Ind AS 107

What is Ind AS 107: A Quick Overview

Ind AS 107, an Indian Accounting Standard titled ‘Financial Instruments: Disclosures’, is a crucial standard notified by the Ministry of Corporate Affairs (MCA) under the Companies (Indian Accounting Standards) Rules, 2015. Its primary objective is to mandate entities to provide comprehensive disclosures in their financial statements. These disclosures enable users of financial statements – such as investors, creditors, and analysts – to accurately evaluate:

• The significance of financial instruments for the entity’s financial position and performance.
• The nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period. This includes credit risk, liquidity risk, and market risk.

Essentially, Ind AS 107 aims to enhance transparency regarding an entity’s financial instruments and the associated risks, providing a clearer picture beyond just their recognition and measurement.

The Journey to Ind AS 107: From IFRS to Indian Shores

Ind AS 107 is India’s converged equivalent of IFRS 7 ‘Financial Instruments: Disclosures’, issued by the International Accounting Standards Board (IASB). India embarked on a journey to converge with International Financial Reporting Standards (IFRS) to align its accounting practices with global benchmarks, starting in a phased manner from the financial year 2016-17. The Institute of Chartered Accountants of India (ICAI) plays a pivotal role in formulating and recommending these standards, which are subsequently notified by the MCA.

The adoption of Ind AS 107, along with other financial instrument standards like Ind AS 109 (Financial Instruments: Recognition and Measurement) and Ind AS 32 (Financial Instruments: Presentation), marked a significant shift in how Indian companies account for and report their financial assets and liabilities. This convergence aims to improve the comparability of Indian financial statements with those prepared under IFRS globally, facilitating cross-border investments and financial analysis.

Unpacking Ind AS 107: Key Disclosure Requirements

Ind AS 107 broadly categorizes its disclosure requirements into two main areas:

1. Significance of Financial Instruments for Financial Position and Performance

This section requires entities to disclose information that allows users to understand the impact of financial instruments on the entity’s overall financial health.

• Balance Sheet Disclosures:
  • Carrying amounts of each category of financial assets and financial liabilities (e.g., financial assets at amortised cost, financial assets at FVOCI, financial assets at FVTPL, financial liabilities at amortised cost, financial liabilities at FVTPL).
  • Information about offsetting financial assets and financial liabilities.
  • Details about collateral held or pledged.
  • Reconciliation of changes in liabilities arising from financing activities.
• Statement of Profit or Loss and Other Comprehensive Income (OCI) Disclosures:
  • Net gains or losses for each category of financial instruments.
  • Total interest income and interest expense.
  • Fee income and expense arising from financial assets and financial liabilities.
  • Impairment losses (or reversals) for financial assets.
• Other Disclosures:
  • Summary of accounting policies for financial instruments.
  • Detailed information on fair value measurement, including valuation techniques, inputs used, and the fair value hierarchy (Level 1, 2, or 3).

2. Nature and Extent of Risks Arising from Financial Instruments

This section focuses on providing insights into the risks associated with financial instruments and how the entity manages them.

• Qualitative Disclosures: An entity must describe its objectives, policies, and processes for managing each type of risk (credit, liquidity, market risk), including changes from the prior period.
• Quantitative Disclosures: Entities must provide summary quantitative data about their exposure to risks at the reporting date.
• Credit Risk:
  • Information about maximum exposure to credit risk.
  • Details of collateral held and other credit enhancements.
  • Credit quality of financial assets that are neither past due nor impaired.
  • Analysis of past due and impaired financial assets.
  • Information on expected credit losses (ECL) under Ind AS 109, including reconciliations.
• Liquidity Risk:
  • A maturity analysis for non-derivative financial liabilities, showing remaining contractual maturities.
  • A description of how the entity manages its liquidity risk.
• Market Risk:
  • Sensitivity analysis for each type of market risk (e.g., interest rate risk, foreign currency risk, other price risk), showing the effect on profit or loss and equity of reasonably possible changes in the relevant risk variable.
  • Management’s policies for managing market risk.
• Capital Management: Disclosures on the entity’s objectives, policies, and processes for managing capital.

