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Thread: 07 - Indian Accounting Standard (Ind AS) 107 - Financial Instruments: Disclosures

  1. #51
    IND-AS
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    Thumbs up Market risk of Indian Accounting Standard (Ind AS) 107 - Financial Instruments: Disclosures

    Market risk of Indian Accounting Standard (Ind AS) 107

    Financial Instruments: Disclosures

    Appendix - D


    Market risk (paragraphs 40–42 and B17–B28)

    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 prof it 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 profit or 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):

    Interest rate risk

    At 31 December 20X2, if interest rates at that date had been 10 basis points lower with all other variables held constant, post -tax profit for the year would have been Rs 1.7 million (20X1—Rs 2.4 million) higher, arising mainly as a result of lower interest expense on variable borrowings, and other comprehensive income would have been Rs 2.8 million (20X1—Rs 3.2 million) higher, arising mainly as a result of an increase in the fair value of fixed rate financial assets classified as available for sale. If interest rates had been 10 basis points higher, with all other variables held constant, post -tax profit would have been Rs 1.5 million (20X1—Rs 2.1 million) lower, arising mainly as a result of higher interest expense on variable borrowings, and other comprehensive income would have been Rs 3.0 million (20X1—Rs 3.4 million) lower, arising mainly as a result of a decrease in the fair value of fixed rate financial assets classified as available for sale. Profit is more sensitive to interest rate decreases than increases because of borrowings with capped interest rates. The sensitivity is lower in 20X2 than in 20X1 because of a reduction in outstanding borrowings that has occurred as the entity’s debt has matured (see note X). (a)

    Foreign currency exchange rate risk

    At 31 December 20X2, if the had weakened 10 per cent against the US dollar with all other variables held constant, post -tax profit for the year would have been Rs 2.8 million (20X1—Rs6.4 million) lower, and other comprehensive income would have been Rs 1.2 million (20X1—Rs 1.1 million) higher. Conversely, if the Rupee had strengthened 10 per cent against the US dollar with all other variables held constant, post-tax profit would have been Rs 2.8 million (20X1—Rs 6.4 million) higher, and other comprehensive income would have been Rs 1.2 million (20X1—Rs 1.1 million) lower. The lower foreign currency exchange rate sensitivity in profit in 20X2 compared with 20X1 is attributable to a reduction in foreign currency denominated debt. Equity is more sensitive in 20X2 than in 20X1 because of the increased use of hedges of foreign currency purchases, offset by the reduction in foreign currency debt. Paragraph 39(a) requires disclosure of a maturity analysis of liabilities.


  2. #52
    IND-AS
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    Thumbs up Other market risk disclosures of Indian Accounting Standard (Ind AS) 107 - Financial Instruments: Disclosures

    Other market risk disclosures of Indian Accounting Standard (Ind AS) 107

    Financial Instruments: Disclosures

    Appendix - D


    Other market risk disclosures (paragraph 42)

    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 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 (ie if the options were exercised); and 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.


  3. #53
    IND-AS
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    Thumbs up Appendix - 1 of Indian Accounting Standard (Ind AS) 107 - Financial Instruments: Disclosures

    Appendix - 1 of Indian Accounting Standard (Ind AS) 107

    Financial Instruments: Disclosures


    Appendix - 1

    Note: This appendix is not a part of the Indian Accounting Standard. The purpose of this Appendix is only to bring out the differences, between Indian Accounting Standard (Ind AS) 107 and the corresponding International Accounting Standard ( IFRS) 7, Financial Instruments: Disclosures

    Comparison with IFRS 7, Financial Instruments: Disclosures

    1. The transitional provisions given in IAS 107 have not been given in Ind AS 107, since all transitional provisions related to Ind ASs, wherever considered appropriate have been included in Ind AS 101, First-time Adoption of Indian Accounting Standards corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards.

    2. Different terminology is used, as used in existing laws e.g., the term ‘balance sheet’ is used instead of ‘Statement of financial position’ and ‘Statement of profit and loss’ is used instead of ‘Statement of comprehensive income’. Words ‘approved for issue’ have been used instead of ‘authorised for issue’ in the context of financial statements considered for the purpose of events after the reporting period.

    3. Requirements regarding disclosure of description of gains and losses presented in the separate income statement, where separate income statement is presented, have been deleted. This change is consequential to t he removal of option regarding two statement approach in Ind AS 1 as compared to IAS 1. Ind AS 1 requires that the components of profit or loss and components of other comprehensive income shall be presented as a part of the statement of profit and loss.

    4. The following paragraph numbers appear as ‘Deleted ‘in IFRS 7. In order to maintain consistency with paragraph numbers of Ind 107, the paragraph numbers are retained in Ind AS 107 :

    (i) paragraph 3(c)
    (ii) paragraph 36 (d)
    (iii) paragraph 37(c)
    (iv) paragraphs B12-B16 of Appendix B
    (v) paragraphs IG3- IG4 of Appendix D
    (vi) paragraphs IG30-IG31 of Appendix D


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