ED 7 Financial Instruments: Disclosures

Date recorded:

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 instgead 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.

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