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ED 7 – Financial Instruments

Date recorded:

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.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.