Brief summary on Amendments to HKFRS 7 to improve disclosures about financial instruments

Amendments to HKFRS 7 “Improving Disclosures about Financial Instruments” has been issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) in March, 2009. The amendments aimed at enhancing the disclosures about fair value measurements and liquidity risk so as to improve transparency with respect to entities’ financial instruments in response to the current market conditions. The Amendments to HKFRS 7 are applicable for entities’ annual accounting periods beginning on or after 1 January, 2009. In the first year of application, comparative information for the disclosures is not required. Fair value disclosures The amendments require that fair value measurement disclosures use a three-level fair value hierarchy, which reflects the significant of the inputs used in measuring fair values, as follows: Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs). The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety shall be determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For example, if the fair value measurement uses observable inputs which require significant adjustment based on unobservable inputs, that the whole instrument is classified as Level 3. In this regard, assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the financial asset or financial liability. Quantitative disclosures For fair value measurements recognized in the statement of financial position, an entity shall disclose for each class of financial instruments: the level in the fair value hierarchy any significant transfer between Level 1 and Level 2 of the fair value hierarchy, distinguishing between transfers into and out of each level. An entity shall present the quantitative disclosures required in a tabular format unless another format is more appropriate. Specific Level 3 fair value measurement disclosures The amendments require an entity to disclose, for each class of financial instruments in Level 3, a reconciliation disclosing separately changes during the period, attributable to the following: (i) total gains or losses for the period recognized in profit or loss, and where they have been presented in the statement of comprehensive income or separate income statement (if presented); (ii) total gains or losses recognized in other comprehensive income; (iii) purchases, sales, issues and settlements (each type of movement disclosed separately); and (iv) transfers into or out of Level 3 (for example, transfers attributable to changes in the observability of market data) and the reasons for those transfers. For significant transfers, transfers into Level 3 shall be disclosed and discussed separately from transfers out of Level 3. The amendments also require an entity to disclose the total amount of gains or losses recognized in profit or loss relating to those assets or liabilities held at the end of the reporting period and where such amounts have been presented in the statement of comprehensive income (or separate income statement). In addition, the amendments require that if changing one or more of the inputs to reasonably possible alternative assumptions would change fair value of the Level 3 instruments significantly, the entity shall disclose the effect of those changes and how the effect of such a change was calculated. Liquidity risk disclosures The definition of liquidity risk has been amended and accordingly only the liquidity risk disclosures for financial liabilities that are settled by delivering cash or another financial assets are required. In addition, the requirements in paragraph 39(a) and (b) of HKFRS 7 has also been amended so as to specify different liquidity risk disclosure requirements for derivative and non-derivative financial liabilities: For non-derivative financial liabilities (including issued financial guarantee contracts), a quantitative maturity analysis that shows the remaining contractual maturities is required. However, for issued guarantee contract, the information to be included in the contractual maturity analysis represents the maximum amount of the guarantee disclosed in the earliest period in which such a guarantee could be called; and For derivative financial liabilities, an entity is only required to disclose the quantitative maturity analysis which include the remaining contractual maturities where these are essential for an understanding of the timing of cash flows. An embedded derivative shall not be separated from a hybrid (combined) financial instrument. The disclosure requirements for non-derivative financial liability shall apply to this instrument. How liquidity risk is managed Under the amendments, additional disclosure is required for how the data are determined. If the estimated cash flows included in the maturity analyses could either: occur significantly earlier than indicated in the maturity analysis, or at significantly different amounts from those indicated in the maturity analysis, the entity shall disclose this fact and provide further quantitative information for cash outflows to enable the users to evaluate this risk. Disclaimer: The publication contains information in summary form and is therefore intended for general guidance only. This publication is not intended as legal, accounting or other professional advice and should not be relied upon as such. If legal, accounting or other professional advice or expert assistance is required, the services of a competent professional should be sought. Neither Reanda Lau & Au Yeung Limited nor any related entity shall have any liability to any person or entity that relies on the information contained in this publication. For more details, please refer to the Amendments to HKFRS 7 Improving Disclosures about Financial Instruments (issued in March 2009) issued by the HKICPA.