www.trinity.edu/rjensen/acct5341/speakers/133glosf.

htm#Disclosure

Disclosure And
Documentation Issues
"New SEC Guidance for Management's Discussion and Analysis"

http://www.sec.gov/rules/interp/33-8350.htm

Slide 8-1
 IAS 39 Versus FAS 133
www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#Disclosure

Under IASB international disclosure rulings, financial

statements should include all of the disclosures required by
IAS 32, except that the requirements in IAS 32 for
supplementary disclosure of fair values (IAS 39 Paragraphs 77
and 88) are not applicable to those financial assets and
financial liabilities carried at fair value (Paragraph 166). The
following should be included in the disclosures of the
enterprise's accounting policies as part of the disclosure
required by IAS 32 Paragraph 47b:

Slide 8-2
 IAS 39 Versus FAS 133
www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#Disclosure

(1) the methods and significant assumptions applied in estimating fair values of financial assets
and financial liabilities that are carried at fair value, separately for significant classes of financial
assets (see IAS 39 Paragraph 46)

2) whether gains and losses arising from changes in the fair value of those available-for-sale
financial assets that are measured at fair value subsequent to initial recognition are included in
net profit or loss for the period or are recognized directly in equity until the financial asset is
disposed of; and

3) for each of the four categories of financial assets defined in paragraph 10, whether 'regular
way' purchases of financial assets are accounted for at trade date or settlement date (see
paragraph 30)

Slide 8-3
 IAS 39 Versus FAS 133
www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#Disclosure

IAS 39 Paragraph 169

With the exception of the previously noted

differences, Paragraph 169 is a long paragraph that
requires virtually all disclosures of FAS 133.

Slide 8-4
 FAS 133 DISCLOSURE REQUIREMENTS

Required disclosures can be divided into four types:

● qualitative disclosures
● quantitative disclosures
● disclosures relating to OCI and AOCI
● U.S. SEC Risk Disclosure Requirements

Slide 8-5
 DISCLOSURE REQUIREMENTS (cont.)

The Standard requires general derivative disclosures and

specific hedge disclosures for cash flow hedges, fair value
hedges and hedges of a net investment in a foreign
operation

Slide 8-6
 DISCLOSURE REQUIREMENTS (cont.)

The Standard requires general derivative disclosures and

specific hedge disclosures for cash flow hedges, fair value
hedges and hedges of a net investment in a foreign
operation

Slide 8-7
 FAS 161 Summary
http://www.cs.trinity.edu/~rjensen/Calgary/CD/fasb/sfas161/

Why Is the FASB Issuing This Statement and When Is It Effective?

The use and complexity of derivative instruments and hedging
activities have increased significantly over the past several years.
Constituents have expressed concerns that the existing disclosure
requirements in FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, do not provide
adequate information about how derivative and hedging activities
affect an entity’s financial position, financial performance, and
cash flows. Accordingly, this Statement requires enhanced
disclosures about an entity’s derivative and hedging activities and
thereby improves the transparency of financial reporting. This
Statement is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008,
with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods
at initial adoption.

Slide 8-8
 FAS 161 Summary
http://www.cs.trinity.edu/~rjensen/Calgary/CD/fasb/sfas161/

How Does This Statement Improve Financial Reporting?

This Statement is intended to enhance the current disclosure framework in
Statement 133. The Statement requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting
designation. This disclosure better conveys the purpose of derivative use
in terms of the risks that the entity is intending to manage. Disclosing the
fair values of derivative instruments and their gains and losses in a
tabular format should provide a more complete picture of the location in
an entity’s financial statements of both the derivative positions existing at
period end and the effect of using derivatives during the reporting period.
Disclosing information about credit-risk-related contingent features
should provide information on the potential effect on an entity’s liquidity
from using derivatives. Finally, this Statement requires cross-referencing
within the footnotes, which should help users of financial statements
locate important information about derivative instruments.

Slide 8-9
 FAS 161 Summary
http://www.cs.trinity.edu/~rjensen/Calgary/CD/fasb/sfas161/

What Is the Effect of This Statement on Convergence with

International Financial Reporting Standards?
In August 2005, the International Accounting Standards Board
issued International Financial Reporting Standard (IFRS) 7,
Financial Instruments: Disclosures. The scope of IFRS 7 includes
all financial instruments, not just derivative instruments. The
FASB decided to limit the scope of its disclosure project to
derivative instruments because of its desire to not delay the
improved transparency about the location and amounts of
derivative instruments in an entity’s financial statements. The
FASB may consider a longer term project to improve disclosures
about all financial instruments and to achieve greater convergence
with IFRS 7 in the future.

Slide 8-10
 DISCLOSURE REQUIREMENTS (cont.)

