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IFRS technical publications

IAS 39 – Derecognition of financial assets inpracticeExplains the requirements of IAS 39, providinganswers to frequently asked questions and detailedillustrations of how to apply the requirements totraditional and innovative structures.

A practical guide to IFRS 8 for real estate entitiesGuidance in question-and-answer format addressingthe issues arising for real estate entities whenapplying IFRS 8, ‘Operating segments’.

PricewaterhouseCoopers’ IFRS and corporate governance publications and tools 2010

IFRS manual of accounting 2010PwC’s global IFRS manual providescomprehensive practical guidance on how toprepare financial statements in accordance withIFRS. Includes hundreds of worked examples,extracts from company reports and model

financial statements.

Understanding financial instruments – A guide to IAS 32, IAS 39 and IFRS 7Comprehensive guidance on all aspects of therequirements for financial instruments accounting.Detailed explanations illustrated through workedexamples and extracts from company reports.

IFRS disclosure checklist 2009Outlines the disclosures required by all IFRSspublished up to October 2009.

IAS 39 – Achieving hedge accounting in practiceCovers in detail the practical issues in achievinghedge accounting under IAS 39. It provides answersto frequently asked questions and step-by-stepillustrations of how to apply common hedgingstrategies.

A practical guide to share-based payments Answers the questions we have been asked byentities and includes practical examples to helpmanagement draw similarities between therequirements in the standard and their own share-based payment arrangements. November 2008.

A practical guide to new IFRSs for 201048-page guidance providing high-level outline of htekey requirements of IFRSs effective in 2010, inquestion and answer format.

Illustrative IFRS financial statements 2009 –investment fundsUpdated financial statements of a fictionalinvestment fund illustrating the disclosure andpresentation required by IFRSs applicable tofinancial years beginning on or after 1 January 2009.The company is an existing preparer of IFRSfinancial statements; IFRS 1 is not applicable.

Getting to grips with IFRS: making sense of IFRSfor the IM industry

Publication highlighting the reporting and businessimplications of IFRS and the possible solutions forinvestment management companies.

Illustrative IFRS financial statements 2009 –private equityFinancial statements of a fictional private equitylimited partnership illustrating the disclosure andpresentation required by IFRSs applicable tofinancial years beginning on or after 1 January 2009.The company is an existing preparer of IFRSfinancial statements; IFRS 1 is not applicable.

Similarities and differences – a comparison ofUS GAAP and IFRS for investment companiesOutline of key similarities and differences betweenIFRS and US GAAP applicable to investmentcompanies.

Investment property and accounting for deferredtax under IAS 12Paper highlighting some of the more frequentlyencountered issues and suggesting practicalsolutions relating to investment property andaccounting for deferred tax under IAS 12.

IFRS pocket guide 2009Provides a summary of the IFRS recognition andmeasurement requirements. Including currencies,assets, liabilities, equity, income, expenses, businesscombinations and interim financial statements.

A practical guide for investment fundsto IAS 32 amendments12-page guide addressing the questions that arearising in applying the amendment IAS 32 and IAS 1,‘Puttable financial instruments and obligations arisingin liquidation’, with a focus on puttable instruments.

Similarities and differences -a comparison of local GAAP and IFRSfor investment companiesOutline of key similarities and differencesbetween IFRS and local GAAP in

Australia, Canada, Hong Kong, India,Japan, and Singapore, available inelectronic format only. Visitwww.pwc.com/investmentmanagement.


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Contents

Page

Introduction 2Questions and answers1. Scope 32. Classes o nancial instrument 63. Fair value measurement disclosurese 8

a. Disclosures by class o nancial instrument 8b. Applying the air value hierarchy 9c. Level 3 disclosure requirements 17

4. Risk disclosures 20

a. General requirements 20b. Credit risk – credit quality 25c. Liquidity risk – maturity analysis 27d. Market risk – sensitivity analysis 32

5. Reclassi cation o nancial assets 446. Other disclosure requirements 46

a. Collateral 46b. Other quantitative disclosures 47

Appendix: Disclosures required under IFRS 7 49

Contacts 63


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Introduction

IFRS 7, ‘Financial instruments: Disclosures’, applies to nancial and non- nancial institutionsand there ore also applies to investment unds, private equity unds, real estate unds andinvestment managers. The extent o disclosure required depends on the extent o the und’suse o nancial instruments and its exposure to risk.

IFRS 7 is divided into two sections. The rst section covers quantitative disclosures about thenumbers in the balance sheet and the income statement. The second section deals with riskdisclosures. This is what takes the disclosures to a new level. The risk disclosures arising rom

nancial instruments under IFRS 7 are given ‘through the eyes o management’ and shouldrefect the way management perceives, measures and manages the und’s risks.

Seeing risk ‘through the eyes o management’ is a welcome opportunity to bring nancialreporting more closely in line with the way unds are managed; it also allows management to

disclose internal measures not previously recognised under IFRS. IFRS 7 enhances the und’sability to demonstrate the strengths o its control environment, but it could also expose anyfaws in the risk assumptions underlying key accounting judgements and estimates.

The amendment to IFRS 7, issued in October 2008, amended the standard to includedisclosure requirements regarding the newly permitted reclassi cation o non-derivative

nancial assets (other than those designated at air value through pro t or loss). A urtheramendment issued in November 2008 clari ed the e ective date and transition date o therequirements. A third amendment to IFRS 7, issued in March 2009, addresses applicationissues and requires enhanced disclosures about air value measurement and liquidity risk toprovide use ul in ormation to users.

Entities should apply the amendments issued in 2008 on or a ter July 2008. The most recent

amendment, issued in March 2009, applies or annual periods beginning on or a ter 1 January2009; no comparatives are required in the rst year o application.

This publication contains questions and answers on the application o IFRS 7 or investmentmanagers and private equity, real estate and investment unds. The document is not intendedto be prescriptive; it aims to provide guidance on how IFRS 7 could be applied under di erentscenarios.

This publication, which is based on the requirements o IFRS 7 applicable to nancial periodsbeginning on or a ter 1 January 2009, is not a substitute or reading the standards andinterpretations themselves or or pro essional judgement as to airness o presentation. Itdoes not cover all possible disclosures that IFRS 7 requires, nor does it take account o anyspeci c legal ramework. Further speci c in ormation may be required in order to ensure air

presentation under IFRS. We recommend that readers re er to our publication IFRS disclosurechecklist 2009 . Additional accounting disclosures may be required in order to comply with locallaws, or stock exchange or other regulations.



1. Scope

The objective o IFRS 7 is to require entities to provide disclosures in their nancial statementsthat enable users to evaluate:

The signi cance o nancial instruments or the entity’s nancial position and per ormance;•

The nature and extent o risks arising rom nancial instruments to which the entity is•

exposed during the period; andHow the entity manages the risks.•

[IFRS 7 para 1].

IFRS 7 applies to all entities and to all types o nancial instrument – recognised andunrecognised [IFRS 7 paras 3 to 4].

1.1 Investment manager A, who manages several investment unds or third-party investors, is exposed to signi cant operational risk. Does IFRS 7require disclosures about operational risk?

No. Operational risk disclosures are not within the scope o IFRS 7.

1.2 A real estate und is exposed to signi cant market risk or the property held.Does IFRS 7 require disclosure o the market risk o real estate?

It depends. IFRS 7 applies to nancial instruments. There is no requirement to disclosethe risk inherent in the holding o real estate property. However, i the real estate und isa und o unds or is invested in real estate property indirectly through participation inreal estate property companies, disclosures about the indirect property risk might berequired or market risk o the instrument held.

1.3 An investment und accrues or the per ormance ee to be paid. Areaccruals or per ormance ees included in the scope o IFRS 7?

It depends. Accruals that represent a right to receive cash or an obligation to delivercash are included in the scope o IFRS 7. When the per ormance period is completedand the right to receive cash by the investment manager is established, the per ormance

ee payable is a nancial liability in the scope o IAS 39, ‘Financial instruments:Recognition and measurement’, and should be included in the IFRS 7 disclosures.

However, at interim periods – when the per ormance period is not complete – theinvestment und has a policy choice to account or the per ormance ee either inaccordance with IAS 39 or IAS 37, ‘Provisions, contingent liabilities and contingentassets’. The per ormance ee accrual is included in the IFRS 7 disclosures i theinvestment und chooses to account or the per ormance ee payable in accordancewith IAS 39; it is excluded rom the IFRS 7 disclosures i the per ormance ee payable isaccounted or as provision in accordance with IAS 37 [IAS 37 para 2 and IFRS 7paras 3 to 4 in combination with IAS 39 para 2(j)].

1.4 Investment manager A pays an independent nancial adviser trailcommissions. Is the trail commission payable in the scope o IFRS 7?

Yes. Trail commission payables are nancial liabilities o investment manager A; theyshould there ore be included in the IFRS 7 disclosure.



1.5 An investment und issues one class o redeemable participating sharesthat are classi ed as equity instruments in the und’s stand-alone

nancial statements in accordance with IAS 32, ‘Financial instruments:Presentation’, para 16A and 16B. Are such redeemable participating sharesin the scope o IFRS 7 ( rom the issuer’s perspective)?

No. Instruments that are required to be classi ed as equity instruments in the issuer’snancial statements are excluded rom the scope o IFRS 7 [IFRS 7 para 3( )]. This scope

exception includes equity instruments that are required to be classi ed as equity inaccordance with the amendment to IAS 32 (issued February 2008).

However, the investment und should disclose a summary o quantitative data aboutthe amount classi ed as equity and its objectives, policies and processes or managingits obligation to repurchase or redeem the instruments when required to do so by theinstrument holders, including any changes rom the previous period [IAS 1 para 136A(a)and (b)]. In addition, it should disclose the expected cash outfow on redemption orrepurchase o that class o nancial instrument and in ormation on how the expectedcash outfow on redemption or repurchase was determined [IAS 1 paras 136A(c) and (d)].

1.6 An investment und issues one class o redeemable participating sharesthat are classi ed as equity instruments in the und’s stand-alone nancialstatements in accordance with IAS 32 paras 16A and 16B and or whichIFRS 7 disclosures are not required rom the und’s perspective[IFRS 7 para 3( )]. Does IFRS 7 apply to the non-controlling interestclassi ed as a nancial liability in accordance with IAS 32 para AG29Ain the investment manager’s consolidated nancial statements ( rom theinvestor’s perspective)?

Yes. The exception to classi y the redeemable participating shares as equity is notextended to the classi cation o the non-controlling interests in consolidated nancialstatements [IFRS 7 para AG29A]. Such interests are nancial liabilities or whichdisclosures in accordance with IFRS 7 are required.

1.7 During the commitment period, investors in a private equity und committhemselves to invest in the und. Are uncalled capital commitments, whichare accounted or as o -balance sheet nancial instruments, in the scopeo IFRS 7?

Yes. IFRS 7 applies to both recognised nancial instruments and unrecognised nancialinstruments [IFRS 7 para 4]. Uncalled capital commitments are accounted or in thesame way as loan commitments. As loan commitments are speci cally re erred to asan example o unrecognised nancial instruments or which disclosures are required by

IFRS 7, the same principle applies to capital commitments in private equity unds.

1.8 A real estate investment und enters into a orward purchase contract,which requires the und to purchase a property in three months time. The

orward purchase contract provides or an option either to trans er therights and obligations o the property in three months time or to settle thecontract net in cash. Does IFRS 7 apply to orward purchase contracts thatcan be settled net in cash?

Yes. IFRS 7 applies also to contracts to buy or sell a non- nancial instrument i thiscontract is in the scope o IAS 39 [IFRS 7 para 5 with IAS 39 paras 5 to 7]. However,i the orward purchase contract is excluded rom the scope o IAS 39, as it is only acontract that is held to receipt or delivery o a property without any option to settle thecontract net in cash, no IFRS 7 disclosure is required.



1.9 A real estate investment und receives lease payments under an operatinglease agreement. The lease payments are paid in advance (end oDecember or January). Are operating leases within the scope o IFRS 7?

No, except or individual payments that are currently due and payable ( or example,receivables rom tenants). Other payments under operating leases are not regardedas nancial instruments [IAS 32 para AG9]. Advances received rom lessees are non-

nancial liabilities (obligation to lease out or another month) and are not in the scope oIFRS 7.

1.10 A real estate investment und enters into a construction contract thatrequires advanced payments to the constructor. Are the amounts paid inadvance in the scope o IFRS 7?

No. IFRS 7 applies only to nancial instruments. Advances paid to a constructor arenon- nancial liabilities (obligation to per orm work) and are not in the scope o IFRS 7.


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2. Classes o nancial instrument

IFRS 7 requires certain disclosures by class o nancial instrument – or example, thereconciliation o an allowance account [IFRS 7 para 16] and the air value o nancial assetsand nancial liabilities [IFRS 7 paras 25 to 27B]. IFRS 7 does not provide a prescriptive list oclasses o nancial instrument. However, IFRS 7 states that a class should contain nancialinstruments o the same nature and characteristics and that the classes should be reconciledto the line items presented in the balance sheet [IFRS 7 para 6].

2.1 When IFRS 7 re ers to ‘classes o nancial instrument’, is this the same asdisclosure by category as de ned in IAS 39?

No. A ‘class’ o nancial instruments is not the same as a ‘category’ o nancialinstruments. Categories are de ned in IAS 39 as nancial assets at air value throughpro t or loss, held-to-maturity investments, loans and receivables, available- or-sale

nancial assets, nancial liabilities at air value through pro t or loss and nancialliabilities measured at amortised cost. Classes are determined at a lower level than themeasurement categories in IAS 39 and are reconciled back to the balance sheet, asrequired by IFRS 7 para 6.

2.2 Can an investment und disclose ‘investments in debt instruments’ as asingle class, or should these be split urther into separate classes?

In the case o an investment und, the category ‘investments in debt instruments’generally comprises more than one class o nancial instrument unless the debtinstruments have similar characteristics (that is, corporate bonds with similar creditratings). In this case, ‘investments in debt instruments’ can be one class.

2.3 What considerations should an investment und invested solely in debtinstruments apply in identi ying di erent classes o nancial instrument, asa prescriptive list o classes is not provided?

An investment und port olio generally comprises more than one class o debtinstrument. However, the level o detail or a class is determined on an entity-speci cbasis. This requires management to take into account the characteristics o the nancialinstrument as well as whether the classes are appropriate to disclose use ul in ormation[IFRS 7 paras 6 and 7]. This judgement would be based on the way in which the

investments are reported to and evaluated by the und’s key management personnel.For example, in the case o an investment und investing in debt instruments, it may beappropriate to disclose separate classes by:

Type o debt instrument ( or example, government bonds, corporate bonds,•

asset-backed securities);Credit rating o issuers ( or example, AAA, AA, A, BBB);•

Payment o interest ( or example, xed rate debt, foating rate debt).•



2.4 What considerations should a private equity und apply in identi yingdi erent classes o nancial instrument that are all classi ed as nancialassets at air value through pro t or loss?

In the case o private equity investments, we would expect the category ‘ nancial assetsat air value through pro t or loss’ to comprise more than one class. However, the levelo detail or a class is determined on an entity-speci c basis. This requires management

to take into account the characteristics o the nancial instruments as well as whetherthe classes are appropriate to disclose use ul in ormation [IFRS 7 paras 6 and 7]. This

judgement would be based on the way in which the investments are reported to andevaluated by the und’s key management personnel. For example, it may be appropriateto disclose separate classes by:

Type o nancial instrument ( or example, ordinary shares, pre erence shares,•

convertible loans, convertible pre erred equity certi cates, shareholder loans andpayment-in-kind notes);Type o investment ( or example, automotive, technology, healthcare);•

Management strategy ( or example, buy out, venture capital, in rastructure,•

growth capital, quoted private equity).

2.5 Where IFRS 7 requires disclosures by class o nancial instrument ( orexample, IFRS 7 paras 25, 27 and 37), the question arises whether di erentclasses o redeemable participating shares issued by an investment undcan be grouped together even though they are legally di erent.

Investment und X issues di erent classes o redeemable participatingshares that do not meet the identical eatures criteria in IAS 32 para 16A(c).It there ore classi es the amounts attributable to unit holders as

nancial liabilities.

Should investment und X split the amounts attributable to unit holders into

separate classes in accordance with IFRS 7 para 6?It depends. Such a disclosure is not required i all redeemable participating share classeshave similar characteristics. IFRS 7 is less restrictive than the criteria in IAS 32. Theaggregated share classes do not there ore need to have identical eatures in order to bedeemed similar. However, i the rights and obligations associated with the share classesare signi cantly di erent. The amounts attributable to unit holders should be splitinto separate classes or IFRS 7 disclosures. The share classes might be signi cantlydi erent i , or example, one share class is redeemable at any time without a noticeperiod and another share class is only redeemed within a one-year notice period.

2.6 Are the identi ed classes applied consistently across all class-speci c

nancial statement disclosures required by IFRS 7, or can management usedi erent classes or each disclosure?

There is no requirement in IFRS 7 to use the same classes consistently across all class-speci c disclosures. IFRS 7 para 6 states ‘an entity shall group nancial instrumentsinto classes that are appropriate to the nature o the in ormation disclosed and thattake into account the characteristics o those nancial instruments’. For example,some disclosures o class-speci c in ormation or an investment und investing in debtinstruments may be more appropriately disclosed by type o debt instrument or, in otherinstances, by credit rating o the issuer. However, in all instances, su cient in ormationshould be provided to permit reconciliation to line items presented in the balance sheet.



3. Fair value measurementdisclosures

A. Disclosures by class o nancial instrument

IFRS 7 para 25 requires the disclosure o the air value o nancial assets and nancialliabilities by class in a way that permits it to be compared with its carrying amount oreach class o nancial asset and nancial liability.

An entity should disclose or each class o nancial instrument the methods and, whenvaluation techniques are used, the assumptions applied in determining air values oeach class o nancial asset or nancial liability. I a change in valuation techniquehas been made, the entity should disclose that change and the reasons or making it

[IFRS 7 para 27].

