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8/3/2019 IFRS 7 Financial Instruments Disclsoures
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IFRS 7 FinancialInstruments: Disclosures
Implementation guidancefor investment funds
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IFRS 7 Financial Instruments: Disclosures Implementation guidance for investment funds
Foreword
Introduction 1
Scope 2
General points to note 2
Balance sheet 3
Disclosure of fair value of financial instruments 4
Income statement 5
Other disclosures 7
Qualitative risk disclosures 10
Quantative risk disclosures 11
Credit risk 11
Liquidity risk 14
Market risk 16
This implementation guidance for investment funds on IFRS 7 Financial
Instruments: Disclosures (IFRS 7 or the Standard) is based on our recent
publication, IFRS 7 Financial Instruments: Disclosures Second Edition
(the Second Edition). In the creation of this guide, we have drawn heavily
on the text of the Second Edition.
The guide has been prepared specically for the investment funds industry and containsinformation on the requirements of IFRS 7 generally, as well as illustrations of the types
of disclosure that a fund may make. Please note that the illustrative examples used in this
guide are not necessarily applicable to other industries. We recommend that any entity
that is not a fund refers to the Second Edition for the types of disclosure that may be
required to meet the disclosure requirements of IFRS 7.
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1IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Introduction
This guide provides an overview of IFRS 7 and its application to
funds. It considers the implementation issues, and highlights
the main differences compared with the previous disclosure
requirements. It should be read in conjunction with our publication,
International GAAP 2007, which sets out the required accounting
treatment for nancial instruments and much of the terminology
used in IFRS 7.
IFRS 7 incorporates the disclosures relating to nancial
instruments required by IAS 32 Financial Instruments: Disclosure
and Presentation (IAS 32)1 and replaces IAS 30 Disclosures in the
Financial Statements of Banks and Similar Financial Institutions
(IAS 30). As a result, all of the disclosure requirements for
nancial instruments are now contained in a single standard for
all types of entity.
The IFRS 7 disclosure requirements encompass both qualitative
narrative descriptions and specic quantitative data. The required
level of detail is not intended to overburden users, but equally,
should not obscure signicant information as a result of
excessive aggregation.
Although the Standard includes relatively little guidance on how
reporting entities should determine the specic disclosures
required, it recognises that the economic environments in which
entities operate vary, and the purposes and objectives for holding
nancial instruments may differ for each entity. In assessing the
disclosure requirements (which are determined by the purpose for
which nancial instruments are held and how the associated risks
are monitored and managed), funds need to identify the risk
factors associated with nancial instruments.
Consequently, the requirements will vary across entities and should
be considered on an individual basis.
Unlike the other disclosures required by IFRS 7, risk disclosures do
not have to be provided in the nancial statements: they may be
incorporated in the nancial statements by reference to another
statement (e.g., the management commentary or a risk report
that is available to users of the nancial statements on the same
terms as the nancial statements). But the risk disclosures are
required by IFRS 7 and, as such, they are subject to audit and,
for those funds with US Securities and Exchange Commission
(SEC) registrations, the Sarbanes-Oxley Act Section 404
attestation process.
Financial instrument disclosures are intended to: (1) provide
information that will enhance the understanding of the signicance
of nancial instruments to a funds nancial position, performance,
and cash ows; and (2) assist in evaluating the risks associated
with these instruments, including how the fund manages
those risks.
IFRS 7 introduces:
The requirements for enhanced balance sheet and income
statement disclosure by category (e.g., whether the instrumentis available-for-sale or held-to-maturity);
Information on any provisions against impaired assets;
An additional disclosure relating to the fair value of collateral
and other credit enhancements used to manage credit risk; and
Market risk sensitivity analyses.
IFRS 7 must be applied for accounting periods beginning on or
after 1 January 2007.
1 Including amendments issued in 2005 for The Fair Value Option and Financial Guarantee Contracts.
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2 IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Scope
IFRS 7 applies to all risks arising from nancial instruments,
including those instruments that are not recognised on-balance
sheet. For example, loan commitments that do not fall within the
scope of IAS 39 Financial Instruments: Recognition and
Measurement (IAS 39) do fall within the scope of IFRS 7.
Contracts to buy or sell a non-nancial item that are within
the scope of IAS 39 (as derivative nancial instruments) are
also within the scope of IFRS 7. The Application Guidance of
IFRS 7 indicates that such nancial instruments should be
considered a separate class for the purpose of preparing the
required disclosures.
The following are excluded from the scope of IFRS 7:
Interests in subsidiaries, associates, and joint ventures
Employee benet plan obligations
Contingent consideration in a business combination
Insurance contracts
Share-based payment transactions.
Consistent with IAS 32, there is no scope exemption for thenancial statements of subsidiaries or, as yet, for small and
medium-sized entities. The application of IFRS 7 to subsidiaries
may present a challenge to entities that are members of a
consolidated group, as they often manage risk on a consolidated
basis. Furthermore, the requirement to provide the disclosures for
each fund may be of limited value to users of nancial statements
(compared with the cost of compilation) when the information is
already disclosed at the group level.
IFRS 7 disclosures must be based on the accounting policies used
for the nancial statements prepared in accordance with IFRS,
including consolidation adjustments. In the event that internal
information available to management for risk management
purposes is not prepared using such accounting policies, it will
need to be adjusted.
The Standard requires disclosure by class of nancial instrument,a group that is appropriate to the nature of the information
disclosed and the characteristics of the instruments. A class of
nancial instrument is a lower level of aggregation than a category,
such as available-for-sale or loans and receivables. For example,
government debt securities, equity securities, or asset-backed
securities may be considered classes of nancial instruments.
Illustrative examples of disclosures for a variety of strategies are
presented in this guide. Each example is based on specic
assumptions with respect to the nancial instruments held, their
purpose and how any associated risks are monitored and managed.
The disclosure requirements for individual investment strategies
may differ depending on the treatment of the risks.
General points to note
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3IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Like IAS 32, IFRS 7 does not prescribe the location of the required
balance sheet-related disclosures. A fund is permitted to present
the required disclosures either on the face of the balance sheet or
in the notes to the nancial statements.
