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Scope Exception Applicable Standard
Interests in subsidiaries IAS 27, Consolidated and Separate Financial Statements
Interests in associates IAS 28, Investments in Associates
Interests in joint ventures IAS 31, Interests in Joint Ventures
Employee benefit plans IAS 19, Employee Benefits
Share-based payment transactions IFRS 2, Share-Based Payment
Contracts for contingent consideration in business combinations IFRS 3, Business Combinations
Insurance contracts IFRS 4, Insurance Contracts
In developing IFRS 7, IASB considered whether to make scope exceptions for insurers, small and medium-size entities, and the separate financial statements of
subsidiaries, but decided not to do so.
SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR FINANCIAL POSITION AND
PERFORMANCE
One of the two principal objectives of IFRS 7 is to require entities to disclose information that enables users of financial statements to evaluate the significance of
financial instruments for the entities’ financial position and performance. To help achieve this objective, IFRS 7 requires disclosure about balance sheet items, income
statement and equity items, accounting policies, hedge accounting, and fair value.
Statement of Financial Position
Carrying amounts. IFRS 7 requires disclosures about the carrying amounts of each of the categories of financial assets and financial liabilities defined in IAS 39.
These disclosures are to be provided either on the face of the statement of financial position or in the notes. The disclosure of carrying amounts by category helps users
of financial statements understand the extent to which accounting policies for each category affect the amounts at which financial assets and financial liabilities are
measured.
Example
The carrying amounts of each of these categories defined in IAS 39 are required to be disclosed:
• Financial assets at fair value through profit or loss, showing separately
• Those designated as such upon initial recognition
• Those classified as held for trading in accordance with IAS 39
• Held-to-maturity investments
• Loans and receivables
• Available-for-sale financial assets
• Financial liabilities at fair value through profit or loss, showing separately
• Those designated as such upon initial recognition
• Those classified as held for trading in accordance with IAS 39
• Financial liabilities measured at amortized cost
Items at fair value through profit or loss. Under IAS 39, entities are permitted to designate financial assets and financial liabilities at fair value through profit or
loss if specified conditions are met. For some assets and liabilities so designated, IFRS 7 requires special disclosures. These disclosure requirements apply to those
loans and receivables (i.e., where the entity is lending cash) and financial liabilities (i.e., where the entity is borrowing cash) that are designated as at fair value through
profit or loss.
The required disclosures include information about the amount of change in the fair value of the asset or liability that is attributable to changes in the credit risk of
that asset or liability (i.e., the risk that the borrower will cause a financial loss for the lender by failing to discharge the obligation). Such information shall be provided
both about the change during the period and the cumulative change since the asset or liability was designated as at fair value through profit or loss.
Without such information, there is a concern that users of financial statements may misinterpret the profit or loss effects of changes in credit risk. For instance, if the
credit risk of a financial liability increases because of an entity’s financial difficulties, the fair value of the financial liability will decrease, resulting in a gain for the
entity. Some view this as counterintuitive, since the reason for the gain is the entity’s financial problems.
PRACTICAL INSIGHT
To provide this disclosure about the change in fair value attributable to credit risk, an entity needs to determine what portion of the total change in the fair
value of the asset or liability is attributable to credit risk. One way to do this is to estimate the amount of the change in fair value that is attributable to risks