3.1 Is the disclosure o the air value required or all nancial instruments,including those measured at amortised cost?

Yes. IFRS 7 para 25 requires the disclosure o the air value irrespective o the act that anancial instrument is measured at amortised cost in the statement o nancial position.

The disclosure is presented in a way that allows a comparison o the amounts disclosedand the carrying amounts. However, i the amounts disclosed in the statement o

nancial position are assumed to be the air values (or approximately the air values), theund discloses that act but is not required to disclose a separate table.

The ollowing examples illustrate when the amounts disclosed in the statement onancial position approximately equal the air values to be disclosed underIFRS 7 para 25:

An investment und designates all its investments at air value through pro t or•

loss: the amounts attributable to unit holders would be assumed to approximatethe air value.The carrying amount o trade receivables due within one year ( or example,•

receivables rom tenants) less impairment approximates the air value o theamounts receivable.The air value o the variable interest bank borrowings is estimated to be the•

discounted contractual uture cash fows.

3.2 IFRS 7 para 25 requires the disclosure o the air value o nancial assetsand nancial liabilities by class. Uncalled capital commitments might notbe in the scope o IAS 39 [IAS 39 para 4]. However, they are included in thescope o IFRS 7 [IFRS 7 para 4].

The investors o a private equity und committed themselves to investC150 million into the und over the next 10 years. The und already calledC50 million over the past two years. The remaining uncalled capitalcommitments amount to C100 million at the balance sheet date.

Is a private equity und required to disclose the total amount o outstanding

uncalled capital commitments (C100 million) under that requirement?



No. IFRS 7 applies to both recognised and unrecognised capital commitments. However,the disclosure requirements in IFRS 7 para 25 only requires the disclosure o the airvalue o such commitments, which should be assessed by applying an option pricemodel. The air value o such capital commitments in private equity unds is usually nil,as the new und units are issued at air value. However, disclosure o the total amountmay not be required under IFRS 7 para 25 but is required under IAS 37. IAS 37para 89 requires the disclosure o an estimate o the nancial e ects, measured using

the principles set out or provisions in IAS 37 para 36 to 52.

3.3 IFRS 7 para 27 requires the disclosure o the valuation methods used todetermine the air values o the nancial instruments. Is the disclosureo the valuation methods used only required or nancial instrumentsmeasured at air value in the statement o nancial position?

No. IFRS 7 para 27 is applicable to all nancial instruments or which air values aredisclosed. This is the case or all nancial instruments carried at air value in thestatement o nancial position, or nancial instruments carried at amortised cost and orunrecognised nancial instruments or which air value disclosures are presented in thenotes in accordance with IFRS 7 para 25.

The disclosure required in IFRS 7 para 27 should be given by class o nancialinstrument. It should include the disclosure o the assumptions applied relating to thein ormation presented. Such assumptions include:

Interest rates and discount rates.•

Credit risk and liquidity risk.•

Estimated credit losses.•

Earnings multiples.•

B. Applying the air value hierarchy

As part o the disclosure requirements or air value measurements, an entity shouldclassi y air value measurements using a ‘ air value hierarchy’ that refects thesigni cance o the inputs used in making the measurements. The air value hierarchy hasthree di erent levels (IFRS 7 para 27A):

Quoted prices in active markets or identical assets or liabilities (Level 1);•

Inputs other than quoted prices included within Level 1 that are observable•

either directly (that is, as prices) or indirectly (that is, derived rom prices)(Level 2);Inputs that are based on unobservable inputs (Level 3).•

The categorisation o the air value measurement into one o the three di erent levelsshould be determined on the basis o the lowest level input that is signi cant to the airvalue measurement in its entirety. The signi cance o an input is assessed against the

air value measurement in its entirety. Assessing the signi cance o a particular inputto the air value measurement in its entirety requires judgement, considering actorsspeci c to the asset or liability [IFRS 7 para 27A].

3.4 What is the impact o the use o valuation models on the classi cationwithin the air value hierarchy?

The use o a valuation technique (rather than simply taking a price rom the market)precludes the use o Level 1. The level within the hierarchy is determined based onthe valuation inputs, not on the methodology or complexity o the model. The use o amodel does not automatically result in a Level 3 air value measurement. For example,a standard valuation model used to compute a value by using all observable inputs islikely to result in a measurement that is classi ed as Level 2. However, to the extentthat adjustments or interpolations are made to Level 2 inputs in an otherwise standardmodel, the measurement may all into Level 3, depending on whether the adjusted inputs



are signi cant to the measurement. I a reporting entity uses a valuation model that isproprietary and relies on unobservable inputs, the resulting air value measurement iscategorised as Level 3.

3.5 Does the valuation technique ( or example, multiples, discounted cashfows) selected by a private equity und impact the classi cation o the airvalue measurement within the air value hierarchy?

No. The IFRS 7 air value hierarchy prioritises the inputs to the valuation techniques, notthe valuation techniques themselves. Selecting the appropriate valuation technique(s)should be based on an assessment o the acts and circumstances speci c to the assetor liability being measured and should be independent o the classi cation o inputsused within the air value hierarchy.

3.6 Does the IAS 39 category (at air value through pro t or loss, available orsale, held to maturity, loans and receivables) in which an investment isclassi ed, impact the classi cation o the air value measurement withinthe air value hierarchy?

No. There is no direct link between the category an investment is classi ed in and theclassi cation o the air value measurement within the air value hierarchy. However,some categories prohibit nancial instruments classi ed in that group rom being quotedin an active market ( or example, loans and receivables), which indicates that or suchinvestments Level 1 classi cation would not be appropriate.

3.7 How does the use o a pricing service or broker quotes impact theclassi cation o an input in the air value hierarchy?

Many reporting entities obtain in ormation rom pricing services − such as Bloomberg,Interactive Data Corporation, Loan Pricing Corporation, Markit’s Totem Service,

broker pricing in ormation and similar sources − or use as inputs in their air valuemeasurements. The in ormation provided by these sources could be any level in the airvalue hierarchy, depending on the source o the in ormation or a particular security.

The ollowing table summarises the classi cation o some common sources o pricinginputs.

Level 1 inputs Level 2 inputs Level 3 inputsLevel 1 is only used or itemstraded on an exchange or anactive index/market location.For a price to quali y asLevel 1, reporting entitiesshould be able to obtain theprice rom multiple sources.

Level 2 values may include:

Posted or published clearing•

prices, i corroborated. 1

Broker quotes corroborated•

with observable marketdata. 1

A dealer quote or a non-•

liquid security, provided thedealer is standing readyand able to transact at thatprice.

Examples o Level 3 valuesinclude:

Inputs obtained rom broker•

quotes that are indicative(that is, not being transactedupon) or not corroboratedwith observable marketdata.

Models that incorporate•

management assumptionsthat cannot be corroboratedwith observable marketdata.

The above are examples o inputs that may be considered appropriate or the levelsindicated. However, the acts and circumstances applicable to the measurement shouldalways be assessed.

1 In order to support an assertion that a broker quote or in ormation obtained rom a consensus pricing service represents a Level 2input, the entity should typically per orm due diligence to understand how the price was developed, including understandingthe nature and observability o the inputs used to determine that price. Additional corroboration could include: discussions withpricing services, dealers or other entities to collect additional prices o identical or similar assets to corroborate the price; back-testing o prices to determine historical accuracy; comparisons to other external or internal valuation model outputs.



3.8 Is the management o an investment und required to test the valuationsprovided by pricing services and brokers or reasonableness?

Yes. The management o an investment und has the ultimate responsibility o assertingthat its nancial assets and liabilities are carried at an appropriate air value and the useo either third-party pricing services or broker-dealers does not reduce that responsibility.Management cannot assume that the in ormation provided by third parties represents

air value without having appropriate processes in place (price veri cation checks orother means) to check the reasonableness o methodologies and input assumptionsused to develop the valuations provided.

This is particularly important in the context o determining the level in the air valuehierarchy in which the investment should be classi ed. Third-party prices might onlybe indicative prices and not rm quotations upon which the third party would actuallytrade 2. Management will need to understand the ollowing eatures in order to havethe considerable insight necessary to determine in which level a measure should beclassi ed in accordance with IFRS 7 para 27B:

The valuation technique or method used by the third party to price the•

nancial instrument;

The inputs used in the methodology;•

The adjustments made to observable data; and•

The availability o corroborative evidence that exists or that type o•

nancial asset or liability.

However, the level o detail and extent o such an analysis depends upon acts andcircumstances, such as type and complexity o a nancial instrument, observabilityo the liquidity o that type o instrument in the market and generally known pricingmethodologies or the instruments. The level o work necessary could includediscussions with the pricing service/dealer to gain an understanding o how thesecurities are being priced and whether all signi cant inputs are observable throughtrading o similar or identical securities.

3.9 How should an investment und assess the signi cance o an input indetermining the classi cation o a air value measurement within the airvalue hierarchy?

There are no bright lines or determining the signi cance o an input to the air valuemeasurement in its entirety. Two di erent investment unds may reach di erentconclusions rom the same acts.

In assessing the signi cance o unobservable inputs to an asset or liability’s air value,management should:

Consider the sensitivity o the asset or liability’s overall value to changes in the•

data; andReassess the likelihood o variability in the data over the li e o the asset or liability.•

For example, i an interest rate swap with an 11-year li e has an observable yieldcurve or 10 years, provided that the extrapolation o the yield curve to 11 years isnot signi cant to the air value measurement o the swap in its entirety, the air valuemeasurement is considered Level 2.

Given the level o judgement that may be involved, a reporting entity should documentthe rationale taken when determining the classi cation o inputs. In addition, a reportingentity should develop and consistently apply a policy or determining signi cance.

2 Prices rom pricing services or brokers might come with descriptive disclaimers stating that the prices are or nancial reportingor operational purposes only and do not represent prices that they would be willing to buy or sell at.



3.10 An investment und invests solely in nancial instruments that are listed ona stock exchange but which are thinly traded. Can the und still classi y all

nancial instruments held in Level 1?

It depends. IFRS 7 para 27A states that Level 1 nancial instruments have quotedprices in active markets. An active market is one in which transactions are taking placeregularly on an arm’s lengths basis. I transactions occurr requently enough to obtain

reliable pricing in ormation on an ongoing basis, the market is considered active.

The price quote may be a Level 2 or Level 3 input where:There are ew transactions or the instrument;•

The price is not current;•

Price quotations vary substantially either over time or among market makers•

( or example, some brokered markets); orThere is little publically available in ormation.•

3.11 An investment und invests solely in nancial instruments that are listed onstock exchanges. The investments are widespread and include holdings

listed in Asia and Canada. The und values its investments at closing o theNew York Stock Exchange. However, due to the early closing o the Asianmarket, the und does not value the Asian holdings with the lasttransaction price provided by the Hong Kong stock exchange but adjuststhe prices by an expected market shi t (sometimes re erred to as indexationor ITG/IDC air value pricing). The expected market shi t is calculated on aninstrument-by-instrument basis and takes into account the developmento the later-closing stock exchanges. Based on past experience, there is astrong correlation between developments on the New York Stock Exchangeand the Asian nancial instruments. Can the investment und disclose all itsinvestments as Level 1?

No. IFRS 7 para 27A(a) requires Level 1 air values to be quoted prices in an activemarket or identical assets. As the und adjusts certain quoted prices to refect expectedmarket fuctuations a ter the closing o the stock exchange, the quoted prices are nolonger unadjusted and there ore do not quali y as Level 1. In the above scenario, the

air value measurement o such investments is most likely considered Level 2, as itrepresents an adjustment or new in ormation to quoted prices in active markets oridentical assets or liabilities. The adjustment puts the air value measurement at alower level. Due to the relatively mechanical nature o the calculation and correlation

actors that are based on market observable inputs, it is unlikely to be considered aLevel 3 valuation as long as the calculation and the correlation actors are relevant andobservable.

3.12 Is it appropriate to look at the investments o a und when determining thelevel in the air value hierarchy in which the air value measure should becategorised?

No. The investor in shares o a und should consider the nature o the und sharesitsel and not look at the underlying investments held by the und in determining thevaluation level. This is because the unit o account is the investment in the und andnot the investment in the und’s underlying assets. I transactions are observable orthe und, they should be taken into account when determining the level o the air valuehierarchy. I no observable market input or the shares themselves is available, valuationtechniques should be applied, and the level o inputs used to determine the air value willdetermine the level o air value hierarchy.



3.13 Investment bank A issues und-linked notes that are linked to theper ormance o Fund X. The underlying Fund X is classi ed as a Level 1investment. The und-linked notes exactly mirror the und investment. Canthe investor invested in the und-linked notes classi y the notes as Level 1with re erence to the classi cation o the underlying und?

No. Investment bank A should consider the nature o the und-linked notes rather thanthe nature o the underlying und. This is because the unit o account is the notes. Itransactions are observable or the notes, they should be taken into account whendetermining the level o the air value hierarchy. I the und-linked note is quoted in anactive market, Level 1 classi cation is appropriate.

However, i no observable market input or the shares themselves is available, valuationtechniques should be applied, and the level o inputs used to determine the air valuewill determine the level o air value hierarchy. Among those inputs, A will consider theobservability. One o the inputs used is the net asset value o the und, but additional

actors such as the credit risk o the issuer would be expected to be considered todetermine the air value o the und-linked notes. Depending on the signi cance o theadditional inputs and their observability, the und-linked note may be classi ed in eitherLevel 2 or Level 3.

3.14 Can an investor in an investment und that issues securities that are listedon a stock exchange, but that is thinly traded, classi y the participation inthe und in Level 1 o the air value hierarchy?

It depends. IFRS 7 para 27A(a) states that Level 1 nancial instruments have quotedprices in active markets. An active market is one in which transactions take placeregularly on an arm’s lengths basis. I transactions occur requently enough to obtainreliable pricing in ormation on an ongoing basis, the market is considered active.

The price quote may be a Level 2 or Level 3 input where:

There are ew transactions or the instrument;•

The price is not current;•

Price quotations vary substantially either over time or among market makers ( or•

example, some brokered markets); orLittle in ormation is released publically.•

Level 1: Investments in exchange-traded investment unds (ETF) are classi ed asLevel 1 i transactions occur with su cient requency and volume to provide pricingin ormation on an ongoing basis

Level 2: Investments in ETFs are classi ed as Level 2 i transactions occur lessrequently and with a low trading volume.

Level 3: Investments in ETFs are classi ed as Level 3 i the ETF cannot be tradedat the stock exchange (listed or marketing purposes only) and price quotationsreceived rom brokers and market-makers are indicative prices and not rmquotations upon which the broker respective market maker would actually trade.



3.15 Can an investor classi y as Level 1 its participating shares in an open-ended investment und that is redeemable at any time and or which a dailyNAV is reported?

It depends. Level 1 inputs are unadjusted quoted prices in an active market oridentical assets and liabilities that the entity can access at the measurement date. Isubscriptions and/or redemptions at the und’s net asset value (NAV) take place with

su cient requency and volume to provide observable pricing in ormation on anongoing basis, the und’s redeemable participating shares valued at the NAV shouldbe classi ed in Level 1. However, with less requent subscriptions and/or redemptions,the NAV may be considered a Level 2 input. As the unit o account is the redeemableparticipating shares and not the underlying assets o the investment und, mutual undshares or which the underlying investments are valued using Level 2 or Level 3inputs might be considered a Level 1 valuation or the und o und’s interest in such

unds (and vice versa).

The ollowing questions may be help ul In determining whether an active market exists:How requently is the reported NAV available?•

Is the price based on recent subscriptions and/or redemptions?•

What volume o subscriptions and/or redemptions exists?•

Are there any indications that the investor would not be able to redeem the•

investments at NAV at the reporting date (that is, due to illiquidity o investments)?

Level 1: Open-ended unds that are redeemable at any time, that report a daily netasset value (NAV) and or which su cient subscriptions and redemptions occur atNAV that support the assessment that an active market exists.

Example: retail mutual unds with (subscriptions and) redemptions on a daily basis,with su cient volume at a daily reported redemption price ( or example, NAV lessredemption cost).

Level 2: Open-ended unds that are redeemable at the reportable NAV at themeasurement date, or which none or no signi cant subscriptions and redemptionsoccur, i a transaction at NAV could have taken place at the balance sheet date.

Example: Open-ended unds held by a single investor (dedicated unds, specialunds) or which NAV is calculated on a quarterly basis and on each date a

subscription or redemption takes place.

Level 3: Open-ended unds that might be redeemable at a uture date i the length othe time until the investment will become redeemable is considered signi cant andthus an adjustment would be made to NAV or credit and liquidity risk.

Example: Mutual unds or which the redemption has been suspended temporarily.

Open-ended unds or which signi cant unobservable adjustments to NAV are madewhen valuing the und units.

Example: Mutual und or which an adjustment has been made to NAV to refect thedevelopments at a stock market that occurred a ter the NAV has been calculated(indexation).



3.16 Investment und X is an open-ended investment und that is redeemable atany time and or which a daily net asset value (NAV) is reported. As the undhas signi cant investments in illiquid investments ( or example, investmentproperties), redemptions may be suspended or postponed at the discretiono the management. In the case o a suspension, a discount or illiquiditymight be applied to the NAV when the investment in the und is valued. Canan investor classi y the investment at Level 2?

It depends. I the investor entity is not com ortable with the initially reported NAV or thelevel o the holdback is signi cant, the valuation at NAV less illiquidity discount shouldbe considered Level 3 rather than Level 2.

3.17 Can an investor classi y as Level 2 its investments in a closed-endedinvestment und that cannot be redeemed at any time but or which asecondary market exists?

It depends. Level 2 inputs are inputs that are observable either directly or indirectly − orexample, closed-ended unds with recent transactions on a secondary market 3 i the

observed price used or valuation purposes is classi ed as Level 2. Closed-ended undsthat cannot be redeemed or traded at the reporting date are classi ed as Level 3 i thevaluation technique applied uses signi cant unobservable inputs.