The Standard requires disclosure of additional detail for each
category of nancial instrument, such as nancial assets held at fair
value through prot or loss or available-for-sale. By contrast, IAS 32required separate disclosure only for nancial instruments carried
at fair value through prot or loss. The required core balance sheet
disclosures for each category of nancial asset and nancial liability
in IFRS 7 are similar to those in IAS 32 and include the carrying
amount and related fair value, along with the amount and reason
for any reclassications between categories. Disclosures relating
to nancial instruments held for trading should be presented
separately from those designated at fair value through prot or loss.
Example 1 Balance sheet disclosures
The following example illustrates the disclosures a fund might make
in accordance with paragraphs 8 (a) and (e) of IFRS 7 whichrequire a fund to disclose the carrying amounts of nancial assets
and liabilities by category, either on the face of the balance sheet
or in the notes. Paragraph 25 of IFRS 7 also requires an entity to
disclose the fair value of each class of nancial asset and liability.
In this example, the carrying value of a nancial instrument not
held at fair value is a reasonable approximation of fair value, thus
the disclosures required in accordance with paragraph 25 of IFRS 7
are also given.
Balance Sheet as at
31 December 2007
Notes 2007
(000)
2006
(000)
Assets
Cash and cash equivalents 8,505 8,643
Trade and other receivables 6,789 7,144
Financial assets at fair value through prot or loss:
Held for trading 1(a) 126,540 136,725
Designated at fair value through prot or loss 1(b) 39,364 42,892
Total assets 181,198 195,404
Liabilities
Financial liabilities at fair value through prot
or loss held for trading
2 (37,962) (41,018)
Trade and other payables (329) (1,916)
Distributions payable (3,069) (3,377)
Total liabilities excluding net assetsattributable to unit holders
(41,360) (46,311)
Net assets attributable to unit holders 139,838 149,093
Notes to the Financial Statements for
the year ended 31 December 2007
2007
(000)
2006
(000)
1. Financial assets at fair value through prot or loss
(a) Held for trading
(i) Listed equities and managed investment schemes
Equities 76,698 82,208
Managed investment schemes 3,671 4,161
80,369 86,369
(ii) Unlisted equities and managed investment schemes
Equities 21,633 23,178
Managed investment schemes 11,626 13,175
33,259 36,353
(iii) Interest bearing securities
Bank accepted bills 3,986 3,800
Promissory notes 3,488 3,254
Negotiable certicate of deposit 2,990 4,338
10,464 11,392
(iv) Derivatives
Share price index futures 432 570
10-year bond futures 504 735
3-year bond futures 216 327
Exchange traded options 648 653
Over-the-counter options 360 326
Interest rate swaps 288
2,448 2,611
Investment in nancial assets held for trading 126,540 136,725
(b) Designated at fair value through prot or loss
Corporate bonds 13,952 16,288
Indexed bonds 11,958 14,116
Government bonds 13,454 12,488
Investment in nancial assets designated at fair value
through prot or loss
39,364 42,892
Total Investments in nancial assets at fair value through
prot or loss
165,904 179,617
2. Financial liabilities at fair value through prot or loss
(a) Held for trading
Listed equities sold short 26,573 28,713
Derivatives 11,389 12,305
Investment in nancial liabilities held for trading 37,962 41,018
Balance sheet
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4 IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Disclosure of fair valueof nancial instruments
Most funds should be familiar with the requirement to disclose the
fair value of nancial instruments as this disclosure is currently
required by IAS 32. The required balance-sheet disclosures include
the following:
Financial liabilities at fair value through prot or loss
IFRS 7 reiterates the requirement in IAS 32 to disclose the change
in the fair value of a nancial liability designated as fair value that
is attributable to changes in the credit risk of that liability during
the period and cumulatively.
As it may be difcult for many funds to identify and measure the
change in fair value due to changes in the credit risk of a liability,
IFRS 7 permits entities to determine the change as the proportion
of change in the liabilitys fair value that is not attributable to
a change in market conditions that gives rise to market risk.
Such change in fair value due to change in credit risk is unlikely
in an investment fund because funds tend not to issue traded
debt securities.
In addition, a fund must disclose the difference between thecarrying amount of nancial liabilities recorded at fair value
through prot or loss and the amount which the fund is
contractually required to pay at maturity.
Loans and receivables at fair value through prot and loss
IFRS 7 contains the disclosure requirements for loans and
receivables at fair value through prot or loss that were introduced
in IAS 32 as a result of the IAS 39 fair value option amendment.
IFRS 7 refers only to loans and receivables in this regard. However,
we believe that the IASB intended that the disclosure requirements
would apply also to hybrid instruments designated at fair value
through prot or loss that contain a loan as the host contract (i.e.,loans with embedded derivatives that would otherwise require
separation). The required disclosures include the following: the
maximum credit exposure, the impact of credit derivatives on the
credit exposure, and the change in the fair value of the loan or
receivable (or group of loans or receivables) and any related credit
derivatives due to changes in credit risk, both during the period
and cumulatively.
Other sundry balance sheet disclosures:
Reclassifcations: the amount and the reason for reclassication
to or from cost or amortised cost and fair value must be
disclosed. (Although reclassication into or out of nancial
assets or liabilities at fair value through prot or loss is not
permitted. In practice, this will relate only to transfers to or
from available-for-sale.)
Derecognition: as per paragraph 13 of IFRS 7, certain
information must be disclosed for each class of nancial
asset when transferred nancial assets do not qualify for
derecognition, or when the assets continue to be recognised
to the extent of the funds continuing involvement.
Collateral given: disclosure is required of the carrying amount in
addition to the terms and conditions of nancial assets pledged
as collateral. In addition, IAS 39 requires collateral provided,
when the counterparty has the right to sell or repledge the
collateral (by custom or contract), to be reclassied separately
from other assets.
Example 2(a) Other sundry balance sheet disclosures
The following example illustrates the disclosures a fund might make
in accordance with paragraph 14 of IFRS 7, which requires a fund
to disclose the carrying amounts and terms and conditions of
nancial assets it has pledged as collateral.
Included in trading securities are securities pledged under
repurchase agreements with other counterparties whose
market value as at 31 December 2007 was 9,450 (2006:
7,250). All repurchase agreements mature three months
from inception. There are no signicant terms and
conditions associated with the use of collateral.
The carrying amount of nancial assets pledged as collateral
for other liabilities is 9,950 (2006: 7,950).
Collateral given
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5IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Collateral received: a fund must disclose the fair value and terms
and conditions of nancial or non-nancial assets received as
collateral which the fund has the right to sell or repledge in the
absence of default.
