International Financial Reporting Standards_guide.pdf

Chapter 34 Financial Instruments: Disclosures (IFRS 7) 379
ing the way liquidity, solvency, and other risks associated with the operations of a bank were
managed and controlled.
34.6.2 Users need information to assist them with their evaluation of an entity’s financial
position, financial performance, and risk management so that they are in a position to make
economic decisions (based on their evaluation). Of key importance are a realistic valuation of
assets, including sensitivities to future events and adverse developments, and the proper
recognition of income and expenses. Equally important is the evaluation of the entire risk
profile, including on- and off-balance-sheet items, capital adequacy, the capacity to withstand
short-term problems, and the ability to generate additional capital.
34.6.3 Market participants also need information that enhances their understanding of
the significance of on- and off-balance-sheet financial instruments to an entity’s financial
position, performance, and cash flows. This information is necessary to assess the amounts,
timing, and certainty of future cash flows associated with such instruments. For several
years, but especially in the wake of the East Asia financial crises of the late 1990s, there has
been criticism regarding deficiencies in accounting practices that have resulted in the incomplete
and inadequate presentation of risk-based financial information in annual financial
reports. Market participants perceived the opacity of financial information as not only an
official oversight, but also as the Achilles heel of effective corporate governance and market
discipline.
34.6.4 Disclosure is an effective mechanism to expose financial risk management practices
to market discipline. Disclosure should be sufficiently comprehensive to meet the needs of
users within the constraints of what can reasonably be required. Improved transparency
through better disclosure may reduce the chances of a systemic financial crisis or the effects
of contagion because creditors and other market participants will be better able to distinguish
between the financial circumstances that face different institutions or countries.
34.6.5 Lastly, disclosure requirements should be accompanied by active regulatory enforcement—and
perhaps even fraud laws—to ensure that the information disclosed is complete,
timely, and not deliberately misleading. Regulatory institutions should also have adequate
enforcement capacities. IFRS 7 aims to rectify some of the remaining gaps in financial risk
disclosure by adding the following requirements to the existing accounting standards:
■ new disclosure requirements for loans and receivables designated as fair value through
profit or loss;
■ disclosure of the amount of change in a financial liability’s fair value that is not
attributable to changes in market conditions;
■ the method used to determine the effects of changes from a benchmark interest rate;
■ where an impairment of a financial asset is recorded through an allowance account (for
example, a provision for doubtful debts as opposed to a direct reduction to the carrying
amount of the receivable), a reconciliation of changes in carrying amounts in that
account during the period, for each class of financial asset;
■ the amount of ineffectiveness recognized in profit or loss on cash flow hedges and
hedges of net investments;
■ gains or losses in fair value hedges arising from remeasuring the hedging instrument
and on the hedged item attributable to the hedged risk; and
■ the net gain or loss on held-to-maturity investments, loans and receivables, and
financial liabilities measured at amortized cost.
34.6.6 Table 34.7 presents a summary of the information to be disclosed and the financial
instruments affected by such disclosure.