Level 1: Closed-ended unds with a secondary market or which the trading volumesupports the assessment that an active market exists (this is expected to be a veryrare scenario).

Level 2: Closed-ended unds with recent transactions in a secondary market i theobservable price is used to value the und units.

Level 3 : Closed-ended unds that cannot be redeemed by the reporting entity at alluntil maturity.

Example: Fixed-li e private equity und with no secondary market.

Closed-ended unds that are valued using a valuation technique (signi cantunobservable inputs) and/or or which no current NAV is reported.

Example: Private equity und with only quarterly reportings.

Funds or which signi cant unobservable adjustments to NAV are made whenvaluing the und units.

Example: Hedge unds or which signi cant adjustments or credit and liquidity riskare made.

3 Absent in ormation to the contrary, there is a rebuttable presumption that such a transaction represents the air value o the privateequity und at the transaction date. However, an investor should consider the timing o the transaction and whether the acts andcircumstances related to the transaction are meaning ul when measuring air value at subsequent measurement dates.



3.18 An investor holds an investment in a closed-ended investment und orwhich no secondary market exists and or which no current transactionis observable. The participation in the und is there ore measured using avaluation technique. The und is invested solely in investments traded in anactive market or which quoted prices exist (Level 1 investments) with theexception o a small amount o cash at bank. Can the investor classi y theinvestment as Level 2?

It depends. Level 2 classi cation requires inputs based on observable market datato be used when a valuation technique is used to value the investment in a und.The calculation o the NAV based on the quoted prices in an active market could beinterpreted as a valuation technique that is solely based on observable market data.However, the investor in the above scenario needs to care ully assess whether the NAVis a su cient estimate o the air value o the investment. The illiquidity o the investmentis expected to be taken into account when valuing the und units. Such an input to thevaluation is likely to be signi cant; the und would there ore be classi ed Level 3.

3.19 A private equity und holds investments in unlisted private equity

investments. The valuation o the investments is done by using multiples(that is, a multiple o earnings or revenue or similar per ormance measures)derived rom observable market data. Can the und classi y the investmentsin Level 2 o the air value hierarchy?

It depends. Many o the air value measures or private equity transactions incorporateobservable data and unobservable data known only to the investor. Considerationshould be given to the impact o such unobservable data on the air value measurementwhen classi ying the level o inputs. Observable data is:

Not proprietary.•

Readily available.•

Regularly distributed.•

From multiple, independent sources.•

Transparent.•

Veri able.•

Level 2 inputs are there ore data that is readily available or market participants andthat requires no assumption to be made in order to be determined. The use o earningsmultiples is likely to be a Level 3 input, as the multiples are derived rom observablemarket data by applying assumptions on the comparability o the businesses,considering operational, market, nancial and non- nancial actors.

In addition, i the valuation includes a nancial orecast ( or example, cash fows oearnings) developed using the reporting entity’s own data, the und classi es the

investments in Level 3 o the air value hierarchy.

3.20 Hedge unds may allocate a percentage o capital to side-pocketinvestments (also re erred to as side-pocket shares). These investmentsmay not be redeemable until the investment has been realised or writteno . How should an investor in a hedge und categorise the side-pocketshares when applying the IFRS 7 air value hierarchy?

I the interest in the side pocket can be distinguished rom the other interest in the und( or example, a separate class o shares), the investor should consider the attributesand characteristics o the side-pocket interest separately rom those o the und interestin determining the proper valuation and the level within the valuation hierarchy or thatinterest. As such investments are illiquid in nature – with no active market − it is likelythat the side-pocket interest will be valued using signi cant unobservable inputs.



I the side pocket interests cannot be separated rom the other interest in the und ( orexample, the investor entity has one aggregated capital interest in the hedge und), theinvestor should consider the signi cance o the unobservable value o the side pocketon the total investment in the hedge und in determining the classi cation o the interestin the hedge und within the hierarchy. I the side-pocket exposure was deemed to besigni cant to the interest as a whole, and that side-pocket investment was derived usingunobservable inputs, the entire investment in the hedge und partnership is a Level 3

valuation.

3.21 IAS 39 para 46(c) allows investments in equity instruments that do not havea quoted price in an active market and whose air value cannot be reliablymeasured to be measured at cost. Investor A invests in a private equity

und or which there is no reliable air value available. It there ore accountsor its investment at cost. However, when the investment is considered to

be impaired, it is written down to the present value o the uture cash fowsdiscounted at the current market rate or a similar investment [IAS 39para 66]. Are such investments subject to IFRS 7 air value disclosures andi so, in what level o the hierarchy should the investments be classi ed?

Investments recorded at cost in accordance with IAS 39 para 46(c) are not subject to airvalue measurement and are there ore not subject to the IFRS 7 disclosure requirements.

However, in the event o an impairment and a write-down o the investment to its presentvalue o the uture cash fows, as required in IAS 39 para 66, the investor should disclosethe method used and the assumptions applied in determining the present value as bestestimate o air value in accordance with IFRS 7 para 27. Such valuations should beclassi ed as Level 3.

C. Level 3 disclosure requirements

For air value measurements in Level 3 o the air value hierarchy, a reconciliation romthe opening balance to the closing balance should be disclosed [IFRS 7 para 27B(c)].In addition, IFRS 7 para 27B(d) requires disclosure o the total gains and losses or theperiod included in pro t or loss that are attributable to those assets and liabilities held atthe end o the reporting period.

I changing one or more o the inputs to reasonably possible alternative assumptionswould change the air value signi cantly, management states that act and discloses thee ect o those changes. Management also discloses how the e ect o a change to areasonably possible alternative assumption has been calculated.

3.22 Are speci c disclosures required or purchases and sales in nancial

instruments classi ed in Level 3?Yes. For air value measurements in Level 3 o the air value hierarchy, a reconciliation

rom the opening balances to the closing balances should be presented (IFRS 7 para27B(c)), disclosing separately changes during the period attributable to:

Purchases, sales, issues and settlements (each type o movement•

disclosed separately);Total gains or losses or the period recognised in pro t or loss respectively,•

recognised in other comprehensive income (including disclosures on wherethe total gains or losses are recognised in pro t or loss o the period);Trans ers into and out o Level 3 (including the reason or such trans ers).•

IFRS 7 IG13B gives an illustrative example on how the above reconciliation should bepresented.



3.23 In measuring air value in Level 3, i changing one or more o the inputsto reasonably possible alternative assumptions changes the air valuesigni cantly, management should state that act and disclose the e ecto those changes, as required by IFRS 7 para 27B(e). Is there likely tobe a sensitivity analysis or all Level 3 measurements where air valuemeasurement is sensitive to underlying assumptions?

No. There is a di erent de nition o signi cant or the two disclosure requirements. Indetermining whether to classi y an instrument as Level 3, the entity considers whetheran unobservable input is signi cant to the air value o that individual instrument in itsentirety. However, IFRS 7 para 27B(e) is explicit that or the purpose o disclosure osensitivity analysis or each class o nancial instrument with Level 3 measurements,signi cance should be judged with respect to the reporting entity’s pro t or loss,total assets or total liabilities, or when changes in air value are recognised in othercomprehensive income or total equity.

3.24 Investment Company X has a ‘ und o und’ structure and invests in otherprivate equity unds (the underlying unds). The underlying unds, which are

managed by a third-party manager not related to X, are invested directlyin private equity investments (the underlying investments). X periodicallyreceives in ormation on the NAV o the underlying unds. However, onlya ew transactions are entered into at NAV; the NAV does not there orerepresent a quoted price in an active market. X needs to apply valuationtechniques to determine the air value o the und investments.

X does not just rely on the NAV received but per orms a high-level checkon the valuation o the underlying investments. It normally uses multipleson earnings to determine the air value o the investments in the underlying

und.

Does X need to disclose the multiples used to control the reliance o theair value measurement received rom a third party?

No. X uses the multiples only or control purposes and to back-test whether NAV is areliable measure or air value. The value is not there ore required or the disclosure othe multiples applied to back-test, but X should provide in ormation on how the NAV hasbeen determined. This might require the disclosure o parameters used by the underlying

unds to value their assets.

The answer might change i , in the case o a signi cant di erence between NAV and thevalue calculated by using multiples, the investment company measures the investmentby applying this calculated value. In that case, disclosures o the multiples applied by Xto value its investments will be required.

3.25 A private equity und acquires unlisted securities. The transaction priceis di erent rom the air value at initial recognition determined by usinga valuation technique. Does IFRS 7 require entities to disclose thatdi erence?

It depends. The best evidence o air value on initial recognition is normally thetransaction price. I this is the case, there would be no di erence to disclose, byde nition. However, i the conditions in IAS 39 para AG76 are met (that is, i the air valueis better evidence with re erence to comparable and observable market transactions), adi erence may exist.

When the conditions are met, IFRS 7 para 28 requires disclosure o ‘day 1’ pro t notrecognised in pro t or loss. In addition, IFRS 7 para 28 requires entities to disclosethe reconciliation o changes in the amount not recognised in the pro t or loss and theaccounting policy or determining when it is recognised in pro t or loss.



3.26 What comparative in ormation is required in the rst year o application othe IFRS 7 amendment on air values:(a) by an entity without any past disclosures with respect to a air value

hierarchy?(b) by an entity that has voluntarily presented in ormation similar to that

required by FAS 157, but which may not have ully complied with all

aspects o the FAS 157 hierarchy?

IFRS 7 para 44G states that, in the rst year o application, an entity need not providecomparative in ormation or the disclosures required by the amendments. Earlierapplication is permitted.

(a) No comparative in ormation needs to be provided or air value hierarchy.(b) Those entities that previously made voluntary air value disclosures should be

encouraged either to keep the air value disclosure with a clear statement thatthis was voluntary and might not be in line with the new amendment, or to modi ythe comparatives to comply with the new amendment.



4. Risk disclosures

A. General requirementsManagement should disclose in ormation that enables users o its nancial statementsto evaluate the nature and extent o risks arising rom nancial instruments to which theentity is exposed at the end o the reporting period [IFRS 7 para 31]. The disclosuresrequire ocus on the risks that arise rom nancial instruments and how they have beenmanaged. These risks typically include, but are not limited to, credit risk, liquidity riskand market risk [IFRS 7 para 32].

Qualitative and quantitative disclosures are required. Management should there oredisclose, or each type o risk arising rom nancial instruments:

The exposures to risk and how they arise, and its objectives, policies and•

processes or managing the risk and the methods used to measure the risk(qualitative disclosure) [IFRS 7 para 33]; andSummary quantitative data about its exposure to that risk at the end o the•

reporting period (quantitative disclosures) [IFRS 7 para 34].

I the quantitative data disclosed at the end o the reporting period is unrepresentativeo an entity’s exposure to risk during the period, management should provide urtherin ormation that is representative [IFRS 7 para 35].

4.1 How should a und with two distinct investment port olios ( or example, abond port olio and an equity port olio) present its risk disclosures requiredby IFRS 7 para 34(a) i management monitors each port olio separately?

A und with two distinct investment port olios should present the disclosures based onthe management reporting [IAS 7 para 34(a)] separately or the bond port olio and theequity port olio, i that is the way management monitors the nancial risks.

4.2 How should the und with two distinct investment port olios ( or example,a bond port olio and an equity port olio) present the minimum riskdisclosures required by IFRS 7 para 34(b) and IFRS 7 paras 36 to 42?

A und with two distinct investment port olios could provide the minimum disclosureson a consolidated basis or the bond port olio and the equity port olio. All disclosuresshould be provided on a consolidated basis in accordance with IAS 27 para 22unless there is a speci c exception (such as or those disclosures that are based onmanagement’s reporting).

The und could provide the minimum disclosures separately or the bond port olio andthe equity port olio to refect the way management monitors the nancial risks, unlessthere were material transactions between the port olios. In this case, the separatedisclosures could be misleading.



4.3 Fund A and Fund B have similar port olio compositions investing solelyin stocks included in the S&P 500 stock index. Fund A’s management

ollows a ‘top-down’ approach when selecting investments, deciding rsthow much o the und’s port olio to allocate to di erent industry sectors,then deciding what stocks within those sectors to invest in. Fund B’smanagement ollows a ‘bottom-up’ approach. Fund B’s managementdoes not manage the port olio by industry sector or utilise any analysiso the port olio by sector. When making investment decisions, Fund B’smanagement ocuses solely on each individual investment. When preparingrisk disclosures under IFRS 7, could the risk disclosures vary between Fund

A and B even though the port olio compositions are similar?

Yes. The basis or much o the risk disclosures under IFRS 7 is ‘through the eyeso management’ – that is, based on the in ormation provided to key managementpersonnel. Two unds with di erent management approaches but similar port oliocompositions would be expected to provide di ering risk disclosures in some areas.However, there are speci c risk disclosures applicable to all entities, so managementshould provide a common benchmark or nancial statement users when comparing riskdisclosures across di erent entities.

4.4 Fund A invests solely in S&P 500 stocks. Fund A’s management ollows a‘top-down’ approach when selecting investments, deciding rst how mucho the und’s port olio to allocate to di erent industry sectors, then decidingwhat stocks within those sectors to invest in. At year end, Fund A investedin two stocks, together comprising 35% o the port olio. One stock wasin the banking sector and represented 15% o the total port olio and 75%o the ‘banking’ sector; the other stock was in the oil and gas sector andrepresented 20% o the total port olio and 100% o the oil and gas sector.In ormation provided to management is by sector and then by stock. Whatlevel o disclosure should be given when providing summary quantitativedata about Fund A’s exposure to equity price risk under IFRS 7 paras 34(a)and (c)?

The use o the above ‘top-down’ approach should result in summary quantitative riskdisclosures being provided by industry sectors, given this is how management views riskand manages the port olio. Such disclosure would show the industry concentrations.However, stock-speci c concentrations also exist and would there ore need to bedisclosed in addition to the industry sector in ormation – or example, 75% o thebanking sector and 100% oil and gas sector were in a single investment.

4.5 Would the answer in the above scenario be di erent i Fund A ollowed a

‘bottom-up’ approach, not managing the port olio by industry sector andnot utilising any analysis o the port olio by sector?

Yes. The answer would be di erent i a ‘bottom-up’ approach was used by management.Summary quantitative data would not need to be provided at the industry sector level.However, Fund A should disclose, as a minimum, that two stocks comprise 35% o theport olio and the industry concentrations they orm part o , irrespective o whether the

und is managed by industry sector.

IFRS 7 has a ‘through the eyes o management’ approach to risk disclosures, but italso has a list o minimum disclosures. Concentration o risk is one o them. So eventhough in ormation is not provided to management by sector, the above investments dorepresent an individual-plus-sector concentration and should there ore be disclosed inaccordance with IFRS 7 para 34(c).



4.6 Should management in the ollowing situations disclose additionalin ormation that is representative o an entity’s exposure to risk during theperiod in addition to disclosure o period-end positions (IFRS 7 para 35)?(a) Investment entity A held a signi cant amount o US sub-prime debt or

an insigni cant portion o the year, which resulted in large losses. Forthe remainder o the year and at year end, investment entity A held

virtually no sub-prime debt.(b) Investment entity B held a signi cant amount o US sub-prime debtor a signi cant portion o the year. By year end it held virtually no

sub-prime debt.(c) Investment entity C has liquidated its equity investments during the

period in anticipation o redeeming all shareholders as part o an orderlywind-up. As at the reporting date, investment entity C has investmentsin cash only.

(d) Investment entity D operated as a eeder und into a master und or asigni cant portion o the year. Investment entity D then reorganiseditsel into a und o unds, investing directly into a port olio o other

investment entities that it was previously exposed to indirectly via itsinvestment in the master und.

(e) Investment entity E traded some equity index derivatives during theperiod; however, it held no such derivatives at year end. The net pro tand loss rom such trading during the period was insigni cant; however,

or a signi cant amount o the period, the overall exposure rom suchderivatives was signi cant to the entity.

Yes. The investment entities should disclose additional in ormation i the quantitativedata as at the reporting date is not representative o the nancial period. A merestatement that the data is not representative is not su cient under IFRS 7 para 35. Tomeet the requirement in IFRS 7 para 35, the entity might disclose the highest, lowestand average amount o risk to which it was exposed during the period [IFRS 7 IG20].There ore:

(a) Investment entity A presents additional disclosure o risk during the period given thesigni cance o the exposure and resultant large losses.

(b) Investment entity B presents additional disclosure o risk during the period becausethe positions at year end are not representative o the risks to which the entity wasexposed during the period.

(c) Investment entity C presents additional disclosure o risks during the period becauseduring the year the entity was exposed to the risk inherent in the equity investments.

(d) Investment entity D presents additional disclosure o risk during the period, althoughsuch additional disclosure could simply explain qualitatively the structure prior to thereorganisation i the ultimate exposures are similar i not the same.

(e) Investment entity E presents additional disclosure o risk during the period. This isbecause it is the actual risk exposures that are relevant when consideringcompliance with IFRS 7 para 35 rather than how much pro t and loss was made

rom the activity that resulted in the risk exposures.



4.7 When considering the requirement to disclose concentrations o credit risk,should a concentration o credit risk be disclosed under IFRS 7 para 34(c)in the ollowing scenarios?(a) The issuers o debt in which the entity invests are concentrated in the

manu acturing and retail sectors.(b) The debt instruments in which the entity invests are concentrated in the

sub-prime market.(c) The entity invests in the debt o European corporate issuers. At year

end, the entity’s investments are concentrated in the issuers o anindividual country.

(d) The entity invests a signi cant portion o its unds in the debt o a groupo closely related companies.

Yes. Separate disclosure o the concentration o credit risk is required, i theconcentration o credit risk arising rom the ollowing is not apparent rom otherdisclosures:

(a) Two individual sectors;

(b) Investment in debt o similar credit quality;(c) Investment in issuers in individual countries; or(d) Investing in a limited number o issuers or groups o closely related issuers.