Example 2(b) Other sundry balance sheet disclosures
The following example illustrates the disclosures a fund might make
in accordance with paragraph 15 of IFRS 7, which requires a fundto disclose the fair value of collateral held, the fair value of
collateral sold or pledged and the terms and conditions associated
with its use of collateral.
Defaults and breaches: disclosure is required of the details of
any defaults by the fund during the period, carrying amounts of
nancial liabilities (other than short term trade payables on
normal credit terms) that are in default at the reporting date,
and whether such defaults were remedied prior to the issue of
the nancial statements.
Similar to the minimum balance sheet disclosures, a fund is
permitted to present the required income statement disclosures
on either the face of the income statement or in the notes to the
nancial statements. However, paragraph 81(b) of IAS 1 requires
interest income and interest expense to be presented separately
on the face of the income statement. The income statement
disclosures required by IFRS 7 are more detailed than those
required by IAS 32. For example, IAS 32 required separate
disclosure only of the net gains or net losses on nancial
instruments carried at fair value through prot or loss, whereas
IFRS 7 requires the disclosure of this information for each category
of nancial assets and nancial liabilities.
IFRS 7 allows a fund to choose how the income statement amounts
are determined, and suggests that the fund discloses in its
accounting policies how net gains or losses on each category of
nancial instrument are determined. For example, interest or
dividends earned on nancial instruments carried at fair value
through prot or loss may be included in net gains or losses for the
category, or in interest or dividend income, and the policy shouldmake it clear where they are reported.
IAS 32 disclosures retained in IFRS 7 include:
Total interest income and total interest expense (calculated
using the effective interest method) for nancial assets and
nancial liabilities that are not measured at fair value through
prot or loss
Gains or losses on available-for-sale nancial assets recognised
in equity and the amounts reclassied from equity to prot or
loss for the period
Interest accrued on impaired nancial assets.
Disclosure requirements introduced by IFRS 7: Net gains or
losses for each category of nancial asset or nancial liability
As already noted, IFRS 7 does not prescribe whether interest and
dividends must be included within net gains or losses for nancial
instruments at fair value through prot or loss, or in interest or
dividend income. It would be possible to treat the various
categories of nancial instruments, and possibly even different
classes, differently, as long as there is consistent application from
period to period and the funds accounting policy is disclosed. For
example, a fund may present interest income for debt securities
held for trading as a component of total interest income, whereas
dividend income received on equity securities held for trading may
be recorded in net gains or losses on nancial instruments at fair
value through prot or loss.
The fair value of collateral that has been accepted and that
the Fund is permitted to sell or re-pledge in the absence of
default is 2,350 (2006: 1,250). The Fund has not sold
or re-pledged any collateral during the period. Collateral
received is not included in the assets of the Fund. The
amount and type of collateral required depends on anassessment of the credit risk of the counterparty. There are
no signicant terms and conditions associated with the use
of collateral.
Collateral received
Income statement
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6 IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Income statement continued
Funding costs related to a funds trading portfolio are not
considered to be part of a funds trading activities and should be
included in interest expense. There are different views as to how to
treat interest or dividend expense on short positions our view is
that they should be classied in a manner consistent with the
treatment of interest and dividends on long positions and included
in either interest or dividend expense, or in gains and losses
on nancial instruments at fair value through prot or loss,
as appropriate.
Example 3 Income statement disclosures
The following example illustrates the disclosure a fund might make
in accordance with paragraph 20(a) of IFRS 7, which requires a
fund to disclose the net gains or net losses on each category of
nancial instrument separately, either on the face of the balance
sheet or in the notes.
Income statement for the year
ended 31 December
Notes 2007
(000)
2006
(000)
Income:
Interest income2 12,011 8,012
Dividend income2 6,112 5,912
Other income 1,239 1,010
Net trading income 1(a) 46,781 35,861
Total income 66,143 50,795
Expenses:
Interest expense2 5,119 4,012
Dividend expense2 2,916 2,513
Other expenses 659 463
Total expenses 8,694 6,988
Net operating income 57,449 43,807
Notes to the Financial Statements
for the year ended 31 December 2007
1(a) Net trading income
Net trading income:
Gains on nancial assets/liabilities designated
at fair value through prot or loss
12,681 10,598
Gains on nancial assets/liabilities classied as
held for trading
32,370 23,643
Gains on available for sale nancial
instruments transferred to income from the
statement
of changes in net assets attributable to
unit holders
1,730 1,620
Net trading income 46,781 35,861
Signicant accounting policies for income statementInterest income and expenses
For all nancial instruments measured at amortised cost and interest-bearing nancial
instruments classied as available-for-sale nancial investments, interest income or
expense is recorded at the effective interest rate. Interest income and expense arising
from nancial instruments recorded at fair value through prot or loss are recorded in
the income statement on an accrual basis.
Net trading income
Results arising from trading activities include all gains and losses from changes in fair
value and the related interest income or expense and dividends for nancial assets or
nancial liabilities held for trading.
2 Interest and dividends may also be included in net trading income (if this is done then the note describing net trading income needs to describe this fact).
Classication of interest and dividends should be consistent from period to period and fund accounting policy should be disclosed.
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7IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Accounting policies
IAS 1 Presentation of Financial Statements (IAS 1) requires
disclosure of a funds signicant accounting policies, including
the judgments that management has used in their application.
The Application Guidance provides guidance on how these
requirements may be applied to nancial instruments. It suggests
that the disclosures might include the criteria for: (1) designating
nancial assets and nancial liabilities as at fair value through
prot or loss; (2) designating nancial assets as available-for-sale;
(3) determining when the carrying amount of impaired nancial
assets are reduced directly and when the allowance account is
used; and (4) writing off amounts charged to the allowance
account against the carrying amount of impaired nancial assets.
A key question with accounting policy disclosures is how detailed
they should be. Some regulators have expressed concern that
certain policy disclosures under IFRS have been too general
summarising the standards rather than setting out how they
have been applied by the fund.
Hedge Accounting
It is unlikely that funds will apply hedge accounting in practice.
However, if a fund does qualify for hedge accounting, the table
below summarises the disclosures required. IFRS 7 expands on
the requirements of IAS 32 in that the gain or loss on a hedging
instrument in a cash ow hedge that is transferred from equity
to prot or loss must be analysed by income statement caption.