Why Every Business Should Understand Ind AS 107: Beyond Compliance

Understanding and complying with Ind AS 107 is paramount for businesses operating under the Ind AS framework. Its importance extends beyond mere regulatory compliance:

• Enhanced Transparency and Accountability: It provides stakeholders with a clear, comprehensive, and standardized view of a company’s financial instrument exposures and risk management strategies. This transparency builds trust and accountability.
• Informed Decision-Making for Stakeholders: Investors, creditors, and other market participants rely heavily on these disclosures to assess a company’s financial health, risk profile, and future prospects, enabling them to make more informed investment and lending decisions.
• Improved Internal Risk Management: The rigorous disclosure requirements compel management to thoroughly review and articulate their risk management objectives, policies, and processes. This fosters a more disciplined and robust internal risk management framework.
• Regulatory Compliance and Mitigating Penalties: Non-compliance with Ind AS 107 can lead to severe penalties, reputational damage, and qualified audit opinions. Adherence ensures the integrity of financial reporting.
• Global Comparability: As a converged standard, Ind AS 107 facilitates easier comparison of financial statements with global peers, which is crucial for international investors and benchmarking.
• Better Access to Capital: Companies with transparent and well-understood financial risk disclosures are often viewed more favorably by lenders and investors, potentially leading to better terms for financing.

Real-World Impact: How Businesses Apply Ind AS 107

Ind AS 107 has widespread application across various sectors, significantly impacting how businesses report their financial activities:

• Banks and Financial Institutions: These entities have extensive holdings of financial instruments (loans, deposits, derivatives, bonds). Ind AS 107 is critical for them to disclose their credit risk concentration, liquidity risk maturity profiles, interest rate sensitivity, and complex derivative exposures.
• Large Manufacturing and Service Corporates: Companies in these sectors utilize Ind AS 107 to disclose their borrowings, investments in debt and equity instruments, trade receivables and payables, and foreign currency hedging strategies. They must provide sensitivity analysis for foreign exchange risk and interest rate risk.
• Treasury Departments: Treasury functions are at the forefront of managing financial risks. Ind AS 107 guides them in preparing the necessary qualitative and quantitative disclosures about their risk management objectives and the effectiveness of their hedging activities.
• Investor Relations Teams: These teams leverage the comprehensive disclosures mandated by Ind AS 107 to communicate the company’s financial resilience and risk management approach to the investment community.
• Audit Firms: Ind AS 107 forms a critical part of the audit process, as auditors must ensure the completeness, accuracy, and compliance of financial instrument disclosures in the financial statements.

Navigating the Landscape: Concepts Connected to Ind AS 107

Ind AS 107 does not operate in isolation but is intricately linked with several other accounting standards and financial concepts:

• Ind AS 109 ‘Financial Instruments’: This is the most crucial related standard, covering the recognition, classification, measurement, and derecognition of financial instruments, as well as hedge accounting and impairment (expected credit loss model). Ind AS 107 then dictates how these recognized and measured items are disclosed.
• Ind AS 32 ‘Financial Instruments: Presentation’: This standard governs how financial instruments are presented in the balance sheet, particularly distinguishing between financial liabilities and equity instruments, and offsetting financial assets and liabilities.
• IFRS 7 ‘Financial Instruments: Disclosures’: As the international equivalent, IFRS 7 is the conceptual basis for Ind AS 107.
• Ind AS 113 ‘Fair Value Measurement’: This standard provides guidance on how to measure fair value when required by other Ind AS, which directly impacts the fair value disclosures under Ind AS 107.
• Risk Management Concepts: Core concepts like Credit Risk, Liquidity Risk, Market Risk (Interest Rate Risk, Currency Risk, Other Price Risk), and Hedging are fundamental to the disclosures required by Ind AS 107.
• Derivatives: Financial instruments such as futures, forwards, swaps, and options often require specific disclosures regarding their fair value, notional amounts, and how they are used for hedging.