Disclosure o the concentrations o risk include: A description o how management determines the concentrations;•

A description o the shared characteristics that identi es each concentration ( or•

example, counterparty, geographical area, currency, market or industry); andThe amount o the risk exposure associated with all nancial instruments•

sharing that characteristic.

[IFRS 7 App B8].

4.8 Feeder und ABC Ltd invests solely in master und DEF Ltd, which investssolely in the Japanese equity market. ABC Ltd is not required to prepareconsolidated accounts. It has provided broad qualitative disclosure o thenature o its investment in DEF Ltd in its stand-alone nancial statements;it states that DEF Ltd invests in the securities o Japanese companieslisted on the Tokyo Stock Exchange. ABC Ltd and DEF Ltd operate as anintegrated structure. Management o ABC Ltd and DEF Ltd are comprisedo the same parties and view the risk exposures o ABC Ltd to be the sameas those o DEF Ltd.

As a result o IFRS 7’s ‘through the eyes o management’ approach, shouldadditional detailed quantitative disclosure o the nancial risks relating tothe port olio o DEF Ltd be made in the nancial statements o ABC Ltd inaddition to the qualitative disclosures previously mentioned?

Yes. IFRS 7 para 34(a) requires the disclosure o quantitative data about ABC Ltd’sexposure to the risks o investing in DEF Ltd. The disclosures should be based onhow ABC Ltd views and manages its risks – that is, using the in ormation provided tomanagement [IFRS 7 BC47]. Given the integrated structure and management’s viewthat the risk exposures o ABC Ltd are the same as those o DEF Ltd, ull disclosureo the risks inherent in the port olio o DEF Ltd should be made in the stand-alone

nancial statements o ABC Ltd. In other words, in this instance, a ‘through the eyes o

management’ approach should be adopted.



4.9 An investment entity invests in a oreign currency bond maturing inone year and simultaneously enters into an FX orward contract with acorresponding maturity to o set the oreign currency risk. IFRS 7 para 34(b)requires speci c risk disclosures or material risks. Is the materiality o the

oreign currency risk on the bond assessed with or without the FX orwardcontract?

The materiality o the oreign currency risk on the bond is assessed without the FXorward contract. The bond and the FX orward are dissimilar items [IAS 1 para 29];

the materiality assessment o the oreign currency risk is there ore per ormed withoutconsidering the FX orward contract.

I it is established that the oreign currency risk is material, the disclosure required in thesensitivity analysis [IFRS 7 paras 40 and 41] is based on the net FX exposure − that is,a ter o setting the oreign currency bond against the FX orward contract.

The same approach would apply or the assessment o credit risk, liquidity risk and othermarket risk.

4.10 The management o an investment entity claims it does not ‘manage’currency risk, it simply ‘trades’ it. Management does not there oreintend to make any risk disclosures under IFRS 7. Does IFRS 7 stillrequire risk disclosure in situations where management believes risksare not managed?

Yes. IFRS 7 requires qualitative [IFRS 7 para 33(a)] and quantitative [IFRS 7 para 34]disclosures o risk, irrespective o whether such risks are considered by management tobe managed. IFRS 7 IG15(b) re ers to the need or management to disclose the reportingentity’s policies and processes or accepting risk, in addition to those or measuring,monitoring and controlling risk.

4.11 Investment entity ABC Ltd, with a unctional currency o New Zealanddollars, invests in a global equity port olio. As a result, it has signi cant

oreign currency exposure through its investments in the yen, euro andUS dollar. Is ABC Ltd considered to have currency risk or the purpose omeeting the IFRS 7 requirements?

No. IFRS 7 does not consider currency risk to arise rom nancial instruments that arenon-monetary [IFRS 7 App B23], such as equity investments. The oreign currencyexposure arising rom investing in non-monetary nancial instruments would be refectedin the other price risk disclosures as part o the air value gains and losses.

4.12 ABC Ltd, in the prior year, reported its policies and processes or managingrisk. In response to an increase in the risks arising rom the markets inwhich ABC Ltd invests, management o ABC Ltd developed its riskmanagement systems during the year and designed additional policies andprocesses or dealing speci cally with credit risk. Should such changes bedisclosed in the nancial statements o ABC Ltd?

Yes. IFRS 7 para 33(c) requires an entity to report any change in qualitative disclosuresrom the previous period and explain the reason or the change – speci cally, in this

instance, changes in the policies and process or managing and measuring risk.

Note: I the change in policies and processes results in a change in accounting policies,additional disclosures may be required [IAS 8 para 29].



4.13 Should an investment entity restate the comparative risk disclosures orchanges in volatility – or example, the reasonably possible change in anexchange rate changes rom 5% in the prior year to 8% in the current year?

No. The prior-year disclosures should not be restated i the volatility (and there orethe range or a reasonable change) increases or decreases between two balancesheet dates.

B. Credit risk – credit quality

IFRS 7 para 36 requires an entity to disclose in ormation about its exposure to creditrisk by class o nancial instrument. Such disclosures include in ormation on the creditquality o nancial assets with credit risk.

4.14 IFRS 7 para 37(a) requires investment entities to disclose an analysis othe age o nancial assets that are past due at the reporting date but notimpaired. Investment und A’s management monitors nancial assets onlywhen they are overdue more than one month. What does ‘past due’ mean?

As de ned in IFRS 7 App A, a nancial asset is past due when a counterparty has ailedto make a payment when contractually due. Past due there ore includes all nancialassets that are one or more days overdue. Although IFRS 7 para 34(a) requires riskdisclosures that are based on the in ormation provided to key managementpersonnel, there are also some minimum disclosure requirements de ned byIFRS 7 (IFRS 7 paras 36 to 42) that should always be disclosed, irrespective o howmanagement monitors the risk.

However, the entity may take the way management monitors nancial assets intoaccount when de ning the appropriate time bands used in the credit risk table. In theabove scenario, it may disclose the amounts past due less than a month and amountspast due more than a month.

4.15 IFRS 7 para 37(a) requires an analysis o the age o nancial assets that arepast due as at the reporting date but not impaired. What amount should bedisclosed to satis y this requirement? Should this be:

• Only the amount past due (that is, the instalment not paid whencontractually due);

• The whole balance that relates to the amount past due; or• The whole balance that relates to the amount past due, including any

other balances with the same debtor?

The investment entity should disclose the whole balance that relates to the amountpast due.

IFRS 7 BC55(a) explains that the purpose o the disclosure required in IFRS 7 para 37(a)is to provide users o the nancial statements with in ormation about those nancialassets that are more likely to become impaired and to help users to estimate the level o

uture impairment losses. The whole balance that relates to the amount past due shouldthere ore be disclosed, as this is the amount that would be disclosed as the amount othe impaired nancial assets i impairment crystallises.

Other associated balances to the same debtor should not be disclosed as past duebut not impaired, as the debtor has not ailed to make a payment on these whencontractually due.



4.16 A private equity und holds equity investments in other entities. Itsmanagement asserts that the IFRS 7 credit risk disclosures [IFRS 7 paras36 to 38] are not relevant. Do the credit risk disclosures required by IFRS 7para 36 to 38 apply to an entity’s holdings o equity investments?

Only the disclosures required by IFRS 7 para 37(b) apply (see Q&A 4.18). The de nitiono equity in IAS 32 requires that the issuer has no obligation to pay cash or trans er other

assets. It ollows that such equity investments are subject to price risk, not credit risk.Most o the IFRS 7 credit risk disclosures are there ore not relevant to investments inequity instruments.

However, IFRS 7 para 37(b) requires entities to disclose an analysis o nancial assetsthat are impaired. This disclosure is relevant and should be given or impaired equityinvestments classi ed as available or sale.

4.17 A private equity und holds an equity investment categorised as AFS, whichwas assessed as being impaired in 20x1. The related loss was included inthe income statement as an impairment loss. As the asset is impaired, it isincluded in the disclosures o impaired nancial assets [IFRS 7 para 37(b)]in the year o impairment. Should there be a disclosure in the subsequent

year as well?

As long as the air value o the nancial asset is below its historical cost, the nancialasset is considered as ‘impaired’. It should there ore be included in the disclosure oimpaired nancial assets irrespective o the act that the entity recognises a valuationgain in the current year’s nancial statements. When the air value returns to above itshistorical cost, the asset should be excluded rom the disclosure (note: this answer isalso applicable to a debt instrument classi ed as AFS).

4.18 Disclosure includes an analysis o nancial assets that are individuallydetermined to be impaired as at the reporting date, including the

actors the entity considered in determining that they are impaired[IFRS 7 para 37(b)].

A real estate investment und has C3 million o receivables (that is,outstanding lease payments), which have been treated as ollows:(a) C1 million o the receivables have been assessed individually or

impairment; based on the conditions stated in IAS 39 paras 58-61,management concludes that they are impaired;

(b) C1 million o a collection o insigni cant receivables are individuallyconcluded to be impaired on the basis o the IAS 39, but theimpairment calculation is carried out on the C1m amount ore ciency purposes; and

(c) C1 million o a port olio o assets has observable data indicating thatthere is a measurable decrease in the estimated uture cash fows romthat group o nancial assets, although the decrease cannotbe identi ed with individual nancial assets [IAS 39 para 59( )].

Which o these require disclosure under IFRS 7 para 37(b)?

Treatments (a) and (b) require disclosure under IFRS 7 para 37(b), as these receivablesare individually assessed or impairment.

The disclosure is not required or (c), as the receivables are assessed on a port olio basisrather than an individual basis. However, actual impairment loss onthe port olio o assets should also be disclosed or income statement purposes underIFRS 7 para 20(e).



C. Liquidity risk – maturity analysis

Management should disclose a maturity analysis or all non-derivative nancial liabilities(including issued nancial guarantee contracts) that shows the remaining contractualmaturities [IFRS 7 para 39(a)]. The maturity analysis required or derivative nancialliabilities should include the remaining contractual maturities or those derivative nancialliabilities or which contractual maturities are essential or an understanding o the timing

o the cash fows [IFRS 7 para 39(b), IFRS 7 App B11].

4.19 Should the ollowing nancial instruments be shown in one maturitybucket, or split across the maturity buckets in which the cash fows occur:

(a) A derivative or which contractual maturities are essential to anunderstanding o the timing o the cash fows and that has multiplecash fows?

(b) A 10-year loan that has annual contractual interest payments?(c) A ve-year loan that has annual contractual interest and

principal repayments?

All the nancial instruments should be split across the maturity buckets in which thecash fows occur. The requirement is to disclose each o the contractual payments in theperiod when it is due (including principal and interest payments). The objective o thisparticular disclosure is to show the liquidity risk o the entity.

4.20 Is a maturity analysis or nancial assets required?

IFRS 7 App B11E requires an entity to disclose a maturity analysis o nancial assets itholds or managing liquidity risk ( or example, nancial assets that are readily saleable orexpected to generate cash infows to meet cash outfows on nancial liabilities), i thatin ormation is necessary to enable users o its nancial statements to evaluate the nature

and extent o liquidity risk.Investment unds may use nancial assets to manage their liquidity risk ( or example,real estate unds that hold some highly liquid investments to meet the daily redemptionrequests). In these circumstances, the in ormation is likely to be necessary to enableusers o nancial statements to evaluate the nature and extent o liquidity risk; in whichcase, we would expect them to present a maturity analysis o nancial assets.

4.21 Can an investment und present one maturity table or all o its non-derivative and derivative nancial liabilities?

Yes, provided it is clear to the users o the nancial statements whether the disclosure

is based on contractual maturities or expected maturities and whether the nancialliabilities are derivatives or non-derivatives.

4.22 When is quantitative in ormation based on how management managesliquidity required [IFRS 7 App B10A]?

Additional quantitative in ormation based on how management manages liquidity riskis required i the outfow o cash could occur signi cantly earlier than indicated in thedata ( or example, a bond that is callable by the issuer in two years but has a remainingcontractual maturity o 12 years).

In addition, i the cash outfow could be or a signi cantly di erent amount than thatindicated in the maturity table, this should also be disclosed.



4.23 An investment und has issued participating shares redeemable at thediscretion o the holders and classi ed them as liabilities. In which timeband in the maturity analysis should the shares be included, given it isunknown when exactly the holders will put the shares back to the entity?

A maturity analysis is always required based on the remaining contractual maturity ornon-derivative nancial liabilities and derivative nancial liabilities or which contractual

maturities are essential or an understanding o the timing o the cash fows. Shares thatare classi ed as liabilities and can be put back to the issuer at anytime without restrictionshould be classi ed in the earliest time band or the purpose o the maturity analysisbased on the contractual maturity [IFRS 7 App B11C(a)].

However, including such shares in the earliest time band may not reveal the expectedmaturities o such liabilities – that is, the redemption expected in normal circumstances.In addition to the maturity analysis based on the remaining contractual maturity, an entitymight disclose a maturity analysis or ( nancial assets and) nancial liabilities showingexpected maturity, i this is the in ormation provided to key management personnel tomanage the business. As a minimum, i management’s monitoring o liquidity risks issubstantially di erent rom the analysis o contractual maturity o liabilities, the entityshould provide qualitative disclosures about the way management is monitoring liquidityrisk [IFRS 7 para 39(c)].

I signi cant, the di erence between the contractual and expected liquidity pro le o theentity should be explained.

4.24 An investment und has issued participating shares redeemable at thediscretion o the holders and classi ed them as liabilities. In which time bandin the maturity analysis should the shares be included i there are restrictionson the redemptions ( or example, no more than 50% o the entity shares canbe put back in any month)?

I there were restrictions on the number o shares that can be redeemed at any time, thematurity analysis should refect such restrictions. IFRS 7 allows judgement in determiningthe appropriate number o time bands used in the maturity analysis [IFRS 7 App B11].However, in the instance when only 50% o the shares can be put back in any givenmonth, due to the signi cance o the item, a time band o not later than one month shouldbe disclosed.

4.25 An investment und, which is to a signi cant extent invested in illiquidinvestments, has issued participating shares redeemable at the discretiono the holders and classi ed them as liabilities. Management o the undreceived signi cant redemption requests, so it decided to close the und orredemptions or the next six months and announced that to the investors.In which time band in the maturity analysis should the shares be included ithere are restrictions on the redemptions?

The investment contract provides the investment manager with the option to temporarilydispense the redemption o the und units. The contractual maturity o the units haschanged as a result o the und closure. The investment und discloses the amountsattributable to unit holders in the due-a ter-six-months time band [IFRS 7 App B11C].



4.26 Investment manager A’s own holding in mutual und B, which he controls, is45%. The remaining 55% is held by retail clients. Fund B issues only puttableshares, which can be put back at any time without any notice period. Basedon historic data, the average investment period o a retail client is our years.

In investment manager A’s consolidated nancial statements, und B isincluded as subsidiary according to IAS 27, ‘Consolidated and separate

nancial statements’. The minority interest o the retail clients is classi edas a nancial liability.

Can investment manager A present the third-party interest in consolidatedunds, which is classi ed as nancial liability in the liquidity analysis using

the expected maturity date – that is, the historic average maturity o our years?

Investment manager A should present as a minimum a maturity analysis based oncontractual maturities [IFRS 7 para 39(a)]. In this case, this is the earliest time band theentity can be required to pay because the counterparty has a choice o when an amountis paid [IFRS 7 App B11C(a)]. As the minority interest is puttable on demand, the liability

should be shown within the earliest time bucket.In addition to the disclosure requirements in IFRS 7 para 39(a), the entity should providesummary quantitative data about its exposure to liquidity risk based on in ormationprovided internally to key management personnel o the entity as required in IFRS 7para 34(a) and App B10A.

4.27 Private equity und ABC LP has a contractual maturity o 12 years. Theund presents the paid-in capital as a nancial liability. The partnership

agreement requires ABC LP to make liquidity distributions within 90 days oa private equity investment being sold. The liquidity distributions include theredemption o a proportionate share o the invested capital. How should

ABC LP present the maturity analysis?

The private equity und ABC LP should disclose the drawn amount in the time bandthat refects when the repayment is contractually due ( or example, when the und isliquidated). However, i the und’s management expects to repay the drawn amountsigni cantly earlier, this act should be disclosed. Such earlier repayment is usuallyrequired because o contractually required liquidity distributions that arise when the undliquidates some o its investments. When the und disposes o an investment, thecontract might require a liquidity distribution within, or example, 90 days. In this case,the contractual maturity (rather than the expected maturity) o the amount to bedistributed is 90 days.

Note: The undrawn amount does not represent uture cash outfow and is there ore notincluded in the maturity analysis.

4.28 During the commitment period, investors commit themselves to invest ina private equity und. What amounts should be included in the maturityanalysis in respect o this acility?

The investor should include the undrawn amount o the capital commitment in the earliestperiod in which the private equity und may be able to draw it [IFRS 7 App B11C(b)]. Suchdisclosures can be made either in a separate table including the o -balance sheet items,or together with the recognised nancial liabilities. IFRS 7 App B11D is not relevant, as theamount the investor is required to pay in cash is xed.



4.29 What liquidity risk disclosures are required or derivative nancialliabilities?

Re erring to IFRS 7 para 39(b), please see the table below:

Gross settled derivatives Net settled derivatives

Contractual maturityis essential tounderstanding

Disclose pay leg based on•

contractual maturity

Disclosure o receive leg•

Disclose net cash fows•

based on contractualmaturity

Contractual maturityis not essential tounderstanding

Disclose pay leg either•

based on contractualmaturity or how the risk ismanaged – or example,expected maturity

Disclosure o receive leg•

optional

Disclose net cash fows•

either based on contractualmaturity or how the risk ismanaged – or example, airvalue

4.30 Should derivatives with a positive air value be included in the maturityanalysis?

Generally, only derivatives in a liability position at the balance sheet date (that is, havinga negative air value) are required to be included in the maturity analysis.

However, entities should also include derivative nancial assets where such in ormationis necessary to understand the nature and extent o liquidity risk [IFRS 7 App B11E].For example, this might be the case where there are signi cant o setting derivativepositions.

4.31 I gross cash fows are exchanged under a derivative contract, doesIFRS 7 require disclosure o the gross cash fows, even i the exchangeoccurs simultaneously?