Moreover, IFRS 7 introduces the requirement to disclose the
amount of ineffectiveness recognised in prot or loss for cash ow
hedges and hedges of net investments in foreign operations, and
the gain or loss during the period on the hedging instrument and
hedged item attributable to the hedged risk for fair value hedges.
Hedge accounting disclosure
The following table illustrates the disclosure a fund might make in
accordance with paragraphs 22 and 24 of IFRS 7 for each type of
hedge relationship described in IAS 39.
Disclosure Fair value Cash ow
hedges
Net
investment
hedges
Description of hedged risk and
hedging instrument with related
fair values
When hedged cash ows are expected
to occur
If forecast transactions are no longer
expected to occur
Gain or loss recognised in equity and
reclassications to P&L
Gain or loss from hedging instrument
and hedged risks
Ineffectiveness recognised in P&L
during the period
Funds may wish to separate the types of hedges (e.g., into
micro and macro hedges) when preparing the required
hedge accounting disclosures, in order to assist in
explaining ineffectiveness.
Other disclosures
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8 IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Other disclosures continued
Fair value
IFRS 7 retains the IAS 32 disclosures relating to the methods and
signicant assumptions used to determine fair value for the
different classes of nancial assets and nancial liabilities.
The required disclosures include:
Whether the fair value is based on quoted prices or
valuation techniques
Whether the fair value is based on a valuation technique that
includes assumptions not supported by market prices or rates,
and, if so, the amount of the change in fair value recognised in
prot or loss that arises from the use of the valuation technique
The effect of reasonably possible alternative assumptions used
in a valuation technique.
Example 4(a) Fair value of nancial instruments general
The following example illustrates the qualitative information
regarding the determination of fair value for nancial instruments,
which includes the effect of changes in fair value due to reasonably
possible, alternative assumptions used in valuation techniques.
All nancial instruments are measured initially at their fair
value plus, in the case of nancial assets and nancial
liabilities not recorded at fair value through prot or loss,
any directly attributable incremental costs of acquisition
or issue.
After initial measurement, the Fund measures nancial
instruments which are classied as at fair value through
prot or loss at fair value. Fair value is the amount for which
an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arms length transaction.The fair value for nancial instruments traded in active
markets at the balance sheet date is based on their quoted
price or dealer price quotations (bid price for long positions
and ask price for short positions), without any deduction for
transaction costs.
For all other nancial instruments not listed in an active
market, the fair value is determined by using appropriate
valuation techniques. Valuation techniques include net
present value techniques, comparison to similar instruments
for which market observable prices exist, options pricing
model and other relevant valuation models.
Notes to the Financial Statements accounting policyfor determining the fair value of nancial instruments
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9IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Example 4(b) Fair value of nancial instruments
The following example illustrates the disclosure a fund might make
in accordance with paragraph 27 of IFRS 7, which requires a fund
to disclose how fair value is measured. The following table shows
an analysis of nancial instruments recorded at fair value, between
those whose fair value is based on quoted market prices, those
involving valuation techniques where all the model inputs are
observable in the market, and those where the valuation
techniques involves the use of non-market observable inputs.
31 December 2007 31 December 2006
(000)
Quoted market
price
Valuation
technique
market
observable
inputs
Valuation
technique
non market
observable
inputs
Total Quoted market
price
Valuation
technique
market
observable
inputs
Valuation
technique
non market
observable
inputs
Total
Financial assets
Financial assets
held for trading
81,169 39,408 3,515 124,092 87,119 39,681 7,314 134,114
Derivative nancialinstruments
1,589 692 167 2,448 1,689 891 31 2,611
Financial assets
designated at fair value
22,685 14,168 2,511 39,364 30,614 8,918 3,360 42,892
Total nancial assets 105,443 54,268 6,193 165,904 119,422 49,490 10,705 179,617
Financial liabilities
Financial liabilities
held for trading
26,573 - - 26,573 28,713 - - 28,713
Derivative nancial
instruments
7,891 2,689 809 11,389 8,978 2,981 346 12,305
Total nancial
liabilities
34,464 2,689 809 37,962 37,691 2,981 346 41,018
Certain nancial instruments are recorded at fair value using valuation techniques such as current market transactions or observable market data. Their fair value is
determined using a valuation model that has been tested against the prices of actual market transactions and using the Funds best estimate of the most appropriate model
inputs. These are adjusted to reect the spread for bid and ask prices to reect costs to close out positions, counterparty credit spread and limitations in the models.
The potential effect of using reasonably possible alternative assumptions for valuing nancial instruments would reduce the fair value by up to 9 million or increase the
fair value by 11 million.
For nancial instruments whose fair value is estimated using valuation techniques with no market observable inputs, the net unrealised amount recorded in the income
statement in the year due to changes in the inputs amounts up to 3.2 million (2006: 4.8 million).
IFRS 7 requires disclosure of the nature and carrying amount of
equity instruments that are recorded at cost because their fair
value cannot be reliably measured, including an explanation of why
this is the case. Furthermore, IFRS 7 requires information about
how the fund intends to dispose of such nancial instruments.
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10 IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Qualitative risk disclosures
IFRS 7 retains the qualitative disclosures required by IAS 32 that
relate to risks (including, but not limited to credit risk, liquidity
risk, and market risk) arising from nancial instruments to which
a fund is exposed. These include a discussion of managements
objectives and policies for managing such risks. The qualitative
disclosures are intended to complement the required quantitative
disclosures and assist readers of the nancial statements to
understand the funds risk management activities. IFRS 7 expands
the qualitative risk disclosure requirements to include information
on the processes that a fund uses to manage and measure its risks.
Although integrated disclosures of qualitative and quantitative
information about market risk are not specically required, a fund
may nd that the disclosures will be more understandable when
the qualitative disclosures are combined with the required
quantitative disclosures.
The qualitative disclosures should include a narrative description
of the risks the fund is exposed to and how they arise. The policies
and processes for managing the risks would typically include:
The structure and organisation of the risk managementfunction, including a discussion of independence
and accountability
The scope and nature of risk reporting and measurement
systems as they relate to a funds portfolio and counterparties
The policies and procedures for hedging or mitigating risks,
including the taking of collateral
The process for monitoring the continuing effectiveness
of hedges and other risk mitigating devices
The process for monitoring the prime brokers activities
The procedures in place in relation to the initial selection
of the underlying investee funds (for a fund of funds)
The process for ongoing monitoring of underlying investee
funds (for a fund of funds)
The policies and procedures to manage redemption requests
and lock-up periods
The policies and procedures to monitor the compliance with
applicable investment policies and restrictions and the liquidity
of investments heldThe policies and procedures for avoiding excessive
concentrations of risk
The use of master-netting arrangements.