Staying Current: Latest Developments and Amendments

While Ind AS 107 itself is a relatively stable standard, its application is significantly influenced by amendments to related standards, particularly Ind AS 109. Recent developments and ongoing considerations include:

• Interest Rate Benchmark Reform (IBOR Transition): Amendments to Ind AS 109 and Ind AS 107 have been issued to address financial reporting issues arising from the reform of interbank offered rates (IBORs), impacting hedge accounting and related disclosures.
• Emphasis on Materiality: Auditors and regulators increasingly focus on the application of materiality when preparing disclosures. Entities are encouraged to provide relevant and specific information, avoiding boilerplate disclosures that do not add value.
• Clarity and Specificity: There’s an ongoing push for disclosures to be clearer, more entity-specific, and less generic, truly reflecting the unique risk profile and management strategies of the reporting entity.
• Impact of Macroeconomic Volatility: Recent global economic events (e.g., inflation, interest rate hikes, supply chain disruptions) put a greater spotlight on the robustness of risk management disclosures, particularly sensitivity analyses for market risks and the adequacy of liquidity management.

Who Needs to Know: Departments Impacted by Ind AS 107

Effective implementation and reporting under Ind AS 107 require collaborative effort across several key business departments:

• Finance & Accounting Department: This is the core department responsible for interpreting the standard, collecting data, preparing the disclosures, and ensuring overall compliance.
• Treasury Department: As the primary function managing financial instruments, foreign exchange exposures, and liquidity, Treasury provides critical inputs regarding risk management objectives, hedging strategies, and quantitative risk data.
• Risk Management Department: This department identifies, assesses, and monitors financial risks. Its analyses and frameworks directly inform the qualitative and quantitative risk disclosures required by Ind AS 107.
• Internal Audit: Internal auditors review the processes and controls related to financial instrument reporting and risk management, ensuring the reliability and accuracy of the disclosures.
• Legal & Compliance Department: Ensures that all disclosures comply with regulatory requirements and that contractual terms of financial instruments are properly understood and reflected.
• Investor Relations: This team uses the comprehensive disclosures to communicate transparently with investors, analysts, and other stakeholders, explaining the company’s financial risk profile and management strategies.
• Senior Management / Board of Directors: While not involved in day-to-day preparation, they are ultimately responsible for the integrity of financial statements and need to understand the implications of the disclosed risks and controls.

The Road Ahead: Future Trends in Financial Instrument Disclosures

The landscape of financial reporting for instruments is continually evolving. Future trends for disclosures under standards like Ind AS 107 are likely to include:

• Greater Integration with ESG Reporting: As environmental, social, and governance (ESG) factors become more critical, there will be increasing pressure to link financial instrument disclosures with climate-related and other sustainability risks. For instance, disclosures on financing related to fossil fuels or green bonds might become more prominent.
• Enhanced Granularity and Automation: Technological advancements, including AI and machine learning, will drive the demand for more granular, real-time data for risk assessment and disclosures. Automation will streamline the data collection and reporting process, improving efficiency and accuracy.
• Focus on Digital Reporting: The push for structured, machine-readable financial reporting (e.g., using XBRL) will continue, making the analysis of financial instrument disclosures easier for regulators and investors.
• Increased Scrutiny on Management Judgements: There will be ongoing emphasis on the clarity and transparency of management’s judgments, especially concerning fair value measurements (Level 3 inputs) and the estimation of expected credit losses (ECL) under Ind AS 109.
• Dynamic Risk Management Disclosures: Disclosures might become more dynamic, reflecting real-time changes in risk exposures and management strategies, moving beyond static period-end snapshots.
• Balance Between Detail and Brevity: Regulators and standard-setters will continue to seek a balance between providing sufficient detail for informed decision-making and avoiding information overload, possibly leading to more principles-based guidance on materiality.