Yes. For derivative nancial liabilities, IFRS 7 App B11D(d) is clear that contractualamounts exchanged in a derivative nancial instrument ( or example, a currency swap)should be disclosed on a gross basis i gross cash fows are exchanged. This is the caseeven i the cash fows are exchanged simultaneously.

4.32 How is a written put option or which contractual cash fows are essentialto an understanding o liquidity treated in the maturity analysis?

It depends on whether the option is settled net or gross and whether the option is in ourout o the money at the balance sheet date.

I the option is out o the money and net settled, no liability is required to be disclosedin the maturity table, because there is no obligation to make a payment based on theconditions existing at the balance sheet date [IFRS 7 App B11D].

For gross-settled derivatives where the counterparty can orce the issuer to make apayment, the pay leg is disclosed in the maturity analysis irrespective o whether theinstrument is in or out o the money.

An American-style option should be disclosed in the earliest time band; a European-styleoption is disclosed in the time bank in which the exercise date alls.



4.33 I the counterparty to a derivative contract has the ability to settle early ondemand, in which time band in the contractual maturity analysis shouldundiscounted cash fows be presented when analysing liquidity risk?

When the counterparty to the derivative instrument has a choice o when an amountis paid, the liability is included on the basis o the earliest date on which the entity canbe required to pay. There ore, i the counterparty to the derivative has the ability to

settle early on demand, the derivative cash fows should be included in the earliestmaturity band.

4.34 An investment entity is party to a derivative instrument that it (but not thecounterparty) has the ability to settle early on demand. In which time bandin the contractual maturity analysis should undiscounted cash fows bepresented when analysing liquidity risk?

The maturity analysis should refect the contractual obligations o the entity at the timeit is prepared. The ability o the investment entity to settle early on demand does notchange its contractual obligations. The cash fows arising rom the respective derivativesinstruments should there ore be included in the relevant time bands based on thecontractual cash fows.

4.35 A private equity und invests in unlisted securities. These securities arehighly illiquid, and the private equity und nds it di cult to nd a buyer. Isthe und required to provide additional disclosures because o the lack oliquidity o the investment?

In addition to the disclosure requirements in IFRS 7 para 25 to 27B ( air valuemeasurement disclosures), the entity should provide summary quantitative data aboutits exposure to liquidity risk based on in ormation provided internally to key managementpersonnel o the entity as required in IFRS 7 para 34(a).

IFRS 7 para 39(c) requires the entity to describe how it manages the liquidity riskinherent in the maturity analysis o nancial liabilities required in IFRS 7 paras 39(a)and (b). An entity should disclose a maturity analysis o nancial assets that it holds ormanaging liquidity risk i that in ormation is necessary to enable users o its nancialstatements to evaluate the nature and extent o liquidity risk [IFRS 7 App B11E].

Given the nature o most private equity unds investments (signi cant investments inunquoted, o ten illiquid, investments), management would rarely consider the liquidityo its investments when managing its ability to settle nancial liabilities as they comedue. As a result, unless there are liabilities that are expected to be settled via assetrealisations, a private equity und would not be expected to make urther disclosuresabout the illiquidity o its investments.

While many limited partnerships are unded by partnership contributions that areclassi ed as debt instruments, this would not ordinarily present a liquidity risk. This isbecause the ultimate settlement o these nancial liabilities is o ten based on the pre-determined, contractual termination date o the partnership once the investments hadbeen realised, providing cash to return to investors.



4.36 What rate should be used to determine the amounts to be disclosedor foating rate nancial instruments and instruments denominated in

a oreign currency, where amounts are required to be disclosed in thematurity table based on contractual undiscounted cash fows [IFRS 7

App B11D]? Should this be the current rate or the orward rate?

An entity has a policy choice that needs to be applied consistently. IFRS 7 App B11Dstates that amounts not yet xed at the reporting date are determined by re erence tothe conditions existing at the reporting date. This could either be viewed as the currentspot rate or the orward rate.

4.37 Should exposure to collateral calls be disclosed?

Collateral requirements on nancial instruments can pose a signi cant liquidity risk.For example, an entity with a derivative liability may be required to post cash collateralon the derivative should the liability exceed certain limits. As a result, i collateral callsdo pose signi cant liquidity risk, such entities should provide quantitative disclosureso their collateral arrangements, as those cash fows could occur earlier than thecontractual maturity [IFRS 7 App B10A]. Whenever an entity is subject to collateral calls,it is recommended that additional qualitative disclosures are provided and include adescription o whether the entity is exposed to collateral calls on nancial instrumentsand how this risk is managed [IFRS 7 para 33].

4.38 How should an entity disclose a perpetual debt instrument with mandatoryinterest payments in the analysis o contractual maturities (undiscountedcash fows) per IFRS 7 para 39(a)?

Interest payments should be shown in each time band based on when they arecontractually due. With regards to the repayment o the nominal amount, entities maypresent this in a number o ways − or example, using a ‘therea ter’ column or presentingit in a column labelled ‘no contractual maturity’. Whichever method is used, this shouldbe complemented by a narrative description o the terms o the instrument.

4.39 What comparative in ormation is required in the rst year o application othe IFRS 7 amendment on air value and liquidity risk?

IFRS 7 para 44G states that an entity need not provide comparative in ormation in therst year o application or the disclosures required by the amendments. The entity

can either keep its previous disclosures (but disclose i this is the case) or adapt thecomparative in ormation to be consistent with that required by the amendment.

D. Market risk – sensitivity analysis

Management should disclose a sensitivity analysis or each type o market risk towhich the entity is exposed at the reporting date. This should show how pro t or lossand equity would have been a ected by changes in the relevant risk variable that werereasonably possible at that date [IFRS 7 para 40(a)]



4.40 Is management required to provide sensitivity analysis on a ‘worse casescenario’ basis?

No. IFRS 7 para 40(a) requires a sensitivity analysis to show the e ect on pro t or lossand equity o reasonably possible changes in the relevant risk variable. A reasonablypossible change is judged relative to the economic environments in which the entityoperates; it does not include remote or ‘worst case’ scenarios or ‘stress tests’.

Furthermore, entities are not required to disclose the e ect or each change within arange o reasonably possible changes o the relevant risk variable. Disclosure o thee ects o the changes at the limits o the reasonably possible range would be su cient[IFRS 7 App B18-19].

4.41 IFRS 7 para 40(a) requires a sensitivity analysis to show the e ect onpro t or loss and equity o reasonably possible changes in the relevantrisk variable. When determining a ‘reasonably possible’ change based onhistorical data, is there any explicit guidance as to how long the historicalperiod should be?

No. Each entity should judge what a reasonably possible change is; assessments maydi er rom entity to entity. However, reasonably possible movements should be assessedbased on a period until the entity next presents the disclosures − it is usually the nextannual reporting period [IFRS 7 App B19 (b)].

When providing such sensitivity in ormation, management will generally be disclosingreasonably possible changes over the next year. It would there ore make sense thathistorical annual movements over a similar period be considered over as many historicalperiods as possible in an e ort to minimise extremes.

There are inherent weaknesses in using historical data to predict uture returns; anychanges in the undamental structure, risk and returns o the relevant markets in therisks that arise should also be considered when basing uture movements on historical

sensitivities. Irrespective o what methodology is adopted, it should be consistentlyapplied and su ciently described so that the user o the nancial statements has anunderstanding o how the sensitivity analysis has been derived [IFRS 7 para 40(b)].

4.42 Fund ABC Ltd invests in ve unds (‘the Funds’), all o which invest inglobal corporate debt markets. ABC Ltd is a und o unds, ocusing oninvesting in unds with global long/short corporate debt strategies. Whilenot being actively involved in managing the Funds’ investment port olios,

ABC Ltd’s management utilises in ormation on the underlying port olios,particularly with respect to risk and return, when deciding to which Fundsto allocate resources. While ABC Ltd is not directly exposed to interest rate

and currency risk, it has signi cant indirect exposures through its equityinvestment in the Funds. How should management meet the IFRS 7 para 40requirement to prepare a sensitivity analysis?

Management should identi y the relevant risk variables that refect best the entity’sexposure to market risk. Management o ABC Ltd views and considers the primary

nancial exposure o ABC Ltd to be to interest rate and oreign exchange movements,given ABC Ltd’s narrow ocus on unds ollowing a global long/short debt strategy.Management has determined the relevant risk variables to be interest and oreigncurrency rates. When preparing the sensitivity analysis or ABC Ltd, management shouldrefect the quantitative impacts o the interest and oreign currency rate sensitivities othe Funds.



4.43 Investment entity ABC Ltd (a ‘ und o unds’) invests in a number o otherinvestment entities (‘the Funds’). The Funds invest in a variety o globalmarkets. Management manages the port olio by allocating and reallocatingmoney to speci c investment strategies and speci c managers withinthose strategies a ter per orming comprehensive due diligence. As at yearend, ABC Ltd invested in 37 Funds, which could be categorised into sixmajor strategies with 15 sub-strategies. ABC’s investment in the Fundsis evidenced by way o shares or units in those Funds. Management o

ABC Ltd considers ABC’s exposure to risk to be to the managers o theunderlying Funds they invest and to the respective strategies. In assessingthat risk, management obtains monthly overall per ormance gures romthe respective underlying managers. While management is aware o thetypes o risk ABC Ltd is exposed to via its investments in the Funds, noin ormation is utilised on the underlying port olios.

ABC Ltd is directly exposed to equity price risk, being the sensitivity o ABC Ltd to movements in the value o the shares or units issued by theFunds, and indirectly exposed to many risks that infuence the value o

those shares or units − or example, interest rates, oreign exchange rates,commodity prices, equity prices, etc.

How should management meet the IFRS 7 para 40 requirement to prepare asensitivity analysis?

Management should identi y the relevant risk variable(s) that refect best the exposure othe entity to market risk.

As management considers ABC’s exposure to risk to be to the managers o theunderlying Funds they invest in and to the respective strategies, the sensitivity o theport olio could be disclosed by und strategy. I the relevant risk variable is determined tobe und strategy, management should look to provide meaning ul disclosure o thesensitivity o ABC Ltd to movements in the respective strategies. In addition,management should disclose qualitative in ormation on the types o risk the Fundswithin each strategy are directly exposed − that is, the inherent risks o each o theFunds within a strategy.

As an example, management o ABC Ltd could provide the ollowing disclosure in thenancial statements:

“The table below summarises the impact on ABC’s post-tax proft o reasonably possible changes in the returns o each o the strategies to which ABC is exposedthrough the 37 Funds in which it invests at year end. A reasonably possible change

is management’s assessment, based on historical data sourced rom [add source], o what is a reasonably possible percentage movement in the value o a und ollowingeach respective strategy over the next year in USD terms. The impact on post-tax

proft is calculated by applying the reasonably possible movement determined or each strategy to the value o each und held by ABC Ltd. The analysis is based onthe assumption that the returns on each strategy have increased or decreased asdisclosed, with all other variables held constant. The underlying risk disclosures

represent the market risks to which the Funds are exposed: I, F, O, representing interest rate, currency and other price risks respectively. In accordance withIFRS 7, currency risk is not considered to arise rom fnancial instruments that are

non-monetary items, such as equity investments.”



Strategy Sub- strategy

Underlyingrisk

exposuresNumbero unds

Reasonablypossible

change (%)

Impact onpost-tax

pro t (“000)

Equity long/short

Sectorspecialists O 4 5.2 115

Short bias O 3 3 157Opportunistic O 1 6.7 155

Fund o unds

Fund o unds I,F,O 6 7.5 365

Multi- manager I,F,O 2 6.6 113

Directional trading

Global macro I,F,O 4 8 313

Market timing I,F,O 1 7 34

Commoditypools I,F,O 1 5.3 45

Event driven

DistressedSecurities I, F 2 7.5 113

Mergerarbitrage O 1 5.6 56

Emergingmarkets I,F,O 2 9.5 169

Relative value

Convergencearbitrage I,F,O 2 6.7 145

Fixed incomearbitrage I,F 1 8.0 37

Convertiblearbitrage I,F,O 1 5.7 45

MBS strategy I,F 1 7.8

Multi-strategy I,F,O 5 7.0 450

Total 37 2,312



4.44 ‘Tracking error’ (TE) is a tool that may be used by management to monitorthe results o a und against a benchmark. TE is a measure o how closely aport olio ollows an index. Can TE be used as a orm o sensitivity analysisto satis y the requirements o IFRS 7 paras 40 and 41?

No. IFRS 7 para 40 requires the disclosure o a sensitivity analysis o each type omarket risk to which an entity is exposed, showing how pro t or loss and equity would

be a ected by changes in the relevant risk variable that were reasonably possible at thebalance sheet date. In addition, IFRS 7 para 41 allows an entity that uses a sensitivityanalysis ( or example, value at risk (VAR)) that refects inter-dependency betweendi erent risk variables to disclose such a sensitivity analysis.

TE does not provide the in ormation required by IFRS 7 para 40, as it does not show howthe pro t or loss and equity o a und will be impacted rom a change in a market riskvariable. In addition, while the TE gure itsel is somewhat based on interdependenciesbetween risk variables, it will also take account o other actors such as ees, rebalancingcosts, cash holdings, etc. The resulting TE gure is not there ore a VAR gure but only anestimate as to how closely the und will track an index. It does not there ore provide thein ormation required by IFRS 7.

4.45 When providing sensitivity analysis in accordance with IFRS 7 para 40(a),should the impact on pro t and loss and equity as a result o changes in therelevant risk variable be net o ees, which may increase or decrease as aresult o such changes?

The impact on pro t and loss and equity as a result o a change in the relevant riskvariable may be disclosed net or gross o ees, provided the methods and assumptionsused in preparing the sensitivity analysis are disclosed [IFRS 7 para 40(b)].

4.46 Investment entity ABC Ltd invests in a debt port olio primarily concentratedin the region o Eurasia. Many o the countries in Eurasia have similareconomic environments. However, one country, Utopia, has a moredeveloped economic environment, which is dissimilar to the other countrieswithin the region. When providing a sensitivity analysis or interest rate risk,should ABC Ltd provide disaggregated in ormation showing the sensitivityo ABC Ltd to reasonably possible movements in interest rates in all thecountries it invests?

It depends. The management o ABC Ltd decides how it aggregates in ormation todisplay the overall picture without combining in ormation with di erent characteristicsabout exposures to risks rom signi cantly di erent economic environments [IFRS 7

App B3 and B17]. Because many o the countries in Eurasia have similar economicenvironments, it could be possible to aggregate the in ormation providing it is notunreasonable to assume a reasonably possible change in interest rates would be thesame in these countries – or example, a 50 basis point move. However, it would neverbe appropriate to aggregate these countries with Utopia due to di erences in theeconomic environments.

4.47 IFRS 7 requires the disclosure o a sensitivity analysis or each type omarket risk to which the entity is exposed at the reporting date [IFRS 7para 40(a)] or a sensitivity analysis that refects interdependencies betweenrisk variables i that is how the entity manages its nancial risks [IFRS 7para 41].



The investment und uses a VAR methodology that refects inter-dependencies between risk types or its equity port olio but manages itsbond port olio using a methodology that refects each type o market risk.

Can the und disclose its VAR gures or the equity port olio and asensitivity analysis or each type o market risk or its bond port olio?

Yes. The investment und may provide di erent types o sensitivity analysis or di erentclasses o nancial instrument [IFRS 7 App B21] or may chose to applying the sensitivityanalysis outlined in IFRS 7 para 40(a) or the whole o the und. However, it is notpermitted to disclose VAR gures or the whole (see Q&A 4.48).

4.48 Investment entity ABC does not use VAR to manage risk. However, itwishes to use VAR to satis y the IFRS 7 requirement to provide a marketsensitivity analysis. Is this acceptable?

No. In order to use to VAR, or any sensitivity analysis that refects interdependenciesbetween risk variables, IFRS 7 para 41 states that the entity should use such analysisto ‘manage nancial risks’. I the entity does not use VAR to manage its nancial risks,it cannot use VAR to satis y IFRS 7 para 41. The entity should disclose a sensitivityanalysis in accordance with IFRS 7 para 40.

4.49 I an entity uses VAR to manage nancial risk and chooses to disclose VAR in the nancial statements in accordance with IFRS 7 para 41, isthere any explicit guidance on what con dence interval to use, what theholding periods are and whether to disclose VAR solely at year end versusmaximum, minimum and average VAR?

No. There is no explicit guidance. An entity should disclose the sensitivity analysis itactually uses to manage/monitor risk. An explanation o the method used in preparing

the analysis and main parameters and assumptions underlying the data should bedisclosed, along with an explanation o the objectives o the method used and o anylimitations that may result in the in ormation not ully refecting the air value o the assetsand liabilities involved [IFRS 7 para 41(a) and (b)].

4.50 The IFRS 7 para 40 sensitivity analysis determined as at year end orinvestment entity ABC Ltd would vary i events occurring a ter year endwere considered when determining what is a ‘reasonably possible’ changein the relevant risk variables. Should these events a ter year end beconsidered when determining what is a ‘reasonably possible’ movement asat year end?

It depends. Management should consider the economic environment in which itoperates when determining what a ‘reasonably possible’ change in the relevant riskvariable is [IFRS 7 App B19(a)]. Management should consider historical movements,

uture expectations and economic orecasts at the balance sheet date. This wouldinclude consideration o events occurring subsequent to year end that provide evidenceo the economic environment that existed at year end. Events occurring subsequent toyear end that are indicative o the economic environment subsequent to year end shouldnot be considered when determining what is a ’reasonably possible’ change at thebalance sheet date.



4.51 Investment entity ABC Ltd, with a unctional currency o New Zealanddollars, invests in a global debt port olio and as a result has signi cantexposure to the yen, euro and US dollar. When preparing a sensitivityanalysis or oreign currency risk, in accordance with IFRS 7 para40, should ABC disaggregate the in ormation by signi cant currencyexposure?