Funds are strongly recommended to keep the description of their
risk management processes factual, and not to make assertions
as to their ability to meet their risk management objectives. The
provision of an assertion would entail a process of evaluation and
testing, which would be expensive to carry out and to audit, similar
to the process required for nancial information by the Sarbanes-
Oxley Act for US SEC registrants.
The Guidance on Implementing IFRS 7 suggests that theinformation concerning the nature and extent of risks will be
more helpful if it highlights any relationships between nancial
instruments that can affect the amount, timing, or uncertainty
of future cash ows.
Disclosure is also required of any changes in the qualitative
information from one period to the next that arises from changes
in exposure to risk or from changes in the way those exposures
are managed.
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11IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
IFRS 7 expands on the quantitative disclosures contained in IAS
32, which are intended to provide information about the extent to
which a fund is exposed to risks based on the information available
to key management personnel3. If a fund uses several methods to
manage risk exposures, it should disclose information using the
methods that are most relevant and reliable. There is an
expectation that information provided to management is reliable,
although some funds are upgrading the quality of their risk
information to ensure that it is robust enough for disclosure in
the annual report.
The Standard requires disclosure of all risk concentrations to which
a fund is exposed in relation to nancial instruments, based on
nancial instruments that have similar characteristics (such as
geographical area, currency, industry, market, and type of
counterparty) and the amount of the risk exposure concerned.
In addition, IFRS 7 requires a description of how management
determines such concentrations.
When the quantitative data disclosed at the reporting date is not
representative of the funds exposure to risk during the period,further information that is representative must be provided (e.g.,
if the portfolio and associated risks at the reporting date are not
representative of the trading activity of the fund during the period
under review).
Credit risk is dened as, the risk that one party to a nancial
instrument will cause a nancial loss for the other party by failing
to discharge an obligation. For each class of nancial instrument,
IFRS 7 requires disclosure of the maximum credit exposure before
consideration of collateral or other credit enhancements received
(e.g., master netting agreements), plus a description of collateral
and other credit enhancements available.
For funds, the credit risk disclosures in IFRS 7 will likely be a
combination of qualitative discussion and extensive quantitative
information, provided in the risk management section of the notes
to the nancial statements or the nancial review section of the
annual report.
Maximum credit exposure
The Standard considers the maximum credit exposure for
investments in loans and other xed income instruments and for
deposits placed to be the carrying amount, net of any impairment
losses, and for derivatives to be the current fair value. For nancial
guarantees and loan commitments, this amount would be themaximum amount the fund could be required to pay (or fund),
without consideration of the probability of the actual outcome.
Example 5 Credit exposure
The following example illustrates the disclosure a fund might make
in accordance with paragraph 36(a) of IFRS 7, which requires a
fund to disclose the amount that best represents its maximum
exposure to credit risk without taking account of any collateral held
or credit enhancements.
The credit exposure is calculated on the
basis of selected items on the balance sheet
2007
(000)
2006
(000)
Bonds:
US Treasury bonds 2,015 1,753
Corporate bonds 37,349 41,139
Derivatives 2,448 2,611
Reverse repos and securities lending 4,015 5,161
Due from brokers 2,016 1,516
Other assets 758 467
Quantitative riskdisclosures
Credit risk
3 IAS 24 Related Party Disclosures denes key management personnel as those persons having authority and responsibility for planning, directing and controlling the activities of the entity,
directly or indirectly, including any director (whether executive or otherwise) of that entity).
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12 IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Credit risk continued
Financial assets that are neither past due nor impaired
IFRS 7 introduces disclosure of information relating to the credit
quality of nancial assets that are neither past due nor impaired.
This disclosure may include a discussion of the nature of the
counterparties, historical information relating to counterparty
default rates, and other information used to assess credit risk
(e.g., an analysis of credit exposure using internal or external
credit ratings). It should be noted that all nancial assets, except
for equity instruments held by a fund, have some level of exposure
to credit risk.
Example 6 Financial assets that are neither past due
nor impaired
The following example illustrates the disclosure a fund might make
in accordance with paragraph 36(c) of IFRS 7, which requires a
fund to disclose the information about the credit quality of nancial
assets that are neither past due nor impaired.
The Fund has three major counterparties* with rating ranging from AAA to AA
(2006: AAA to AA).
* A major counterparty is dened as any counterparty that holds portfolio positions
and cash that in the aggregate, are greater than 10% of net assets.
Analysed by geographical distribution:
2007 Bonds
(000)
Derivatives
(000)
Repurchase
agreements
and
securities
lending
(000)
Due from
brokers
(000)
Other
assets
(000)
European
Union
31,591 1,908 3,716 1,817 419
North
America
2,679 405 219 90 60
Latin
America2,094 135 80 109 279
Total 2007 39,364 2,448 4,015 2,016 758
2006
European
Union
40,128 1,998 4,160 917 219
North
America2,150 560 679 280 108
Latin
America614 53 322 319 140
Total 2006 42,892 2,611 5,161 1,516 467
Analysed by industrial distribution:
2007 Bonds
(000)
Derivatives
(000)
Repurchase
agreements
and
securities
lending
(000)
Due from
brokers
(000)
Other
assets
(000)
Financial 25,173 1,691 1,891 1,617 491
Telecomm-
unications
8,191 517 987 351 82
Energy 3,985 240 1,137 48 185
Govern-
ment
2,015 - - - -
Total 2007 39,364 2,448 4,015 2,016 758
2006
Financial 28,917 1,391 3,981 781 225
Telecomm-
unications
6,192 670 1,001 290 89
Energy 6,030 550 179 445 153Govern-
ment
1,753 - - - -
Total 2006 42,892 2,611 5,161 1,516 467
Distribution of derivatives by type:
Derivatives Financial
Instruments
2007
(000)
2006
(000)
Swaps
Interest Rate Swaps 1,019 897
Cross Currency Swaps 225 310
Credit Derivatives
Credit Default Swaps 925 1,089
Total Return Swaps 279 315
Total 2,448 2,611
The Fund may be adversely impacted by an increase in its credit exposure related
to investing, nancing, and other activities. The Fund is exposed to the potential
credit-related losses that may occur as a result of either an individual, counterparty
or issuer being unable or unwilling to honour its contractual obligations.
