The International Financial Reporting Standards (IFRS) came into force in 2005 as a result of the decision from financial regulators to standardise the presentation of accounting data on an international scale through a single reference framework.
Revised in the wake of the 2008 global financial crisis, IFRS 7 requires an increased level of transparency from all companies using financial instruments to simplify international analysis of their financial and accounting information.
This article provides a full definition of IFRS 7, its accounting principles and details of the disclosures it requires to be met.
Finalised in August 2005 by the International Accounting Standards Board (IASB) and effective from 1 January 2007, IFRS 7 is an international accounting standard for financial instruments that replaces IAS 30 and IAS 32.
Proposing a new conceptual framework and limiting the scope for interpretation, IFRS 7 completes the rules on the recognition and presentation of financial instruments that were already contained in IAS 32 and IFRS 9. Following the global subprime crisis, this standard was significantly revised in 2009.
The objective of IFRS 7 is to require an entity that holds or issues financial instruments to disclose information that enables readers of its financial statements to evaluate the significance of financial instruments for its financial position and performance and the nature and extent of risks arising from those financial instruments.
Good to know: As defined in IAS 32, a financial instrument is any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.
IFRS applies to all entities (listed and unlisted companies), irrespective of their industrial sector or the size and complexity of the financial instruments in their accounts. In fact, this standard does not only concern banks and insurance companies, but all companies with financial instruments, including corporates.
This IFRS 7 shall be applied by all entities to all types of financial instruments, except:
IFRS 7 requires an entity to disclose information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance. These disclosures apply as set out in paragraphs 8 to 30 of the standard, which are summarised below.
Balance sheet disclosures:
Important: When applying the standard, it is important to distinguish between category and class. The classes of financial instruments as defined by IFRS 7 do not correspond to the categories in IAS 32 and IFRS 9.
Equity and Income Statement:
Other disclosures to be provided include:
IFRS 7 requires an entity to provide both qualitative and quantitative information to users of its financial statements in order to enable them to evaluate not only the nature but also the extent of risks relating to those instruments to which it is exposed at the reporting date.
These disclosures therefore relate to the risks arising from financial instruments and how they are managed, including:
Although relatively complex to understand at first glance, IFRS standards represent a real challenge in terms of financial communication and in particular IFRS 7 which concerns the solidity and resilience of your cash management,
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