Yes. Even though the management o ABC Ltd has some discretion over what itaggregates and disaggregates [IFRS 7 App B3], aggregation in this instance wouldobscure the risk that each currency exposure represents. For the purpose o IFRS 7,no currency risk is deemed to arise rom nancial instruments that are non-monetaryitems – or example, equity investments. In accordance with IFRS 7 para 40(b), themethods used in preparing the sensitivity analysis needs to be very clear and shouldstate speci cally that the oreign currency sensitivity analysis refects only the sensitivityo monetary items.

4.52 Fund ABC Ltd invests in a long/short equity port olio with a ocus onS&P 500 stocks. It measures its per ormance against the S&P 500.However, management manages ABC Ltd so that the beta (sensitivityto movements in the market) o the overall port olio (including long andshort positions) to the S&P 500 is as close to zero as possible – that is, theport olio has no or little sensitivity to the movement in market prices (in thiscase the S&P 500). How should this be refected in the sensitivity analysiswhen showing equity price risk?

IFRS 7 de nes market risks as including ‘other price risk’. Other price risk is de ned as‘The risk that the air value or uture cash fows o a nancial instrument will fuctuatebecause o changes in market prices (other than those arising rom interest rate risk orcurrency risk), whether those changes are caused by actors speci c to the individual

nancial instrument or its issuer, or actors a ecting all similar nancial instrumentstraded in the market’. There ore, while the sensitivity o ABC to movements in the market(represented by the S&P 500 in this instance) may be close to neutral, ABC remainssensitive to movements in the price o the port olio it invests. Management should makequantitative disclosure o the sensitivity o ABC Ltd to movements in the S&P 500, eveni the sensitivity is very minor, and qualitative disclosure o how it manages exposure tothe index. It should also disclose that the entity is exposed to movements in the priceo the securities in which it invests and that movements in those prices will have aproportional impact on the net income and equity o the entity.

4.53 Fund ABC Ltd invests in a long-only equity port olio ocusing on S&P 500stocks. The management o ABC Ltd does not measure per ormance ormanage risk against the S&P 500; it ocuses instead on providing returns

4%-5% above a risk- ree rate o return. When disclosing the sensitivityanalysis in accordance with IFRS 7 para 40, how should ABC Ltd show itssensitivity to equity price movements?

Even though ABC Ltd does not measure or manage risk against the S&P 500,management is still required to identi y a relevant risk variable on which to base thesensitivity analysis. Compliance with IFRS 7 para 40 is not based on how managementmanages or measures risk; it is based on the identi cation o a relevant risk variableon which to determine reasonably possible changes. There is no speci c guidance inIFRS 7 para 40 as to what is a ‘relevant’ risk variable. However, when determining a riskvariable, management should consider what index or benchmark best refects the risk othe markets in which they invest. In this instance, the S&P 500 would appear to be the

most relevant risk variable. Management should there ore provide a sensitivity analysisusing the S&P 500 as the risk variable.



4.54 Fund ABC Ltd invests in a global equity port olio. The management o ABC Ltd does not measure per ormance or manage risk against anyspeci c benchmark or index; it ocuses instead on providing returns4%-5% above a risk- ree rate o return. When disclosing the sensitivityanalysis in accordance with IFRS 7 para 40, how should ABC Ltd show itssensitivity to equity price movements?

Even though ABC Ltd does not measure or manage risk against a speci c benchmarkor index, management is still required to identi y a relevant risk variable on which tobase the sensitivity analysis. There is no one index that refects the risk o the marketsin which ABC Ltd invests, given its global ocus. Management should there ore identi ythe most relevant risk variable on which to base the sensitivity analysis. This could be bycountry allocation or sectors, or any other relevant variable.

For example, i management considers the most appropriate risk variable to beallocation by country, other price risk should be analysed by country with an appropriateindex o each country being the risk variable. Management should then determine oreach index what a reasonably possible shi t would be and calculate the sensitivitiesbased on the historical correlation o ABC Ltd’s equity instruments to the index. Forexample:

“The table below summarises the impact o increases in the major equity indexeso countries in which the und invests on the und’s post-tax proft or the year.The analysis is based on the assumption that the equity indexes have increased/ decreased as disclosed, with all other variables held constant and all the Fundsequity investments moved according to historical correlations with the index.”

IndexReasonably possible

change in %Impact on post-tax pro t

(‘000)

DAX 6 109

Dow Jones 6 250

FTSE 6 67

All Ords 8 45

NZX 50 8 15

Hang Seng 10 25

Total 511

4.55 IFRS 7 para 40 requires management, when providing a sensitivity analysis,to disclose the e ect on pro t and loss and equity rom reasonablypossible changes in the relevant risk variable. I there is no e ect on equity

other than the e ect the change in pro t and loss has on retained earnings,should the e ect on equity be disclosed separately?

No. IFRS 7 para 40 requires management to disclose the e ect on the pro t and lossand other components o equity i any ( or example, e ects rom categorising someinvestments as available or sale). I the only e ect on equity is the e ect an increaseor decrease in pro t or loss has on retained earnings, no e ect on equity needs to bedisclosed [IFRS 7 App B27 and IFRS 7 IG 34-36].



4.56 Investment entity X is a und o und structure and invests in other privateequity unds (the ‘underlying unds’). The underlying unds, which aremanaged by a third-party manager not related to X, are invested directlyin private equity investments (the ‘underlying investments’). X receivesperiodically the NAVs o the underlying unds. The NAV normally representsthe air value at which transactions could be entered into.

All underlying investments are reported at air value, which is derived romthe NAV o the underlying und. The historic volatility o the und was 10%.

What method should be applied to present the other price risk?

IFRS 7 requires management to present a sensitivity analysis or all nancialinstruments. Fund investments quali y as nancial instruments; a sensitivity analysisshould there ore be disclosed. The sensitivity can be directly derived rom the balancesheet value. I the air value o the investments increased/decreased by 10%, the pro twould increase/decrease by C1 million.

4.57 A private equity und (ABC) invests in a number o other unds (‘Fund ounds’). The underlying unds invest in a variety o quoted and unquoted

port olio companies spanning multiple industry sectors and geographies.Management manages the port olio by allocating and reallocating moneyto speci c investment strategies. It speci cally manages within thosestrategies a ter per orming comprehensive due diligence. As at yearend, ABC invested in 25 unds that could be categorised into our majorstrategies. ABC’s investment in the unds is evidenced by way o limitedpartnership interests. ABC’s management considers ABC’s exposure torisk to be to the managers o the underlying unds they invest and to therespective strategies. In assessing that risk, management obtains quarterlyoverall investment updates and per ormance gures rom the underlying

managers.While management is aware o the types o risk ABC is exposed to viaits investments in the underlying unds, no in ormation, apart rom thequarterly investor updates, is requested or obtained in respect o theunderlying port olios. ABC is directly exposed to equity price risk. This isthe sensitivity o ABC to movements in the value o the limited partnershipinterests in the underlying unds and indirectly exposed to equity pricerisk and other risks that infuence the value o their interests ( or example,interest rates, FX rates, commodity prices and equity prices).

What in ormation should ABC disclose in the nancial statements o ABC to

satis y the requirements o IFRS 7 para 40 (sensitivity analysis with respectto market risk variables), in order to provide a meaning ul representation othe risks inherent in the port olio and the sensitivity o ABC to movementsin the respective strategies?



Management should identi y the relevant risk variable/s that best refect the exposure othe entity to market risk.

As management considers ABC’s exposure to risk to be to the managers o theunderlying unds they invest and to the respective strategies, the sensitivity o theport olio could be disclosed by und strategy. I the relevant risk variable is determinedto be und strategy, management should look to provide meaning ul disclosure o thesensitivity o ABC to movements in the respective strategies. We would also expectmanagement to disclose qualitative in ormation on the types o risk the unds, withineach strategy, are directly exposed to – that is, the inherent risks o each o the undswithin a strategy.

The ollowing is an example o disclosure that may be suitable in the abovecircumstances:

“The table below summarises the impact on ABC’s proft o reasonably possiblechanges in returns o each o the strategies to which ABC is exposed throughthe 25 unds in which it invests over the year. A reasonably possible change is

management’s assessment, based on historical data sourced rom [add source], o what is a reasonably possible percentage movement in the value o a und ollowingeach respective strategy over the next year. The impact on proft is determined by

applying the reasonably possible movement o the respective strategy to each und’s individual air value. The analysis is based on the assumption that the relevantfnancial variables have increased or decreased as disclosed, with all other variables

held constant. The underlying risk disclosures represent the direct market risks towhich the unds are exposed. I, F, O represent interest rate, currency and other

price risks”.

StrategyUnderlying

risk exposureNumber o

unds

Reasonablepossible

change (+/- %)Impact on posttax pro t (“000)

Pan-Europeanbuyout unds I, F, O 10 5 900

UK buyout unds I, O 8 5 600

US buyout unds I, O 4 3 500

UK venturecapital, smallcap unds O 3 2 300

Total 25 2,300

There is no one risk variable that refects the risk o the markets in which ABC isexposed, given ABC’s large number o investments in other unds and diverse strategiesthat it ollows. As a result, ABC should identi y what management considers to be themost relevant risk variable (strategy) on which to base the sensitivity analysis. The levelo disclosure refects the sensitivity to risk ABC that is exposed to and also the inherentrisk o the instruments in which it invests.



4.58 A private equity und invests in unlisted securities. The air value o unlistedsecurities is determined by using valuation techniques. IFRS 7 para 40(a)requires entities to provide sensitivity analysis showing how pro t or lossand equity would have been a ected by changes in relevant risk variablethat were reasonably possible at the reporting date.

A private equity und typically determines air value o unlisted securities

by using valuation techniques, such as earnings multiples, and sometimesother discounted cash fow and net asset based techniques. Thesevaluation methodologies incorporate a variety o variables, inputs andassumptions.

What actors should be considered by a private equity und investing inunlisted securities when presenting sensitivity analyses or market risk?

Management should determine the key risk variables and inputs used in the valuationmethodologies and provide sensitivity analysis or reasonably possible changes inthese variables. IFRS 7 requires in ormation about nancial risks only, not operatingor business risks. Earnings multiples, interest rates and currency rates are considered

market risk variables. However, entity-speci c asset values and earnings are notconsidered risk variables or IFRS 7 purposes. I management expects the key riskvariable or a valuation methodology to be the discount rate (with re erence to risk- reerates o return) or earnings multiple used (with re erence to published private equitymultiples), a sensitivity analysis should be disclosed or reasonably possible changes inthe discount rate or the earnings multiple.

For example, European Fund LP (EF) invests in management buy-outs across a numbero industry sectors in Western Europe. It manages its port olio o investee companiesaccording to the industries in which they operate, being consumer goods, transportationand technology. EF values these investments on an earnings-multiple basis, withvaluation changes disclosed in the income statement. EF also invests in a number oin rastructure projects, which are valued on a DCF basis.

Buyouts: on the basis that earnings multiples are the key market risk variable•

impacting the air value, EF should divide its port olio into the three industries,determine what a reasonable possible shi t o PE multiples would be, by sector,and work out the impact or each investment o applying this variation.In rastructure: on the basis that interest rates are the key market risk variable•

impacting the air value, EF should consider past variability in the appropriateinterest rate and determine a reasonable change, and apply to its DCFcalculations.

IndustryMarket riskvariable

Number oinvestee

companies

Reasonablepossible

change (%)

Impact onpost-tax pro t

(“000)

Consumer goods PE multiple 10 2 500

Transportation PE multiple 4 1,5 350

Technology PE multiple 8 4 600

In rastructure Interest rates 2 1 200

Total 24 1,650



This Q&A ocuses only on the market risk disclosures required by IFRS 7 para 40. Additional disclosures may be required with respect to discounted cash fowcalculations. When a valuation technique is used, IFRS 7 para 27 requires disclosureo the assumptions used. I there has been a change in valuation technique, the entityshould disclose that change and the reasons or making it. For air value measurement inLevel 3 o the air value hierarchy, the entity should disclose i a change o one or moreo the inputs to reasonably possible alternative assumptions would change air value

signi cantly. Disclosure o the e ect o those changes is required [IFRS 7 para 27B(e)].

4.59 An investment entity is required to show in a sensitivity analysis theimpact o a reasonably possible shi t in market risks on pro t or loss andequity. Should a private equity und that has AFS equity investments takeinto consideration its impairment policy to distinguish between impactson equity (i a reasonably possible decrease in share prices results in anamount below the impairment threshold) and impacts on pro t or loss (i areasonably possible decrease in share prices results in an amount abovethe impairment threshold)?

Yes. In cases where the air value o a non-monetary AFS instrument is close to theimpairment threshold, the entity should distinguish between pro t or loss and equitye ects, taking into consideration its impairment policy.

In cases where a non-monetary AFS nancial asset is already impaired, the downwardsshi t should be shown as a ecting pro t or loss; the upwards shi t should be showna ecting equity.

4.60 A private equity und has a large holding o listed securities o a company.I the securities o that company are sold in its entirety by the private equity

und, the securities would be sold at a discount to the price or a smallholding. Should the private equity und disclose the e ect o the discount?

A ‘blockage actor’ is not recorded or measurement purposes; hence no disclosures arerequired with re erence to market risks. However, certain disclosures may be necessarywith re erence to market risk sensitivity analysis, disclosing the quoted security price asthe market risk variable that is fexed.

The private equity und also considers disclosure o risk concentration and/or liquidityrisks. IFRS 7 para 34 requires disclosure o quantitative data about concentrations orisk [IFRS 7 IG18]. IFRS 7 para 39(c) requires the entity to describe how it managesthe liquidity risk inherent in the maturity analysis o nancial liabilities. The ollowingadditional disclosures might be considered:

The nature o security;•

The extent o holding; and•

The e ect on pro t or loss.•



5. Reclassi cation o nancial assets

Management may choose to reclassi y a non-derivative trading nancial asset out o theheld- or-trading category i the nancial asset is no longer held or the purpose o sellingit in the near term. Financial assets other than loans and receivables are permitted to bereclassi ed out o the held- or-trading category only in rare circumstances arising roma single event that is unusual and highly unlikely to recur in the near term. In addition,management may choose to reclassi y nancial assets that would meet the de nitiono loans and receivables out o the held- or-trading or available- or-sale categories ithe group has the intention and ability to hold these nancial assets or the oreseeable

uture or until maturity at the date o reclassi cation.

Reclassi cations are made at air value as o the reclassi cation date. Fair valuebecomes the new cost or amortised cost as applicable, and no reversals o air valuegains or losses recorded be ore reclassi cation date are subsequently made. E ectiveinterest rates or nancial assets reclassi ed to loans and receivables and held-to-maturity categories are determined at the reclassi cation date. Further increases inestimates o cash fows adjust e ective interest rates prospectively.

5.1 Can an investment und reclassi y the amounts attributable to unit holdersout o the air value through pro t or loss category?

No. Only non-derivative nancial assets classi ed as held or trading can be consideredor reclassi cation out o the air value through pro t or loss category.

5.2 Can an investment und reclassi y nancial assets designated at air value

through pro t or loss at initial recognition?

No. IAS 39 para 50(b) prohibits entities rom reclassi ying nancial instruments out othe air value through pro t or loss category i they were voluntarily designated into thatcategory on initial recognition.

5.3 Can an investor who committed to an investment in a private equity undthat the investor has classi ed at air value through pro t or loss becausethe investor has a past practice o selling the participations resulting

rom its capital commitments shortly a ter origination reclassi y under theproposed amendments?

No. Loan commitments in the scope o IAS 39 meet the de nition o a derivative; theyare there ore prohibited rom being reclassi ed under this amendment [IAS 39para 50(a)].

5.4 Can an investment und reclassi y investments in associates that uponinitial recognition were classi ed as held or trading under IAS 39?

Yes. Entities are permitted to reclassi y investments in associates that are no longerheld or trading (selling in the near term) in rare circumstances [IAS 39 para 50B]. Thoseinvestments are no longer eligible or the scope exemption; equity accounting inIAS 28 should there ore be applied. Fair value on the date o reclassi cation should be

the deemed cost o the investment in associate or subsequent measurement.However, reclassi cation is not permitted i the entity upon initial recognition designatedthe investment as at air value through pro t or loss.



5.5 IAS 1 para 122 requires disclosure o critical accounting judgements.Should an entity treat a decision to reclassi y nancial assets under theIAS 39 reclassi cations amendment as a critical accounting judgementand provide the disclosure required by IAS 1 para 122?

It depends. Where signi cant judgement was involved and the impact on nancialstatements is signi cant, the disclosure required by IAS 1 para 122 should be made. In

this case, the signi cant judgement note should include a cross re erence to relevantin ormation presented elsewhere in the nancial statements ( or example, as part oIFRS 7 reclassi cation disclosure). I the e ect on the nancial statements is notsigni cant, the IAS 1 para 122 disclosure may not be required; however, thereclassi cation disclosures required by IFRS 7 para 12A(a)-( ) should still be given.



6. Other disclosure requirements

A. CollateralManagement should disclose the carrying amount o nancial assets that it has pledgedas collateral or liabilities or contingent liabilities, including amounts that have beenreclassi ed in accordance with IAS 39 para 37(a) and the terms and conditions relatingto its pledge [IFRS 7 para 14].

When an entity holds collateral (o nancial or non- nancial assets) and is permitted tosell or repledge the collateral in the absence o de ault by the owner o the collateral, itshould disclose [IFRS 7 para 15]:

The air value o the collateral held;•

The air value o any such collateral sold or repledged, and whether the•

entity has an obligation to return it; andThe terms and conditions associated with its use o the collateral.•

6.1 How should a und disclose the nancial assets pledged or securitieslending?

The extent o the disclosures required depends on the terms and conditions relating tothe pledge. For all assets pledged, the und is required to disclose the carrying amountand the terms and conditions relating to the pledge [IFRS 7 para 14]. However, i thetrans eree has the right to sell or repledge the collateral received, the und is required todisclose the nancial assets pledged separately in its statement o nancial position[IAS 39 para 37(a)].