■ Disclosures are different from prior requirements

■ Systems may require enhancements to accumulate new
information required to be disclosed
■ Additional qualitative disclosures are encouraged

Slide 8-11
 DISCLOSURE REQUIREMENTS ¶44-55
QUALITATIVE DISCLOSURES

For all derivative instruments the entity shall disclose:

● Objectives for holding derivatives
● Context needed to understand those objectives
● Entity’s risk management policy
● Description of the items or transactions that are
being hedged

Slide 8-12
 QUANTITATIVE DISCLOSURE

■ Fair Value Hedges

■ Cash Flow Hedges
■ Hedges of a net investment in a foreign operation

Slide 8-13
 QUANTITATIVE DISCLOSURE
REQUIREMENTS
FOR FAIR VALUE HEDGES ¶45(a)

■ Net gain or loss recognized in earnings during the

reporting period from hedge ineffectiveness
■ Component of the derivatives gain or loss excluded
from the assessment of hedge effectiveness

Slide 8-14
 QUANTITATIVE DISCLOSURE
REQUIREMENTS
FOR FAIR VALUE HEDGES ¶45(a)

■ Where the net gain or loss is reported

■ The amount of net gain or loss recognized in earnings
when a hedged firm commitment no longer qualifies as
a fair value hedge

Slide 8-15
 QUANTITATIVE DISCLOSURE
REQUIREMENTS -
CASH FLOW HEDGES ¶45(b)

■ Net gain or loss recognized in earnings during the

reporting period from hedge ineffectiveness
■ Component of the derivative’s gain or loss excluded
from the assessment of hedge effectiveness
■ Where the net gain or loss is reported

Slide 8-16
 QUANTITATIVE DISCLOSURE
REQUIREMENTS -
CASH FLOW HEDGES ¶45(b) (cont.)

■ Description of transactions or other events that will

result in reclassification of gains and losses reported in
accumulated OCI into earnings and net amount
expected within next 12 months
■ Maximum length of time entity is hedging the
variability in cash flows of a forecasted transaction

Slide 8-17
 QUANTITATIVE DISCLOSURE
REQUIREMENTS -
CASH FLOW HEDGES ¶45(b) (cont.)

■ Gains and losses reclassified into earnings from

discontinuance of cash flow hedges because it is
probable that the forecasted transaction will not occur

Slide 8-18
 QUANTITATIVE DISCLOSURE
REQUIREMENTS
HEDGES OF A NET INVESTMENT

■ For a hedge of a net investment in a foreign operation,

entities must disclose the net amount of gains or losses
included in the cumulative translation adjustment
during the reporting period

Slide 8-19
 DISCLOSURES RELATED TO OCI
AND AOCI

■ Required to display as a separate classification within

Other Comprehensive Income the net gain or loss on
derivative instruments designated and qualifying as
cash flow hedging instruments
■ As part of disclosures of AOCI, separately disclose the
beginning and ending accumulated derivative gain or
loss, the related net change, and the net amount of
reclassification into earnings.

Slide 8-20
 TYPICAL INTEREST RATE
EXPOSURES

■ Variable rate debt

■ Fixed rate debt

■ Prospective asset/liability purchases or sales

■ Interest associated with funding/investing in a

non-functional currency

Slide 8-21
 TYPICAL CURRENCY EXPOSURES

■ Prospective currency transactions

■ Firm commitments
■ Currency components of prospective cashflows
■ Assets or liabilities denominated in a non-
functional currency
■ Non-functional currency funding/investing

Slide 8-22
 NON-FUNCTIONAL CURRENCY

■ Borrow fixed non-$ / swap to fixed $

■ Borrow floating non-$ / swap to fixed $

■ Borrow fixed non-$ /swap to floating $

■ Borrow floating non-$ /swap to floating $

Slide 8-23
 TYPICAL COMMODITY EXPOSURES

■ Prospective purchase / sale

■ Inventory price risk

■ Firm commitment

Slide 8-24
 FAS 107 Disclosures

■ Requires fair value disclosures for all financial

instruments (both on and off balance sheet) for
which it is practicable to estimate that value.
■ What is Fair Value?
● Focuses on market price of a single unit times
the number of units
● Use single unit price even if an order to sell
entire holding would move the market.
● Amount at which the instrument could be
exchanged in a current transaction between
willing parties, but not in a forced liquidation

Slide 8-25
 FAS 107 Disclosures

■ Disclose methods and significant assumptions used

to make estimates
■ Excludes core deposit intangibles
■ A/R and A/P excluded if fair value approximates
carrying amount
■ If not practicable to estimate, disclose
● information pertinent to estimating the fair
value such as effective interest rate, carrying
amount, and maturity
● reasons why not practicable

Slide 8-26
 Fair Value Hierarchy

Quoted Market Prices

Reliability

Estimates based on MVs of similar items

Estimates based on PV of cash flows

Slide 8-27
 FAS 157

■ Definitional Standard for “Fair Value”

■ Deleted Controversial Option to Extend Fair Value

Accounting to Virtually All Financial Instruments

■ Jensen Working Paper on Fair Value Controversies

http://www.trinity.edu/rjensen/FairValueDraft.htm

Slide 8-28
 REPORTING TO SENIOR
MANAGEMENT
Keys to Success

■ Draft a risk management policy document that

identifies exposures to hedge
■ Require traders to be explicit about choice of hedge
strategy and tactics
■ Demand documentation as to rationale for adjusting
strategies and tactics
■ Implement a control function that measures hedge
performance against expected results.

