had suggested the liquidity risk disclosure of IFRS 7 could be improved. The Board agreed that while the disclosures might be able to be improved, the delay to the project was not justifiable.

The Board agreed that there was not a need to re-expose the amendments to IFRS 4 as a result of today's discussion.

Day 1 Profit Disclosures

At its February meeting the Board agreed disclosures in respect of Day 1 Profits. Staff noted that the proposed disclosures have been reproduced in the observer notes for this session which are available on the IASB website www.iasb.org. The Board agreed that these should be placed in a more prominent position on the website. Staff asked that any comments from the public be received by June 1st at the latest.

Issuance procedure

The Board discussed briefly the publication of near final drafts on its website. It was noted that in general the final pre-ballot draft was released on the website. The Board briefly debated whether, in the context of this, the 20 day notice period to National Standard Setters was really necessary. They agreed to debate this topic further in private session.

August 2005: IASB Issues IFRS 7 on Financial Instruments Disclosures

On 18 August 2005 the IASB issued IFRS 7 Financial Instruments: Disclosures. The standard:

• Adds certain new disclosures about financial instruments to those currently required by IAS 32;
• Replaces the disclosures now required by IAS 30; and
• Puts all of those financial instruments disclosures together in a new combined standard. The remaining parts of IAS 32, which will be renamed Financial Instruments: Presentation, deal only with presentation matters, including classifying instruments as debt or equity, compound financial instruments, offsetting, and treasury shares.

IFRS 7 applies to all entities and is effective for annual periods beginning on or after 1 January 2007, with earlier application encouraged. Early appliers are given some relief with respect to comparative prior period disclosures. Both IAS 39 and the disclosure requirements of IAS 32 are withdrawn. Click for a Summary of IFRS 7.

As part of its project to develop IFRS 7 Financial Instruments: Disclosures, the IASB decided also to amend IAS 1 Presentation of Financial Statements to add requirements for disclosures of:

• The entity's objectives, policies and processes for managing capital.
• Quantitative data about what the entity regards as capital.
• Whether the entity has complied with any capital requirements.
• If it has not complied, the consequences of such non-compliance.

These disclosure requirements apply to all entities, effective for annual periods beginning on or after 1 January 2007, with earlier application encouraged. Illustrative examples are added to IAS 1 as guidance.