6.2 IFRS 7 para 14 requires disclosure o the carrying amount o the nancialassets that an entity has pledged as collateral or liabilities and the termsand conditions relating to such pledges. Does this include assets pledgedas collateral or short sales?

Yes. Short sales are considered a liability or the purpose o complying with IFRS 7para 14.

6.3 Does IFRS 7 require the quantitative disclosure o the air value ocollateral held as security or nancial instruments that are neither pastdue nor impaired?

It depends. I the collateral held is permitted to be sold or repledged in the absence ode ault by the owner o the collateral, the air value o the collateral is disclosed[IFRS 7 para 15(a) and (b)], in addition to qualitative disclosure [IFRS 7 para 15(c)]. I thecollateral is not permitted to be sold or repledged, only qualitative disclosure is required[IFRS 7 para 36(b)].



B. Other quantitative disclosures

Management should disclose quantitative in ormation or several items o income,expense, gains or losses either in the nancial statements or in the notes.

6.4 Should interest income, interest expense and dividend income on nancialinstruments at air value through pro t or loss be reported as part o netgains or net losses in these nancial instruments or separately as part ointerest income, interest expense or dividend income?

IFRS 7 App B5(e) allows an accounting policy choice between these two treatments. Thechosen policy should be consistently applied and disclosed.

It is possible to adopt one treatment or interest income and interest expense and adi erent treatment or dividend income, as no such prohibition exists in IFRS 7. However,the reporting o interest income should be consistent with that o interest expense.

IAS 18 para 35(b)(v) requires entities to disclose the amount o dividend income, isigni cant. There ore, i dividend income is reported as part o net gains or net losses on

nancial instruments at air value through pro t or loss, the amount o dividend incomeon nancial assets at air value through pro t or loss should be disclosed in the notes.

I management reports interest income and interest expense on nancial instruments atFVTPL within interest income and interest expense, it should use the e ective interestmethod in accordance with IAS 18 para 30(a) and IAS 39 para 9.

6.5 IFRS 7 para 20 requires a number o items o income, expenses, gains orlosses to be disclosed separately, either in the income statement or in thenotes. These items include:

• Net gains/losses per category of nancial assets and liabilities;

• Total interest income and expense for nancial assets not at fair valuethrough pro t or loss;• Fee income and expense;• Interest income on impaired assets; and• The amount of any impairment loss for each class of nancial assets.

Foreign exchange gains or losses are not mentioned in IFRS 7 para 20.Should the oreign exchange gains and losses be included in thedisclosures o net gains or net losses?

It depends. IFRS 7 is silent on this issue; and management should look to the underlyingprinciple o the standard that disclosures should be presented ‘through the eyes omanagement’. Foreign exchange gains and losses on nancial instruments should bedisclosed externally by analogy based on the in ormation provided to management.

In addition, the requirements o IAS 21 para 52(a) (disclosure o the amount o FXdi erences recognised in pro t or loss) need to be met.



6.6 Investment manager A is acting as manager or unds as well as orindividuals. Investment manager A receives a management ee oC10 million. The assets under A’s management are C1.5 billion.

Is an investment manager who is engaged signi cantly in trust activitiesrequired to disclose that act and to give an indication o the extent o thoseactivities?

IFRS 7 does not require speci c disclosures or duciary activities other than a disclosureo the ees earned and expenses borne [IFRS 7 para 20(c)(ii)]. However, an entity isrequired to disclose a description o the nature o the entity’s operations and its principalactivities [IAS 1 para 138(b)]. As a minimum, Investment manager A should disclose the

act that he is acting in a duciary capacity.

Even though there is no requirement in IFRS 7 to disclose the assets under management,such a disclosure would be help ul to users o the nancial statements, as it would givean indication o the extent o those duciary activities.

Note: The disclosure o the assets under management might be required in some jurisdictions.

6.7 Investment manager B is managing investment unds sold to retail andinstitutional investors. To sell the und, investment manager B employedan independent nancial adviser and pays a trail commission o x% o therelevant net asset value.

Should B disclose the trail commission paid as ee expense romduciary capacity?

Yes. The investment manager is acting in a duciary capacity while managing the und,and the ees are paid when an investment contract is secured. The ees paid shouldthere ore be disclosed as expenses born rom duciary activities.

6.8 Investment management company C is managing investment unds sold toretail and institutional investors. For managing the unds, C employs several

und managers. Each o the und managers receives a xed payment;in addition, i the und’s per ormance exceeds a de ned benchmark,they receive a bonus o 10% o the per ormance ee that Investmentmanagement company C receives.

Should C disclose the remuneration o the und managers as ee expensesrom duciary capacity?

No. The payments to the employees o the investment manager are not expenses born ina duciary capacity.



Appendix: Disclosures requiredunder IFRS

1. General disclosures

IFRS7p6 When IFRS 7 requires disclosures by class o fnancialAppxB1-B3 instrument , group the fnancial instruments into classes that

are appropriate to the nature o the in ormation disclosed.Take into account the characteristics o those fnancial

instruments. Provide su fcient in ormation to permit reconciliation to the line items presented in the balance sheet.

IFRS7p7 For each class o nancial asset, nancial liability and equityinstrument, disclose the accounting policies and methodsadopted, including the criteria or recognition and the basis omeasurement.

As part o the disclosure o an entity’s accounting policies,disclose, or each category o nancial assets, whether regularway purchases and sales o nancial assets are accounted or attrade date or at settlement date (IAS 39 para 38).

Provide disclosure o all signi cant accounting policies, includingthe general principles adopted and the method o applying thoseprinciples to transactions, other events and conditions arising inthe entity’s business. In the case o nancial instruments, suchdisclosure includes:(a) the criteria applied in determining when to recognise a

nancial asset or nancial liability, and when to

derecognise it;(b) the measurement basis applied to nancial assets and

nancial liabilities on initial recognition and subsequently; and(c) the basis on which income and expenses arising rom

nancial assets and nancial liabilities are recognisedand measured.

Disclose in ormation that enables users o the nancialstatements to evaluate the signi cance o nancial instruments

or nancial position and per ormance.

2. Categories o nancial assets and nancial liabilities

IFRS7p8 Disclose either on the ace o the balance sheet or in the notesthe carrying amounts o each o the ollowing categories, asde ned in IAS 39:(a) nancial assets at air value through pro t or loss, showing

separately:(i) those designated as such upon initial recognition; and(ii) those classi ed as held or trading in accordance

with IAS 39;(b) held-to-maturity investments;(c) loans and receivables;(d) available- or-sale nancial assets;(e) nancial liabilities at air value through pro t or loss,

showing separately:(i) those designated as such upon initial recognition; and(ii) those classi ed as held or trading in accordance with

IAS 39; and( ) nancial liabilities measured at amortised cost.

Y-NA-NM REF



3. Financial assets or nancial liabilities at air valuethrough pro t or loss

IFRS7p9 1. I a loan or receivable (or group o loans or receivables) isdesignated as at air value through pro t or loss, disclose:(a) the maximum exposure to credit risk (see IFRS7p36(a)) o

the loan or receivable (or group o loans or receivables) atthe reporting date;

(b) the amount by which any related credit derivatives orsimilar instruments mitigate that maximum exposure tocredit risk;

(c) the amount o change, during the period and cumulatively,in the air value o the loan or receivable (or group o loansor receivables) that is attributable to changes in the creditrisk o the nancial asset determined either:(i) as the amount o change in its air value that is not

attributable to changes in market conditions that giverise to market risk; or

(ii) using an alternative method that the entity believesmore aith ully represents the amount o change inits air value that is attributable to changes in thecredit risk o the asset. Changes in market conditionsthat give rise to market risk include changes in anobserved (benchmark) interest rate, commodity price,

oreign exchange rate or index o prices or rates; and(d) the amount o the change in the air value o any related

credit derivatives or similar instruments that has occurredduring the period and cumulatively since the loan orreceivable was designated.

IFRS7p10 2. I the entity has designated a nancial liability as at air valuethrough pro t or loss in accordance with IAS 39 para 9,

disclose:(a) the amount o change, during the period and cumulatively,

in the air value o the nancial liability that is attributable tochanges in the credit risk o that liability determined either:(i) as the amount o change in its air value that is not

attributable to changes in market conditions that giverise to market risk (see IFRS 7 App B4); or

(ii) using an alternative method that the entity believesmore aith ully represents the amount o change inits air value that is attributable to changes in the creditrisk o the liability. Changes in market conditions that

give rise to market risk include changes in a

benchmark interest rate, the price o another entity’sfnancial instrument, a commodity price,a oreignexchange rate or an index o prices or rates. For contracts that include a unit-linking eature, changes in

market conditions include changes in the per ormanceo the related internal or external investment und; and

(b) the di erence between the nancial liability’s carryingamount and the amount the entity would be contractuallyrequired to pay at maturity to the holder o the obligation

IFRS7p11 3. Disclose:AppxB4 (a) the methods used to comply with the requirements in

IFRS 7 para 9(c) and IFRS 7 para 10(a); and(b) i the entity believes that the disclosure it has given to

comply with the requirements in IFRS 7 para 9(c) andIFRS 7 para 10(a) does not aith ully represent the changein the air value o the nancial asset or nancial liabilityattributable to changes in its credit risk, the reasons or

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reaching this conclusion and the actors it believesare relevant.

4. Reclassi cation

IFRS7p12 1. I the entity has reclassi ed a nancial asset (in accordancewith paragraphs IAS 39 paras 51-54) as one measured:(a) at cost or amortised cost, rather than at air value; or(b) at air value, rather than at cost or amortised cost, disclose

the amount reclassi ed into and out o each category andthe reason or that reclassi cation

An amendment to IAS 39, issued in October 2008, permits an entity to reclassi y non-derivative fnancial assets (other than those designated at air value through proft or loss

by the entity upon initial recognition) out o the air valuethrough proft or loss category in particular circumstances.The amendment also permits an entity to trans er rom the

available- or-sale category to the loans and receivablescategory a fnancial asset that would have met the defnitiono loans and receivables (i the fnancial asset had not beendesignated as available or sale), i the entity has the intention

and ability to hold that fnancial asset or the oreseeableuture.

IFRS7p12A 2. I the entity has reclassi ed a nancial asset out o the airvalue through pro t or loss category in accordance withIAS 39 paras 50B or 50D or out o the available- or-salecategory in accordance with paragraph 50E oIAS 39, disclose:(a) the amount reclassi ed into and out o each category;(b) or each reporting period until derecognition, the carrying

amounts and air values o all nancial assets that havebeen reclassi ed in the current and previous reportingperiods;

(c) i a nancial asset was reclassi ed in accordance withparagraph 50B, the rare situation, and the acts andcircumstances indicating that the situation was rare;

(d) or the reporting period when the nancial asset wasreclassi ed, the air value gain or loss on the nancialasset recognised in pro t or loss or other comprehensiveincome in that reporting period and in the previousreporting period;

(e) or each reporting period ollowing the reclassi cation(including the reporting period in which the nancialasset was reclassi ed) until derecognition o the nancialasset, the air value gain or loss that would have beenrecognised in pro t or loss or other comprehensive incomei the nancial asset had not been reclassi ed, and thegain, loss, income and expense recognised in pro t orloss; and

( ) the e ective interest rate and estimated amounts o cashfows the entity expects to recover, as at the date oreclassi cation o the nancial asset .

5. Derecognition

IFRS7p13 I nancial assets have been trans erred in such a way thatpart or all o the nancial assets do not quali y orderecognition (see IAS 39 paras 15-37), disclose or eachclass o such nancial assets:

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(a) the nature o the assets;(b) the nature o the risks and rewards o ownership to which

the entity remains exposed;(c) when the entity continues to recognise all o the assets,

the carrying amounts o the assets and o the associatedliabilities; and

(d) when the entity continues to recognise the assets to theextent o its continuing involvement, the total carryingamount o the original assets, the amount o the assetsthat the entity continues to recognise, and the carryingamount o the associated liabilities.

6. Collateral

IFRS7p14 1. Disclose:(a) the carrying amount o nancial assets that the entity has

pledged as collateral or liabilities or contingent liabilities,including amounts that have been reclassi ed inaccordance with IAS 39 para 37(a); and

(b) the terms and conditions relating to its pledge.IFRS7p15 2. When the entity holds collateral (o nancial or non- nancial

assets) and is permitted to sell or repledge the collateral in theabsence o de ault by the owner o the collateral, disclose:(a) the air value o the collateral held;(b) the air value o any such collateral sold or repledged, and

whether the entity has an obligation to return it; and(c) the terms and conditions associated with its use o the

collateral.

7. Allowance account or credit losses

IFRS7p16 When nancial assets are impaired by credit losses and theAppxB1-B2, entity records the impairment in a separate account ( orB1(d) example, an allowance account used to record individual

impairments or a similar account used to record a collectiveimpairment o assets) rather than directly reducing thecarrying amount o the asset, disclose a reconciliation ochanges in that account during the period or each class o

nancial assets.

8. Compound nancial instruments with multiple embeddedderivatives

IFRS7p17 I the entity has issued an instrument that contains both aliability and an equity component (IAS 32 para 28) and theinstrument has multiple embedded derivatives whose valuesare interdependent (such as a callable convertible debtinstrument), disclose the existence o those eatures.

9. De aults and breaches

IFRS7p18 1. For loans payable recognised at the reporting date, disclose:(a) details o any de aults during the period o principal,

interest, sinking und or redemption terms o thoseloans payable;

(b) the carrying amount o the loans payable in de ault at thereporting date; and

(c) whether the de ault was remedied, or the terms o theloans payable were renegotiated, be ore the nancialstatements were authorised or issue.

IFRS7p19 2. I during the period there were breaches o loan agreementterms other than those described in IFRS 7 para 18, disclose



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the same in ormation as required by IFRS 7 para18 i thosebreaches permitted the lender to demand acceleratedrepayment (unless the breaches were remedied, or the termso the loan were renegotiated, on or be ore the reporting date).

10. Items o income, expense, gains or losses

IFRS7p20 Disclose the ollowing items o income, expense, gains orAppxB1-B3, losses either on the ace o the nancial statements or inB5(d) the notes:

(a) net gains or net losses on:(i) nancial assets or nancial liabilities at air value

through pro t or loss, showing separately those onnancial assets or nancial liabilities designated as

such upon initial recognition, and those on nancialassets or nancial liabilities that are classi ed as held

or trading in accordance with IAS 39;(ii) available- or-sale nancial assets, showing separately

the amount o gain or loss recognised directly in

equity during the period and the amount removedrom equity and recognised in pro t or loss or theperiod;

(iii) held-to-maturity investments;(iv) loans and receivables; and(v) nancial liabilities measured at amortised cost;

(b) total interest income and total interest expense (calculatedusing the e ective interest method) or nancial assets or

nancial liabilities that are not at air value through pro tor loss;

(c) ee income and expense (other than amounts included indetermining the e ective interest rate) arising rom:(i) nancial assets or nancial liabilities that are not at

air value through pro t or loss; and(ii) trust and other duciary activities that result in the

holding or investing o assets on behal o individuals,trusts, retirement bene t plans and other institutions;

(d) interest income on impaired nancial assets accrued inaccordance with IAS 39 AG 93; and

(e) the amount o any impairment loss or each class onancial asset.

11. Other disclosures

(a) Accounting policies

IFRS7p21 1. Disclose in the summary o signi cant accounting policies 1p117 the measurement basis (or bases) used in preparing the

nancial statements and the other accounting policiesused that are relevant to an understanding o the

nancial statements.IFRS7 Disclosure required by IFRS 7 para 21 may include:AppxB5 (a) or nancial assets or nancial liabilities designated as at

air value through pro t or loss:(i) the nature o the nancial assets or nancial liabilities

the entity has designated as at air value through pro tor loss;

(ii) the criteria or designating such nancial assets ornancial liabilities on initial recognition; and

(iii) how the entity has satis ed the conditions in IAS 39para 9, IAS 39 para 11A or IAS 39 para 12 or suchdesignation. For instruments designated inaccordance with IAS 39 para 9(b)(i) o the de nition o



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a nancial asset or nancial liability at air valuethrough pro t or loss, include a narrative descriptiono the circumstances underlying the measurementor recognition inconsistency that would otherwisearise. For instruments designated in accordance withIAS 39 para 9(b)(ii) o the de nition o a nancial asset

or nancial liability at air value through pro t or loss,include a narrative description o how designation atair value through pro t or loss is consistent with the

entity’s documented risk management orinvestment strategy;

(b) the criteria or designating nancial assets as availableor sale;

(c) whether regular way purchases and sales o nancialassets are accounted or at trade date or at settlementdate (see IAS 39 para 38);

(d) when an allowance account is used to reduce the carryingamount o nancial assets impaired by credit losses:(i) the criteria or determining when the carrying amount

o impaired nancial assets is reduced directly (or,in the case o a reversal o a write-down, increaseddirectly) and when the allowance account is used; and

(ii) the criteria or writing o amounts charged to theallowance account against the carrying amount oimpaired nancial assets (see IFRS 7 para 16);

(e) how net gains or net losses on each category o nancialinstrument are determined (see IFRS 7 para 20(a)), orexample, whether the net gains or net losses on items at

air value through pro t or loss include interest ordividend income;

( ) the criteria the entity uses to determine that there is

objective evidence that an impairment loss has occurred(see IFRS 7 para 20(e)); and(g) when the terms o nancial assets that would otherwise

be past due or impaired have been renegotiated, theaccounting policy or nancial assets that are the subjecto renegotiated terms (see IFRS 7 para 36(d)).

2. Disclose, in the summary o signi cant accounting policiesor other notes, the judgements, apart rom those involvingestimations, that management has made in the process oapplying the entity’s accounting policies and that have themost signi cant e ect on the amounts recognised in the

nancial statements (see IAS 1 para 122).