Slide 8-29
 SEC REG. S-X & S-K Risk Disclosrues
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#Disclosure

■ a tabular format --- a presentation of the terms, fair value, expected

principal or transaction cash flows, and other information, with
instruments grouped within risk exposure categories based on common
characteristics;

■ a sensitivity analysis --- the hypothetical loss in earnings, fair values, or

cash; (the minumum percentage change seems to be 10% in Item 3.A of
the Instructions to Paragraphs 305a and 305b.)

■ flows resulting from hypothetical changes in rates or prices;

■ value-at-risk --- a measure of the potential loss in earnings, fair values, or

cash;

■ flows from changes in rates or prices.

Slide 8-30
 IFRS 7 Summary
http://www.iasplus.com/standard/ifrs07.htm

■ Adds certain new disclosures about financial

instruments to those currently required by IAS 32;

■ Replaces the disclosures now required by IAS 30; and

■ Puts all of those financial instruments disclosures

together in a new standard on Financial Instruments:
Disclosures. The remaining parts of IAS 32 deal only
with financial instruments presentation matters.

Slide 8-31
 IFRS 7 Disclosure Requirements
http://www.iasplus.com/standard/ifrs07.htm

■ An entity must group its financial instruments into

classes of similar instruments and, when disclosures are
required, make disclosures by class. [IFRS 7.6]
■ The two main categories of disclosures required by
IFRS 7 are:
1. Information about the significance of financial
instruments.
2. Information about the nature and extent of risks
arising from financial insturments.
Information about the significance of financial
instruments

Slide 8-32
 IFRS 7 Balance Sheet
http://www.iasplus.com/standard/ifrs07.htm

■ Disclosure of the significance of financial instruments for an entity's

financial position and performance. [IFRS 7.7] This includes disclosures
for each of the following categories: [IFRS 7.8]
■ Financial assets measured at fair value through profit and loss, showing
separately those held for trading and those designated at initial
recognition.
■ Held-to-maturity investments.
■ Loans and receivables.
■ Available-for-sale assets.
■ Financial liabilities at fair value through profit and loss, showing
separately those held for trading and those designated at initial
recognition.
■ Financial liabilities measured at amortised cost.

Slide 8-33
 IFRS 7 Balance Sheet
http://www.iasplus.com/standard/ifrs07.htm

■ Special disclosures about financial assets and financial liabilities

designated to be measured at fair value through profit and loss, including
disclosures about credit risk and market risk and changes in fair values
[IFRS 7.9-10]
■ Reclassifications of financial instruments from fair value to amortised
cost or vice versa [IFRS 7.12]
■ Disclosures about derecognitions, including transfers of financial assets
for which derecogntion accounting is not permitted by IAS 39 [IFRS 7.13]
■ Information about financial assets pledged as collateral and about
financial or non-financial assets held as collatersl [IFRS 7.14-15]
■ Reconciliation of the allowance account for credit losses (bad debts).
[IFRS 7.16]
■ Information about compound financial instruments with multiple
embedded derivatives. [IFRS 7.17]
■ Breaches of terms of loan agreements. [IFRS 7.18-19]

Slide 8-34
 IFRS 7 Income Statement
http://www.iasplus.com/standard/ifrs07.htm

■ Items of income, expense, gains, and losses, with separate

disclosure of gains and losses from: [IFRS 7.20(a)]
■ Financial assets measured at fair value through profit and loss,
showing separately those held for trading and those designated at
initial recognition.
■ Held-to-maturity investments.
■ Loans and receivables.
■ Available-for-sale assets.
■ Financial liabilities measured at fair value through profit and loss,
showing separately those held for trading and those designated at
initial recognition.
■ Financial liabilities measured at amortised cost.

