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Thread: 32 Accounting Standard AS 32 Financial Instruments: Disclosures AS 32

  1. #31
    Accounting Standards
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    Default Accounting

    (b) expects some of its undrawn loan commitments not to be drawn;

    (c) holds financial assets for which there is a liquid market and that are readily saleable to meet liquidity needs;

    (d) has committed borrowing facilities (eg commercial paper facilities) or other lines of credit (eg stand-by credit facilities) that it can access to meet liquidity needs;

    (e) holds financial assets for which there is not a liquid market, but which are expected to generate cash inflows (principal or interest) that will be available to meet cash outflows on liabilities;

    (f) holds deposits at central banks to meet liquidity needs;

    (g) has very diverse funding sources; or

    (h) has significant concentrations of liquidity risk in either its assets or its funding sources.

    Market risk (paragraphs 4042 and B17B28)

    IG32 Paragraph 40(a) requires a sensitivity analysis for each type of market risk to which the entity is exposed. There are three types of market risk: interest rate risk, currency risk and other price risk. Other price risk may include risks such as equity price risk, commodity price risk, prepayment risk (ie the risk that one party to a financial asset will incur a financial loss because the other party repays earlier or later than expected), and residual value risk (eg a lessor of motor cars that
    writes residual value guarantees is exposed to residual value risk). Risk variables that are relevant to disclosing market risk include, but are not limited to:

    (a) the yield curve of market interest rates. It may be necessary to consider both parallel and non-parallel shifts in the yield curve.

    (b) foreign exchange rates.

    (c) prices of equity instruments.

    (d) market prices of commodities.


    IG33 Paragraph 40(a) requires the sensitivity analysis to show the effect on profit or loss and equity of reasonably possible changes in the relevant risk variable. For example, relevant risk variables might include:

    (a) prevailing market interest rates, for interest-sensitive financial instruments such as a variable-rate loan; or

    (b) currency rates and interest rates, for foreign currency financial instruments such as foreign currency bonds.

    IG34 For interest rate risk, the sensitivity analysis might show separately the effect of a change in market interest rates on:

    (a) interest income and expense;

    (b) other line items of the statement of profit and loss (such as trading gains and losses); and

    (c) when applicable, equity.


    An entity might disclose a sensitivity analysis for interest rate risk for each currency in which the entity has material exposures to interest rate risk.

    IG35 Because the factors affecting market risk vary depending on the specific circumstances of each entity, the appropriate range to be considered in providing a sensitivity analysis of market risk varies for each entity and for each type of market risk.


    IG36 The following example illustrates the application of the disclosure requirement in paragraph 40(a):

  2. #32
    Accounting Standards
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    Default Accounting Standard (AS) 32

    (b) expects some of its undrawn loan commitments not to be drawn;

    (c) holds financial assets for which there is a liquid market and that are readily saleable to meet liquidity needs;

    (d) has committed borrowing facilities (eg commercial paper facilities) or other lines of credit (eg stand-by credit facilities) that it can access to meet liquidity needs;

    (e) holds financial assets for which there is not a liquid market, but which are expected to generate cash inflows (principal or interest) that will be available to meet cash outflows on liabilities;

    (f) holds deposits at central banks to meet liquidity needs;

    (g) has very diverse funding sources; or

    (h) has significant concentrations of liquidity risk in either its assets or its funding sources.

    Market risk (paragraphs 4042 and B17B28)

    IG32 Paragraph 40(a) requires a sensitivity analysis for each type of market risk to which the entity is exposed. There are three types of market risk: interest rate risk, currency risk and other price risk. Other price risk may include risks such as equity price risk, commodity price risk, prepayment risk (ie the risk that one party to a financial asset will incur a financial loss because the other party repays earlier or later than expected), and residual value risk (eg a lessor of motor cars that
    writes residual value guarantees is exposed to residual value risk). Risk variables that are relevant to disclosing market risk include, but are not limited to:

    (a) the yield curve of market interest rates. It may be necessary to consider both parallel and non-parallel shifts in the yield curve.

    (b) foreign exchange rates.

    (c) prices of equity instruments.

    (d) market prices of commodities.


    IG33 Paragraph 40(a) requires the sensitivity analysis to show the effect on profit or loss and equity of reasonably possible changes in the relevant risk variable. For example, relevant risk variables might include:

    (a) prevailing market interest rates, for interest-sensitive financial instruments such as a variable-rate loan; or

    (b) currency rates and interest rates, for foreign currency financial instruments such as foreign currency bonds.

    IG34 For interest rate risk, the sensitivity analysis might show separately the effect of a change in market interest rates on:

    (a) interest income and expense;

    (b) other line items of the statement of profit and loss (such as trading gains and losses); and

    (c) when applicable, equity.


    An entity might disclose a sensitivity analysis for interest rate risk for each currency in which the entity has material exposures to interest rate risk.

    IG35 Because the factors affecting market risk vary depending on the specific circumstances of each entity, the appropriate range to be considered in providing a sensitivity analysis of market risk varies for each entity and for each type of market risk.


    IG36 The following example illustrates the application of the disclosure requirement in paragraph 40(a):

  3. #33
    Accounting Standards
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    Default Accounting Standard (AS) 32 Financial Instruments: Disclosures

    IG37 Paragraph 42 requires the disclosure of additional information when the sensitivity analysis disclosed is unrepresentative of a risk inherent in a financial instrument. For example, this can occur when:

    (a) a financial instrument contains terms and conditions whose effects are not apparent from the sensitivity analysis, eg options that remain out of (or in) the money for the chosen change in the risk variable;

    (b) financial assets are illiquid, eg when there is a low volume of transactions in similar assets and an entity finds it difficult to find a counterparty; or

    (c) an entity has a large holding of a financial asset that, if sold in its entirety, would be sold at a discount or premium to the quoted market price for a smaller holding.


    IG38 In the situation in paragraph IG37(a), additional disclosure might include:

    (a) the terms and conditions of the financial instrument (eg the options);

    (b) the effect on profit or loss if the term or condition were met (i.e. if the options were exercised); and

    (c) a description of how the risk is hedged.

    For example, an entity may acquire a zero-cost interest rate collar that includes an out-of-the-money leveraged written option (eg the entity pays ten times the amount of the difference between a specified interest rate floor and the current market interest rate). The entity may regard the collar as an inexpensive economic hedge against a reasonably possible increase in interest rates. However, an unexpectedly large decrease in interest rates might trigger payments under the written option that, because of the leverage, might be significantly larger than the benefit of lower interest rates. Neither the fair value of the collar nor a sensitivity analysis based on reasonably possible changes in market variables would indicate this exposure. In this case, the entity might provide the additional information described above.


    IG39 In the situation described in paragraph IG37(b), additional disclosure might include the reasons for the lack of liquidity and how the entity hedges the risk.

    IG40 In the situation described in paragraph IG37(c), additional disclosure might include:
    (a) the nature of the security (eg entity name);
    (b) the extent of holding (eg 15 per cent of the issued shares);
    (c) the effect on profit or loss; and
    (d) how the entity hedges the risk.

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