Martin O'Donovan, ACT's assistant director of policy and technical issues, examines the International Accounting Standards Board's (IASB) draft of proposed amendments to IFRS 7 disclosure on financial instruments.
 

The greater focus on the need for transparency on financial instruments, driven by current market conditions, has prompted the International Accounting Standards Board (IASB) to issue an exposure draft of proposed amendments to its IFRS 7 disclosure standard. The proposed amendments focus on:

• enhancing disclosures about fair value measurements, particularly for those that use the most subjective inputs
• improving disclosures about liquidity risk, including proposing quantitative disclosures for derivative liabilities based on how liquidity risk is actually managed

Fair value

The IASB follows the hierarchy of bases for establishing fair values already in force in the US under the Financial Accounting Standards Board's (FASB) fair value measurement standard Statement 157, namely:

• Level 1: fair values measured using quoted prices in active markets for the same instruments
• Level 2: fair values measured using quoted prices in active markets for similar instruments or using other valuation techniques for which all significant inputs are based on observable market data
• Level 3: fair values measured using valuation techniques for which any significant input is not based on observable market data

Based on the split of financial instruments between these three levels, the exposure draft proposes new disclosures about:

• the level of the fair value hierarchy into which fair value measurements are categorised
• the fair value measurements resulting from the use of significant unobservable inputs to valuation techniques. For these measurements, the disclosures include a reconciliation from beginning balances to ending balances
• the movements (and reasons for them) between different levels of the fair value hierarchy

Clearly this is of particular relevance to financial institutions but even companies with minimal volumes of financial instruments recorded at fair value are also required to disclose the fair values (again split by the three-level hierarchy) even of instruments measured at cost or amortised cost.

Where fair value measurements are categorised as level 3, the IASB is proposing additional disclosures and reconciliations, including disclosure by class of asset of the effect, if significant, of changing the input assumptions to a reasonably possible alternative.

Liquidity

The exposure draft confirms that liquidity risk disclosures are only required for financial liabilities that will result in an outflow of cash or other assets. Thus, disclosure requirements would not apply to financial liabilities settled in the entity's own equity instruments and to liabilities in the scope of IFRS 7 settled with non-financial assets. The proposed amendments:

• require entities to provide quantitative disclosures based on how they manageliquidity risk for derivative financial liabilities

• require entities to disclose the remaining expected maturities of non-derivative financialliabilities if they manage liquidity risk on the basis of expected maturities
• strengthen the relationship between qualitative and quantitative disclosures of liquidity risk

Also read law firm Dechart's technical briefing on fair value [1].