(b) Hedge accounting

IFRS7p22 1. Disclose the ollowing separately or each type o hedgedescribed in IAS 39 (ie, air value hedges, cash fow hedgesand hedges o net investments in oreign operations):(a) a description o each type o hedge;(b) a description o the nancial instruments designated as

hedging instruments and their air values at the reportingdate; and

(c) the nature o the risks being hedged.

IFRS7p23 2. For cash fow hedges, disclose:(a) the periods when the cash fows are expected to occur

and when they are expected to a ect pro t or loss;(b) a description o any orecast transaction or which hedge

accounting had previously been used, but which is nolonger expected to occur;



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(c) the amount that was recognised in equity during theperiod;

(d) the amount that was removed rom equity and included inpro t or loss or the period, showing the amount includedin each line item in the income statement; and

(e) the amount that was removed rom equity during the

period and included in the initial cost or other carryingamount o a non- nancial asset or non- nancial liabilitywhose acquisition or incurrence was a hedged highlyprobable orecast transaction.

IFRS7p24 3. Disclose separately:(a) in air value hedges, gains or losses:

(i) on the hedging instrument; and(ii) on the hedged item attributable to the hedged risk;

(b) the ine ectiveness recognised in pro t or loss that arisesrom cash fow hedges; and

(c) the ine ectiveness recognised in pro t or loss that arisesrom hedges o net investments in oreign operations.

IFRIC16p17 4. I the step-by-step method o consolidation is used, disclosewhether the entity has chosen to adjust the amountsreclassi ed to pro t or loss on a disposal (or partial disposal)o a oreign operation to the amount that arises under thedirect method.

(c) Fair value

IFRS7p25 1. Except as set out in IFRS 7 para 29, or each class o nancialAppxB1-B3 assets and nancial liabilities (see IFRS 7 para 6), disclose the

air value o that class o assets and liabilities in a way thatpermits it to be compared with its carrying amount.

IFRS7p26 In disclosing air values, group nancial assets and nancialAppxB1-B3 liabilities into classes, but o set them only to the extent that

their carrying amounts are o set in the statement onancial position.

IFRS7p27 2. Disclose or each class o nancial instrument the methodsAppx B1-B3 and, when a valuation technique is used, the assumptions

applied in determining air values o each class o nancialassets or nancial liabilities. For example, i applicable, anentity discloses in ormation about the assumptions relatingto prepayment rates, rates o estimated credit losses, andinterest rates or discount rates. I there has been a change invaluation technique, disclose that change and the reasons ormaking it.

IFRS7p27A 3. To make the disclosures required by paragraph 27B, classi yair value measurements using a air value hierarchy that

refects the signi cance o the inputs used in making themeasurements. The air value hierarchy has the ollowinglevels:(a) quoted prices (unadjusted) in active markets or identical

assets or liabilities (Level 1);(b) inputs other than quoted prices included within Level 1

that are observable or the asset or liability, either directly(that is, as prices) or indirectly (that is, derived rom prices)(Level 2); and

(c) inputs or the asset or liability that are not based onobservable market data (unobservable inputs) (Level 3).

The level in the air value hierarchy within which the air valuemeasurement is categorised in its entirety is determined onthe basis o the lowest level input that is signi cant to the air



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value measurement in its entirety. The signi cance o an inputis assessed against the air value measurement in its entirety.I a air value measurement uses observable inputs that requiresigni cant adjustment based on unobservable inputs, thatmeasurement is a Level 3 measurement. Assessing thesigni cance o a particular input to the air value measurement

in its entirety requires judgement, considering actors speci cto the asset or liability.

IFRS7p27B 4. For air value measurements recognised in the statement onancial position, disclose or each class o nancial

instrument:(a) the level in the air value hierarchy into which the air value

measurements are categorised in their entirety, segregatingair value measurements in accordance with the levels

de ned in IFRS 7 para 27A.(b) any signi cant trans ers between Level 1 and Level 2 o the

air value hierarchy and the reasons or those trans ers.Trans ers into each level are disclosed and discussed

separately rom trans ers out o each level. For this purpose,signi cance is judged with respect to pro t or loss, and totalassets or total liabilities;

(c) or air value measurements in Level 3 o the air valuehierarchy, a reconciliation rom the beginning balances to theending balances, disclosing separately changes during theperiod attributable to the ollowing:(i) total gains or losses or the period recognised in pro t or

loss, and a description o where they are presented in thestatement o comprehensive income or the separateincome statement (i presented);

(ii) total gains or losses recognised in other comprehensiveincome;

(iii) purchases, sales, issues and settlements (each type omovement disclosed (a) separately); and

(iv) trans ers into or out o Level 3 ( or example, trans ersattributable to changes in the observability o marketdata) and the reasons or those trans ers. For signi canttrans ers, trans ers into Level 3 are disclosed anddiscussed separately rom trans ers out o Level 3;

(d) the amount o total gains or losses or the period in (c)(i)included in pro t or loss that are attributable to gains orlosses relating to those assets and liabilities held at the endo the reporting period and a description o where those gainsor losses are presented in the statement o comprehensive

income or the separate income statement (i presented); and(e) or air value measurements in Level 3, i changing one or

more o the inputs to reasonably possible alternativeassumptions would change air value signi cantly, then theentity states that act and discloses the e ect o thosechanges. The entity discloses how the e ect o a change toa reasonably possible alternative assumption was calculated.For this purpose, signi cance is judged with respect to pro tor loss, and total assets or total liabilities, or, when changesin air value are recognised in other comprehensive income,total equity.

Disclose the quantitative disclosures in IFRS 7 para 27B in

tabular ormat unless another ormat is more appropriate.





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Applying the liability adequacy test (IFRS 4 paras 15-19) to such comparative in ormation may be impracticable, but it isunlikely to be impracticable to apply other requirements o IFRS 4 paras 10-35 to such comparative in ormation. IAS 8explains the term ‘impracticable’.

12. Nature and extent o risks arising rom nancialinstruments

IFRS7p31 Disclose in ormation that enables users o the nancialstatements to evaluate the nature and extent o risks arising

rom nancial instruments to which the entity is exposed at thereporting date.

IFRS7 The disclosures required by IFRS 7 paras 31-42 should either AppdxB6 be given in the fnancial statements or incorporated by cross-

re erence rom the fnancial statements to some other statement, such as a management commentary or risk report,that is available to users o the fnancial statements on the

same terms as the fnancial statements and at the sametime. Without the in ormation incorporated by cross-re erence,the fnancial statements are incomplete.

IFRS7p32 The disclosures required by IFRS 7 para 33-42 ocus on therisks that arise rom nancial instruments and how they havebeen managed. These risks typically include, but are notlimited to, credit risk, liquidity risk and market risk.

13. Qualitative disclosures

IFRS7p33 For each type o risk arising rom nancial instruments,disclose:(a) the exposures to risk and how they arise;

(b) objectives, policies and processes or managing the riskand the methods used to measure the risk; and(c) any changes in (a) or (b) rom the previous period.

14. Quantitative disclosures

IFRS7p34 1. For each type o risk arising rom nancial instruments,AppdxB7, disclose:B10A (a) summary quantitative data about exposure to that risk

at the reporting date. This disclosure should be basedon the in ormation provided internally to key managementpersonnel o the entity (as de ned in IAS 24), or examplethe entity’s board o directors or chie executive o cer;

(b) the disclosures required by IFRS 7 para 36-42, to theextent not provided in (a), unless the risk is not material(see IAS 1 paras 29-31 or a discussion o materiality); and

(c) concentrations o risk i not apparent rom (a) and (b).

IFRS7 IFRS 7 para 34(c) requires disclosures about concentrationsAppdxB8 o risk. Concentrations o risk arise rom nancial instruments

that have similar characteristics and are a ected similarly bychanges in economic or other conditions. The identi cationo concentrations o risk requires judgement, taking intoaccount the circumstances o the entity. Include in thedisclosure o concentrations o risk:(a) a description o how management determines

concentrations;(b) a description o the shared characteristic that identi eseach concentration ( or example, counterparty,geographical area, currency or market); and



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(c) the amount o the risk exposure associated with allnancial instruments sharing that characteristic.

IFRS7p35 2. I the quantitative data disclosed as at the reporting date isunrepresentative o the entity’s exposure to risk during theperiod, provide urther in ormation that is representative.

(a) Credit risk

IFRS7p36 Disclose by class o nancial instrument:AppdxB9-10 (a) the amount that best represents the entity’s maximum

exposure to credit risk at the reporting date withouttaking account o any collateral held or other creditenhancements ( or example, netting agreements that donot quali y or o set in accordance with IAS 32);

(b) in respect o the amount disclosed in (a), a description ocollateral held as security and other credit enhancements;

(c) in ormation about the credit quality o nancial assets thatare neither past due nor impaired; and

(d) the carrying amount o nancial assets that would

otherwise be past due or impaired whose terms havebeen renegotiated.

Financial assets that are either past due or impaired IFRS7p37 Disclose by class o nancial asset:

(a) an analysis o the age o nancial assets that are past dueas at the reporting date but not impaired;

(b) an analysis o nancial assets that are individuallydetermined to be impaired as at the reporting date,including the actors the entity considered in determiningthat they are impaired; and

(c) or the amounts disclosed in (a) and (b), a description ocollateral held by the entity as security and other credit

enhancements and, unless impracticable, an estimate otheir air value.

Collateral and other credit enhancements obtainedIFRS7p38 1. When an entity obtains nancial or non- nancial assets during

the period by taking possession o collateral it holds assecurity or calling on other credit enhancements ( or example,guarantees), and such assets meet the recognition criteriain other standards, disclose:(a) the nature and carrying amount o the assets obtained; and(b) when the assets are not readily convertible into cash, the

policies or disposing o such assets or or using them inits operations.

(b) Liquidity risk

IFRS7p39 Disclose:AppdxB10A (a) a maturity analysis or non-derivative nancial liabilities-B11A, (including issued nancial guarantee contracts) that showsB11C, the remaining contractual maturities;B11D, (b) a maturity analysis or derivative nancial liabilities. TheB11E and maturity analysis should include the remaining contractualB11F maturities that are essential or an understanding o the

timing o the cash fows; and(c) a description o how the liquidity risk inherent in (a) and (b).

IFRS7 In preparing the contractual maturity analysis or fnancialAppdxB11 liabilities required by IFRS 7 para 39(a) and (b), use judgementto determine an appropriate number o time bands. For example, an entity might determine that the ollowing time

bands are appropriate:



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(a) no later than one month;(b) later than one month and no later than three months;(c) later than three months and no later than one year; and(d) later than one year and no later than fve years.

(c) Market risk

Sensitivity analysisIFRS7p40 Unless an entity complies with IFRS 7 para 41, disclose:AppdxB17- (a) a sensitivity analysis or each type o market risk to whichB19 and the entity is exposed at the end o the reporting period,B21-B28 showing how pro t or loss and equity would have been

a ected by changes in the relevant risk variable that werereasonably possible at that date;

(b) the methods and assumptions used in preparing thesensitivity analysis; and

(c) changes rom the previous period in the methods andassumptions used, and the reasons or such changes.

IFRS7p41 I the entity prepares a sensitivity analysis, such as value at

AppdxB20 risk, that refects interdependencies between risk variables( or example, interest rates and exchange rates) and uses itto manage nancial risks, it may use that sensitivity analysisin place o the analysis speci ed in IFRS 7 para 40. Alsodisclose:(a) an explanation o the method used in preparing such a

sensitivity analysis, and o the main parameters andassumptions underlying the data provided; and

(b) an explanation o the objective o the method used and olimitations that may result in the in ormation not ullyrefecting the air value o the assets and liabilities involved.

IFRS7p42 Other market risk disclosuresWhen the sensitivity analyses disclosed in accordance withIFRS 7 para 40 or IFRS 7 para 41 are unrepresentative o arisk inherent in a nancial instrument ( or example, becausethe year-end exposure does not refect the exposure duringthe year), disclose that act and the reason the sensitivityanalyses are unrepresentative.

IFRIC2p13 When a change in the redemption prohibition leads to atrans er between nancial liabilities and equity, discloseseparately the amount, timing and reason or that trans er.

15. Capital disclosures

1p134,135 1. Disclose in ormation that enables users o its nancialstatements to evaluate its objectives, policies and processesor managing capital.

1p135 2. To comply with paragraph 134, disclose the ollowing:(a) qualitative in ormation about its objectives, policies and

processes or managing capital, including (but notlimited to):(i) a description o what it manages as capital;(ii) when an entity is subject to externally imposed capital

requirements, the nature o those requirements andhow those requirements are incorporated into themanagement o capital; and

(iii) how it is meeting its objectives or managing capital;



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(b) summary quantitative data about what it manages ascapital. Some entities regard some nancial liabilities( or example, some orms o subordinated debt) as parto capital. Other entities regard capital as excluding somecomponents o equity ( or example, components arising

rom cash fow hedges);

(c) any changes in (a) and (b) rom the previous period;(d) whether during the period it complied with any externallyimposed capital requirements to which it is subject; and

(e) when the entity has not complied with such externallyimposed capital requirements, the consequences o suchnon-compliance.

Base these disclosures on the in ormation provided internallyto the entity’s key management personnel.

1p136 An entity may manage capital in a number o ways and be subject to a number o di erent capital requirements. For example, a conglomerate may include entities that undertake

insurance activities and banking activities, and those entities may also operate in several jurisdictions. When an aggregatedisclosure o capital requirements and how capital is managedwould not provide use ul in ormation or distorts a fnancial

statement user’s understanding o an entity’s capital resources,the entity should disclose separate in ormation or each capital

requirement to which the entity is subject.

1p80A(a) 5. I an entity has reclassi ed a puttable nancial instrumentclassi ed as an equity instrument between nancial liabilitiesand equity, disclose:(a) the amount reclassi ed into and out o each category

( nancial liabilities or equity); and(b) the timing and reason or that reclassi cation.

1p136A 6. Disclose or puttable nancial instruments classi ed as equityinstruments (to the extent not disclosed elsewhere):

1p136A(a) (a) summary quantitative data about the amount classi edas equity;

1p136A(b) (b) its objectives, policies and processes or managing itsobligation to repurchase or redeem the instruments whenrequired to do so by the instrument holders, including anychanges rom the previous period;

1p136A(c) (c) the expected cash outfow on redemption or repurchase othat class o nancial instruments; and

1p136A(d) (d) in ormation about how the expected cash outfow onredemption or repurchase was determined.

1p136A(b) 7. I an entity has reclassi ed an instrument that imposes onthe entity an obligation to deliver to another party a pro ratashare o the net assets o the entity only on liquidation andis classi ed as an equity instrument between nancial liabilitiesand equity, disclose:(a) the amount reclassi ed into and out o each category

( nancial liabilities or equity); and(b) the timing and reason or that reclassi cation.

1p136A(a), 8. Disclose in relation to dividends:(b) (a) the amount o dividends proposed or declared be ore the

nancial statements were authorised or issue but not

recognised as a distribution to owners in the period, andthe related amount per share; and

(b) the amount o any cumulative pre erence dividends notrecognised.



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16. Financial guarantees

Amendments to IAS 39 and IFRS 4, Financial GuaranteeContracts, was issued in August 2005.

The issuer o fnancial guarantee contracts may elect to apply either IFRS 4 (i the entity has previously asserted explicitly that it regards such contracts as insurance contracts and hasused accounting applicable to insurance contracts) or IAS 39

or measurement o fnancial guarantee contracts.

I the entity elects to apply IFRS 4, it should comply withIFRS 4 disclosure requirements to such contracts (re er toSection E).

I the entity elects to apply IAS 39 or measurement o fnancial guarantee contracts, it should comply with IFRS 7 disclosure requirements or these contracts.



Contacts

AustraliaDarren Ross+61 2 826 [email protected]

Bermuda Andrew Brook+1 441 299 [email protected]

CanadaRajendra K Kothari+1 416 869 [email protected]

Cayman IslandsPaul Donovan+1 345 914 [email protected]

Channel IslandsBrendan McMahon+44 1534 [email protected]

DenmarkMichael E Jacobsen+45 3945 [email protected]

FranceMarie-Christine Jetil+33 1 5657 8466marie-christine.jetil@ r.pwc.com

Germany Anita Dietrich+49 69 9585 [email protected]

LuxembourgMarc Minet+352 494848 [email protected]

Hong KongMarie-Anne Kong+852 2289 [email protected]

IrelandJonathan O’Connell+353 1 792 8737

[email protected]

Isle o ManPeter C Craig+44 1624 [email protected]

JapanTakeshi Shimizu+81 90 6515 [email protected]

South A ricaPierre de Villiers+27 11 797 [email protected]

SwitzerlandCornelia Herzog+41 58 792 [email protected]

The NetherlandsKees Roozen+31 88 792 [email protected]

UKMarcus Hine+44 207 804 [email protected]

USThomas Romeo+1 646 471 [email protected]



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© 2010 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms ofPricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.PricewaterhouseCoopers accepts no liability or responsibility to the contents of this publication or any reliance placed on it.

PricewaterhouseCoopers’ IFRS and corporate governance publications and tools 2010

C OMPERIO®

Your Path to Knowledge

To order copies of any of these publications, contact your localPricewaterhouseCoopers office or visit www.cch.co.uk/ifrsbooks

PwC inform – IFRS onlineOnline resource for finance professionals globally, coveringfinancial reporting under IFRS (and UK GAAP). Use PwC

inform to access the latest news, guidance, comprehensiveresearch materials and full text of the standards. The searchfunction and intuitive layout enable users to access all theyneed for reporting under IFRS.Register for a free trial at www.pwcinform.com

Comperio – Your path to knowledge Online library of global financial reporting andassurance literature. Contains full text of financial

reporting standards of US GAAP and IFRS, plusmaterials of specific relevance to 10 otherterritories.Register for a free trial at www.pwccomperio.com

IFRS real estate survey 2008 – Are you keeping up the pace?2007 survey of 50 IFRS financial statements of auditedreal estate entities, assessing the status of the realestate industry in applying IFRS and industry guidance,and the application of new IFRS developments.



www.pwc.com/ifrs

Documents

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