These credit exposures exist within nancing relationships, commitments, derivatives
and other transactions. They may arise, for example, from a decline in the nancial
condition of a counterparty, from entering into swap or other derivative contracts
under which counterparties have obligations to make payments to the Fund, from a
decrease in the value of securities of third parties that the Fund holds as collateral, or
from extending credit through guarantees or other arrangements. As the Funds creditexposure increases, it could have an adverse effect on the Funds business and
protability if material unexpected credit losses were to occur.
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14 IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Liquidity risk
IFRS 7 requires a maturity analysis for nancial liabilities to be
presented showing their remaining contractual maturities, and a
description of how the fund manages those liquidity risks. In
practice, most funds manage liquidity risk based not on contractual
cash ows but on expected maturities. This is especially true for
funds where substantially all nancial liabilities are short term and/
or repayable on demand. If this is the case, then funds may wish to
provide a separate maturity analysis based on expected maturity
dates, possibly both for nancial assets and liabilities, together
with the limits or other measures used by the fund to manage its
liquidity exposures. However, such an analysis will not remove the
need to produce the contractual liability analysis required by
the Standard.
IFRS 7 does not require disclosure of contractual maturities of
nancial assets. However, funds are encouraged to present such
information in order to provide a complete view of contractual
commitments, as most nancial liabilities will be short term in
nature, resulting from trading activities and will be collateralised
by trading assets.According to the Application Guidance of IFRS 7 on the contractual
maturity analysis:
Financial liabilities must be disclosed by their contractual
maturity, based on undiscounted cash ows. Note that if they
are undiscounted, then the table is unlikely to reconcile easily
to information recorded in the balance sheet and, also, is
unlikely to be information which is routinely prepared for
management purposes.
For derivatives, the contractual amounts to be disclosed should
be the gross cash ows to be paid. Hence, a currency swap will
need to be grossed up to show the gross amounts payable, while
an interest rate swap would be shown net. In order to show thetrue liquidity prole, most funds will wish also to disclose
amounts receivable that are related to the gross cash outows.
Disclosure practices may well vary.
It is unclear how to treat perpetual instruments. Since the cash
ows are required to be shown undiscounted, the cash ows are
potentially innite. Most funds will probably wish to deal with
such instruments using narrative disclosure.
Financial instruments that give the creditor an option as to
when amounts are paid should be analysed according to their
earliest date on which the can be required to pay, withoutconsidering the probability of the option being exercised.
The analysis should include guarantees and commitments.
Description of how liquidity risk inherent in nancial liabilities
is managed
Factors listed in the Implementation Guidance that the company
may wish to consider in describing how it manages its liquidity risks
include whether the fund:
Expects some liabilities may be paid later than the earliest
contractual due date
Has undrawn loan commitments that it does not expect to draw
Holds nancial assets for which there is a liquid market and are,therefore, readily saleable to meet liquidity needs
Has committed borrowing facilities that it could use to help
provide liquidity
Holds nancial assets that are not traded in a liquid market,
but which can be expected to generate cash inows that will
be available to meet cash outows on liabilities
Has diverse funding sources
Has signicant concentration of liquidity risk in either its assets
or its funding sources.
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15IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Example 8 Liquidity risk
The following example illustrates the disclosure a fund might make
in accordance with paragraph 39 of IFRS 7, which requires a fund
to disclose the maturity analysis for nancial liabilities that shows
the remaining contractual maturity, and a description of how it
manages liquidity risk.
Due on demand
(000)
Due within
3 months
(000)
Due between 3 and
12 months
(000)
Due between 1 and
5 years
(000)
Due >5 years
(000)
Total
(000)
Assets
Cash and cash equivalents 6,201 2,304 - - - 8,505
Trade and other receivables 6,288 381 16 87 17 6,789
Financial assets at fair
value through prot or loss86,932 38,090 32,080 7,601 1,201 165,904
Total assets 99,421 40,775 32,096 7,688 1,218 181,198
Liabilities
Financial liabilities at fair
value through prot or loss
13,702 12,091 12,169 - - 37,962
Trade and other payable - 329 - - - 329
Distribution payable - 3,069 - - - 3,069
Redeemable shares 139,838 - - - - 139,838
Total liabilities 153,540 15,489 12,169 - - 181,198
Liquidity risk is dened as the risk that the Fund may not be able to settle or meet its obligations on time or at a reasonable price. The Fund is exposed to daily cash
redemptions of redeemable shares. Redeemable shares are redeemed on demand at the holders option based on the Funds net assets value per share at the time of
redemption. The redeemable shares are carried at the redemption amount payable at the reporting date if the holder exercises the right to put the shares back to the Fund.
The Fund manages its liquidity risk by investing primarily in marketable securities and nancing its trading activities through the use of margin loans with brokers and
short-term repurchase nancing transactions. Additionally, trading limits and collateral arrangements limit the extent to which liabilities may be extended to the Fund.
Such trading limits will be based upon the size and marketability of the assets held by the Fund. The expected holding period of all liabilities is substantially less than the
contractual maturities outlined in the table above. The average holding period of a short investment is less than six months.
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16 IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Market risk
Market risk is dened as the risk that the fair value or future cash
ows of a nancial instrument will uctuate because of changes in
market prices and includes interest rate risk, foreign currency risk
and other price risks, such as equity and commodity risk. All
nancial instruments are subject to market risk; however, the
required market risk quantitative disclosures are restricted to the
sensitivity of prot or loss and equity to changes in market risks.
The disclosures, therefore, focus on accounting (as opposed to
economic) sensitivity and exclude, for example, interest rate risk
arising on xed rate nancial assets held to maturity or loans and
receivables. Funds may also provide disclosures about such items
but, arguably, they would need to be shown separately.
There are two ways in which market risk sensitivity may
be disclosed:
A separate sensitivity analysis for each type of market risk to
which the fund is exposed at the reporting date, based on
changes in the risk variable that are considered reasonably
possible at that date; or
An analysis such as Value at Risk (VaR) that takes into accountthe interdependencies between market risk variables, if this
method is used by the fund to manage its nancial risks.
All sensitivity analyses should take account of the effects of hedges
but, as the amounts to be disclosed are the expected effect on
prot or loss or equity, the Standard implies that the accounting
treatment of the hedges needs to be taken into account in
the analysis.