Slide 8-35
 IFRS 7 Income Statement
http://www.iasplus.com/standard/ifrs07.htm

■ Interest income and interest expense for those financial

instruments that are not measured at fair value
through profit and loss [IFRS 7.20(b)]

■ Fee income and expense [IFRS 7.20(c)]

■ Amount of impairment losses on financial assets [IFRS

7.20(d)]

■ Interest income on impaired financial assets [IFRS

7.20(e)]
Slide 8-36
 IFRS 7 Other Disclosures
http://www.iasplus.com/standard/ifrs07.htm

■ Accounting policies for financial instruments [IFRS 7.21]

■ Information about hedge accounting, including: [IFRS 7.22]
■ Description of each hedge, hedging instrument, and fair values of
those instruments, and nature of risks being hedged.
■ for cash flow hedges, the periods in which the cash flows are
expected to occur, when they are expected to enter into the
determination of profit or loss, and a description of any forecast
transaction for which hedge accounting had previously been used
but which is no longer expected to occur.

Slide 8-37
 IFRS 7 Other Disclosures
http://www.iasplus.com/standard/ifrs07.htm

■ If a gain or loss on a hedging instrument in a cash flow hedge has

been recognised directly in equity, an entity should disclose the
following: [IAS 7.23]
■ The amount that was so recognised in equity during the period.
■ The amount that was removed from equity and included in profit
or loss for the period.
■ The amount that was removed from equity during the period and
included in the initial measurement of the acquisition cost or other
carrying amount of a non-financial asset or non- financial liability
in a hedged highly probable forecast transaction.

Slide 8-38
 IFRS 7 Other Disclosures
http://www.iasplus.com/standard/ifrs07.htm

■
■ For fair value hedges, information about the fair value
changes of the hedging instrument and the hedged
item. [IFRS 7.24]

■ Hedge ineffectiveness recognised in profit and loss

(separately for cash flow hedges and hedges of a net
investment in a foreign operation). [IFRS 7.24]

Slide 8-39
 IFRS 7 Fair Values
http://www.iasplus.com/standard/ifrs07.htm

Information about the fair values of each class of financial

asset and financial liability, along with: [IFRS 7.25-30]
Comparable carrying amounts.
Description of how fair value was determined.
Detailed information if fair value cannot be reliably
measured.
Note that disclosure of fair values is not required when the
carrying amount is a reasonable approximation of fair value,
such as short-term trade receivables and payables, or for
instruments whose fair value cannot be measured reliably.
[IFRS 7.29]

Slide 8-40
 IFRS 7 Risk (Qualitative)
http://www.iasplus.com/standard/ifrs07.htm

The qualitative disclosures describe:

Risk exposures for each type of financial instrument.

Management's objectives, policies, and processes for

managing those risks.

Changes from the prior period.

Slide 8-41
 IFRS 7 Risk (Quantitative)
http://www.iasplus.com/standard/ifrs07.htm

■
The quantitative disclosures provide information about
the extent to which the entity is exposed to risk, based
on information provided internally to the entity's key
management personnel. These disclosures include:
[IFRS 7.34]
■ Summary quantitative data about exposure to each risk
at the reporting date.
■ Disclosures about credit risk, liquidity risk, and market
risk as further described below.
■ Concentrations of risk.
Slide 8-42
 IFRS 7 Risk (Quantitative)
http://www.iasplus.com/standard/ifrs07.htm

Maximum amount of exposure (before deducting the value

of collateral), description of collateral, information about
credit quality of financial assets that are neither past due nor
impaired, and information about credit quality of financial

assets whose terms have been renegotiated. [IFRS 7.36]

For financial assets that are past due or impaired, analytical
disclosures are required. [IFRS 7.37]

Information about collateral or other credit enhancements

obtained or called. [IFRS 7.38]

Slide 8-43
 IFRS 7 Liquidity Risk
http://www.iasplus.com/standard/ifrs07.htm

Disclosures about liquidity risk include:

[IFRS 7.39]

A maturity analysis of financial

liabilities.

Description of approach to risk

management
Slide 8-44
 IFRS 7 Market Risk
http://www.iasplus.com/standard/ifrs07.htm

Market risk is the risk that the fair value or cash flows of a financial
instrument will fluctuate due to changes in market prices. Market
risk reflects interest rate risk, currency risk, and other price risks.

■ Disclosures about market risk include:

■ A sensitivity analysis of each type of market risk to which the
entity is exposed.
■ IFRS 7 provides that if an entity prepares a sensitivity analysis for
management purposes that reflects interdependencies of more
than one component of market risk (for instance, interest risk and
foreign currency risk combined), it may disclose that analysis
instead of a separate sensitity analysis for each type of market
Slide 8-45
 IFRS 7 Application Guidance
http://www.iasplus.com/standard/ifrs07.htm

■
Application Guidance
■ An appendix of mandatory application guidance is part of the
standard.
■ There is also an appendix of non-mandatory implementation
guidance that describes how an entity might provide the
disclosures required by IFRS 7.

Effective Date
■ IFRS 7 is effective for annual periods beginning on or after 1
January 2007, with earlier application encouraged. Early appliers
are given some relief with respect to comparative prior period
disclosures.
Slide 8-46