IFRS 7

IFRS 7, titled Financial Instruments: Disclosures, is an International Financial Reporting Standard published by the International Accounting Standards Board. It requires entities to provide certain disclosures regarding financial instruments in their financial statements. The standard was originally issued in August 2005 and became applicable on 1 January 2007, superseding the earlier standard IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and replacing the disclosure requirements of IAS 32, previously titled Financial Instruments: Disclosure and Presentation.

Disclosure requirements

IFRS 7 requires entities to provide disclosures about:

The significance of financial instruments for the entity's financial position and performance.
The carrying amount of each class of financial instrument on the statement of financial position or within the notes.
Items of income, expense, gains and losses for each class of financial instrument, either in the statement of profit or loss and other comprehensive income or within the notes.
The nature and extent of risks faced by the entity due to the financial instruments.

According to accounting expert David Grünberger, qualitative disclosures are essential to explain how management perceives and manages risk. Steffen Kuhn and Dirk Hachmeister emphasize that a central goal of IFRS 7 is to enable users to evaluate the entity's exposure to risk and the way those risks are managed based on the internal perspective of management. This must cover management's objectives and policies for managing those risks, and any changes in the year.

Accounting policies that the entity adopts regarding financial instruments.
Qualitative and quantitative information about hedges and hedge accounting.

Fair value measurement

The three-level "fair value hierarchy" is used to measure the fair values of each class of financial instruments. Kuhn and Hachmeister point out that the auditing of Level 3 measurements presents significant challenges, as the valuation relies heavily on entity-internal models and non-observable parameters.
; Level 1
; Level 2
; Level 3
As an illustrative disclosure for IFRS 13 requirements, Deutsche Bank categorizes its financial instruments held at fair value into a three-level hierarchy. This classification is based on whether the inputs to the valuation technique are observable or unobservable.
Disclosure of fair value is not required if the carrying amount is a reasonable approximation of fair value. Kuhn and Hachmeister further note that the depth of disclosure must correspond to the risk relevance of the respective financial instruments.

Illustrative Accounting Examples

1. Credit Risk: Expected Credit Loss (ECL) Disclosure

Scenario: An entity calculates an impairment for trade receivables.

Event	Debit	Credit	Amount	Rationale
Recognition of ECL	Impairment Loss		$12,000	Required disclosure of the reconciliation of changes in the loss allowance.
		Allowance for ECL	$12,000	Net credit exposure must be disclosed clearly.

2. Market Risk: Interest Rate Sensitivity

Scenario: An entity has a floating-rate bank loan of $1,000,000.

Market Shift	Impact on Profit	Impact on Equity	Rationale
Interest Rate +1%			Required sensitivity analysis showing impact on profit or loss.
Interest Rate -1%	$10,000	$10,000	Sensitivity analysis must reflect reasonably possible changes.

Illustrative disclosure

As an illustrative disclosure for IFRS 7 requirements regarding credit risk concentrations, Deutsche Bank provides a granular industry breakdown of its loan book in its notes. This presentation includes all assets classified under IFRS 9—specifically those at amortized cost, fair value through other comprehensive income, and fair value through profit and loss —using the European NACE system for counterparty classification.

Allowance for credit losses

To satisfy the requirements of IFRS 7.35H, Deutsche Bank provides a reconciliation of the allowance for credit losses in its notes, showing the movement between Stage 1, Stage 2, and Stage 3 for financial assets at amortized cost.

Movement in Allowance	Stage 1	Stage 2	Stage 3	Stage 3 POCI	Total
Balance, beginning of year	447	680	3,960	198	5,285
Movements		194	1,814	3	1,861
Transfers due to changes in creditworthiness	128		0	N/M	0
Changes in models			0	0
Financial assets derecognized	0	0		0
Recovery of written off amounts	0	0	157	0	157
Foreign exchange and other changes	15			11
Balance, end of reporting period	438	736	4,412	213	5,799
Provision for Credit Losses		59	1,814	3	1,852

Disclosure Requirements (IFRS 7)

IFRS 7 requires entities to provide disclosures that enable users to evaluate the significance of financial instruments for the entity's financial position and performance, and the nature and extent of risks arising from those instruments.

Paragraph	Category	Disclosure Requirement	Description / Examples
IFRS 7.8	Significance	Carrying Amounts	Disclosure of the carrying amounts of each category of financial assets and liabilities.
IFRS 7.25	Fair Value	Fair Value Hierarchy	For each class of financial instrument, the fair value must be disclosed and categorized into Level 1, 2, or 3 based on the observability of inputs.
IFRS 7.33	Risk Management	Qualitative Risk	For each type of risk : the exposures to the risk and how they arise, and the objectives/policies for managing them.
IFRS 7.34	Risk Management	Quantitative Data	Summary quantitative data about the entity's exposure to risk at the end of the reporting period based on information provided internally to key management.
IFRS 7.35	Risk Management	Credit Risk & ECL	Information about an entity’s credit risk management practices and how they relate to the recognition and measurement of Expected Credit Losses.
IFRS 7.39	Liquidity Risk	Maturity Analysis	A maturity analysis for financial liabilities showing the remaining contractual maturities.
IFRS 7.40	Market Risk	Sensitivity Analysis	A sensitivity analysis for each type of market risk showing how profit/loss and equity would have been affected by "reasonably possible" changes.
IFRS 7.13	Collateral	Pledged Assets	The carrying amount of financial assets the entity has pledged as collateral for liabilities and the terms and conditions relating to its pledge.