Sensitivity analysis
IFRS 7 does not prescribe the format in which a sensitivity analysis
should be presented, although exposures to risks from signicantly
different economic environments should not be combined. For
example, exposure to market risks in hyperinationary economies
might be disclosed separately from exposure to the same market
risks arising in economies with low ination rates.
Funds with signicant non-nancial commodity contracts may wish
to present a sensitivity analysis both for contracts that are
recognised in the nancial statements (i.e., those within the scope
of IAS 39) and those that are not recognised, in order to provide a
complete picture of the funds exposure to commodity price risk.
The Application Guidance indicates that it is possible to use
different sensitivity methodologies for different classes of nancial
instruments or business segments. For example, a fund with both
long/short and private equity investments might manage its risks
related to the two strategies differently and may wish to present its
sensitivity analysis in accordance with the manner in which it
manages the risks.
The Implementation Guidance identies two types of interest rate
sensitivity. These are the effects of changes in interest rates on:
Fixed rate nancial assets and liabilities; and
Variable rate nancial assets and liabilities.
The rst type of sensitivity analysis measures the impact on prot
or loss (for items recorded at fair value through prot or loss)
and on equity (for available-for-sale securities and nancial
instruments used as cash ow hedges and net investment hedges)
that would arise from a reasonably possible change in interest
rates at the balance sheet date on nancial instruments held at the
period end. The second measures the change in interest income orexpense over the period of a year attributable to a reasonably
possible change in interest rates, based on the oating rate assets
and liabilities held at the balance sheet date.
The Application Guidance makes it clear that the sensitivity
analysis should show the effects of changes that are reasonably
possible over the period until the fund will next present its risk
disclosures, i.e., usually the next year. The sensitivity test should
exclude remote or worst case scenarios or stress tests.
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17IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
The foreign currency risk sensitivity information required by
IFRS 7 is limited to the risks that arise on nancial instruments
denominated in currencies other than the functional currency in
which they are measured. As a result, there is no requirement
in IFRS 7 to provide quantitative disclosures of the currency
risks posed by overseas net investments (and so revalued on
consolidation through equity). Similarly, there is no requirement
to provide disclosures about hedges of overseas net investments.
VaR and similar models
If the fund uses a method such as VaR analysis that reects
interdependencies between risk variables it must explain the
method used in preparing the sensitivity analysis and the
parameters and assumptions underlying the data provided.
This will usually include:
The period over which positions are expected to be held
(and so the modelled losses incurred); and
The condence level at which the calculation is made, i.e. the
percentage number of days in which losses are expected to be
less than the disclosed VaR.
We would also expect funds to provide sufcient narrative
information to explain what these parameters mean and how they
should be interpreted.
When VaR is used, there is no reference in IFRS 7 to reasonably
possible changes the assumptions are left for the fund to select,
based on those it uses to measure risk for management purposes.
Funds may use a wide variety of assumptions, for example one
fund may use a 95% condence level and a one-day holding period,
while another fund may use a 99% condence level and a ten-day
holding period. Such differences in assumptions make it difcult to
compare the risk proles of different institutions.
If a methodology such as VaR is used, then the fund also needs to
disclose the limitations of the method, which may include:
That the measure is a point-in-time calculation, reecting
positions as recorded at that date, which do not necessarily
reect the risk positions held at any other time
That VaR is a statistical estimation and therefore it is possible
that there could be, in any period, a greater number of days inwhich losses could exceed the calculated VaR than implied by
the condence level
That although losses are not expected to exceed the calculated
VaR on, say, 95% of occasions, on the other 5% of occasions,
losses will be greater and might be substantially greater than
the calculated VaR.
Most funds using VaR would be expected to make reference to their
use of stress testing to help manage losses arising from lower-
frequency, higher-magnitude movements in market prices than
those modelled using VaR. As there is no requirement to disclose
stress test sensitivities, funds would not normally quantify the
losses expected to arise in stress circumstances.
Whatever form of sensitivity analysis is presented, if the
sensitivities based on year-end positions are not representative of
the risks managed during the year, the fund must provide further
disclosure to show the level of risk that would be a better indicator.
For example, a fund may disclose maximum, minimum, and/or
average amounts in addition to the required year-end amount.
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18 IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Market risk continued
(m) Foreign
exchange
Interest
rate
Equity Effects of
correlation
Total
2007
31 December
8 10 3 (3) 18
2007 Average daily
7 9 3 (4) 15
2007 Highest 9 12 4 (4) 21
2007 Lowest 4 6 2 (3) 9
2006
31 December
7 8 2 (3) 14
2006
Average daily
6 8 2 (4) 12
2006 Highest 7 10 3 (4) 16
2006 Lowest 4 6 1 (4) 7
Only once in the year were daily losses greater than the VaR (loss 18 million,
VaR 11 million).
Market risk
The Investment Board has set limits on the level of risk that may be accepted.The Fund applies a VaR methodology to assess the market risk positions held and
to estimate the potential economic loss based upon a number of parameters and
assumptions for various changes in market conditions. VaR is a method used in
measuring nancial risk by estimating the potential negative change in the market
value of a portfolio at a given condence level and over a specied time horizon.
The Fund uses a full non-linear VaR model for interest rate, spread, equity index
and volatility risk. These calculations are based on Monte-Carlo simulations derived
from a variance/covariance matrix. For the VaR in relation to foreign exchange rates,
the Fund uses a variance/covariance model. The equity-specic risk is captured by
using a single factor model.
Objectives and limitations of the VaR Methodology
The Fund uses simulation models to assess possible changes in the market value of
the trading portfolio based on historical data from the past ve years. The VaR models
are designed to measure market risk in a normal market environment. The modelsassume that any changes occurring in the risk factors affecting the normal market
environment will follow a normal distribution. The distribution is calculated by using
exponentially weighted historical data. The use of VaR has limitations because it is
based on historical correlations and volatilities in market prices and assumes that
future price movements will follow a statistical distribution. Due to the fact that VaR
relies signicantly on historical data to provide information and may not clearly predict
the future changes and modications of the risk factors, the probability of large
market moves may be underestimated if changes in risk factors fail to align with the
normal distribution assumption. VaR may also be under or over-estimated due to the
assumptions placed on risk factors and the relationship between such factors for
specic instruments. Even though positions may change throughout the day, the VaR
only represents the risk of the portfolios at the close of each business day, and it does
not account for any losses that may occur beyond the 99% condence level.
