The following is a very basic summary of the information provided by Carmen Ridley last Friday, 16 August in the one-hour webinar “Financial Risk Disclosures”. Carmen will be conducting more industry information webinars for CaseWare Australia & New Zealand in December and throughout 2014. Click here for a list of the current webinar topics and dates scheduled.
AASB 7 Financial Instruments: Disclosures was effective at 31 December 2007 and it has been a standard that has been on the ASIC focus list every year since. Carmen focussed on non-financial entities for this webinar presentation, as the requirements under AASB 7 for financial entities (banks, financial co-ops) are much too complex to be covered in the time allotted.
AASB 7 – Non-Financial Entities
Scope – is fairly broad and the application of this standard to the financial instruments of the entity should be carefully considered. Entities that prepare general purpose financial statement will need to address AASB 7. Entities that prepare general purpose RDR (Reduced Disclosure Regime) reports do NOT have to comply with most of the requirements of AASB 7.
Types of Risk
Qualitative Disclosures can be quite tricky. This component should be tackled “through the eyes of management” and to highlight the entity’s strategy for managing financial instrument risk.
Credit Risk Disclosures should be quite specific and address trading operations, including exposure to debt and funds held in financial institutions. Local and international examples were provided and discussed.
Liquidity Risk components need to address debt payment ability, contain maturity analysis for contractual cash outflows (nb. Figures can be different in balance sheet, but should be explained). Again, examples were discussed and suggestions on improvements provided. A maturity analysis table was also presented and examined.
Market Risk should examine each identified market risk and explain mitigation strategies (eg. Fixed vs floating borrowings, forward exchange contracts, interest rate swaps…)
Carmen suggests that this should be a fairly ‘weighty’ disclosure and should also take into account Australian market conditions. For example, interest rate swings of + or – 1% are not likely to apply in Australia in the short term future, so more likely ranges should be applied and “reasonably possible” movement effects described and/or mitigation strategies outlined in this disclosure.
The sorts of errors that are usually evident in AASB 7 disclosures and which should be avoided include:
- ‘Boiler plate’ narrative disclosures
- Keeping reasonable possible movements at the same rate as previous years, even though market conditions have obviously moved on
- Missing disclosures
- Analysis of immaterial risks
Much more detailed information was provided during the webinar and all attendees received a copy of the slide presentation. Be sure to catch Carmen’s other webinars on industry topics of interest which can be located here.