In practice, the actual trading results will differ from the VaR calculation and, in
particular, the calculation does not provide a meaningful indication of prots and
losses in stressed market conditions. To determine the reliability of the VaR models,
actual outcomes are monitored regularly to test the validity of the assumptions and
the parameters used in the VaR calculation. Market risk positions are also subject
to regular stress tests to ensure that the fund would withstand an extreme
market event.
VaR assumptions
The VaR that the Fund measures is an estimate, using a condence level of 99%,of the potential loss that is not expected to be exceeded if the current market risk
positions were to be held unchanged for one day. The use of a 99% condence level
means that, within a one day horizon, losses exceeding the VaR gure should occur,
on average, not more than once every hundred days.
Since VaR is an integral part of the Funds market risk management, VaR limits have
been established for all trading operations and exposures are reviewed daily against
the limits by management.
Example 9 VaR disclosures
The following example illustrates the disclosure a fund might make
in accordance with paragraph 41 of IFRS 7, which permits a fund
to disclose a sensitivity analysis, such as value-at-risk, that reects
interdependencies between risk variables.
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19IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Example 10 Interest rate risk
The following example illustrates the disclosure a fund may make in
accordance with paragraph 40 of IFRS 7 which requires a fund to
disclose a sensitivity analysis for interest rate risk to which the fund
is exposed.
Interest rate risk arises from the possibility that changes in interest rates will affect
future cash ows or the fair values of nancial instruments. The Investment Boardhas established limits on the interest rate gaps for stipulated periods. Positions are
monitored on a daily basis and hedging strategies are used to ensure positions are
maintained within the established limits.
The following table demonstrates managements best estimate of the sensitivity to
reasonably possible change in interest rates, with all other variables held constant,
of the Funds income statement. In practice, the actual trading results may differ
from the sensitivity analysis below and the difference could be material.
The sensitivity of the income statement is the effect of the assumed changes in
interest rates on the net interest income for one year, based on the oating ratetrading nancial assets and nancial liabilities held at 31 December 2007, including
the effect of hedging instruments. The sensitivity of net assets is calculated by
revaluing xed rate fair value through prot or loss nancial assets, including the
effect of any associated hedges and swaps designated as cash ow hedges,
at 31 December 2007 for the effects of the assumed changes in interest rates.
The sensitivity of net assets is analysed by maturity of the asset or swap. The total
sensitivity of net assets is based on the assumption that there are parallel shifts
in the yield curve, while the analysis by maturity band displays the sensitivity to
non-parallel changes.
Sensitivity of net assets
Currency Increase in
basis points
2007
Sensitivity of
net interest
income 2007
0 to 6 months
2007
6 months to
1 year
2007
1 year to
5 years
2007
More than
5 years
2007
Total
2007
( m) ( m) ( m) ( m) ( m) ( m)
EUR + 15 11 (22) (16) (10) (12) (60)
US$ + 20 24 (48) (16) (14) (18) (96)
GBP + 15 7 (14) (6) (6) (4) (30)
Others + 25 (4) 8 2 4 4 18
Sensitivity of net assets
Currency Increase in
basis points
2006
Sensitivity of
net interest
income 2006
0 to 6 months
2006
6 months to
1 year
2006
1 year to
5 years
2006
More than
5 years
2006
Total
2006
( m) ( m) ( m) ( m) ( m) ( m)
EUR + 10 13 (21) (17) (12) (14) (64)
US$ + 15 32 (53) (19) (11) (15) (98)
GBP + 10 4 (9) (5) (8) (3) (25)
Others + 15 (2) 5 1 3 2 11
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20 IFRS 7 Financial Instruments:Disclosures Implementation guidance for investment funds
Market risk continued
Example 11 Currency risk
The following example illustrates the disclosure a fund may make in
accordance with paragraph 40 of IFRS 7 which requires a fund to
disclose a sensitivity analysis for currency risk to which the fund
is exposed.
Currency risk is the risk that the value of a nancial instrument will uctuate due to
changes in foreign exchange rates. The Investment Board has set limits on positions bycurrency. Positions are monitored on a daily basis and hedging strategies are used to
ensure positions are maintained within established limits.
The table below indicate the currencies to which the Fund had signicant exposure
at 31 December 2007 on its trading monetary assets and liabilities and its forecast
cash ows. The analysis discloses managements best estimates of the effect of a
reasonably possible movement of the currency rate against the dollar, with all other
variables held constant on the income statement (due to the fair value of currency
sensitive trading monetary assets and liabilities) and equity (due to the change in fair
value of currency swaps and forward foreign exchange contracts used as cash ow
hedges). A negative amount in the table reects a potential net reduction in income
statement or equity, while a positive amount reects a net potential increase. In
practice the actual trading results may differ from the below sensitivity analysis and
the difference could be material.
Currency Change
in
currency
rate
Effect on
prot
before
tax
Effect on
net
assets
Change
in
currency
rate
Effect on
prot
before
tax
Effect on
net
assets
2007
%
2007
( m)
2007
( m)
2006
%
2006
( m)
2006
( m)
US$ + 9 (7) 17 + 8 (12) 15
GBP + 8 (6) 3 + 7 (16) 2
It should be noted that, for the purposes of IFRS 7, currency risk does not arise from
nancial instruments that are non-monetary items or from nancial instruments that
are denominated in euro.
Example 12 Equity price risk
The following example illustrates the disclosure a fund might make
in accordance with paragraph 40 of IFRS 7, which requires a fund
to disclose a sensitivity analysis for equity price risk to which the
fund is exposed.
Equity price risk is the risk that the fair values of equities decrease as a result of
changes in the levels of the equity indices and the values of individual stocks.The trading equity price risk exposure arises from the Funds investment portfolio.
Managements best estimate of the effect on net assets and prots due to a
reasonably possible change in equity indices, with all other variables held constant,
is as follows (in practice, the actual trading results may differ from the sensitivity
analysis below and the difference could be material).
Market
indices
Change in
equity price
Effect on
net assets
and prot
Change in
equity price
Effect on
net assets
and prot
2007
%
2007
( m)
2006
%
2006
( m)
FTSE 100 + 9 8 + 9 10
Euronext 100 + 11 14 + 10 12
Nikkei + 8 9 + 8 8
NYSE + 10 10 + 10 6
Others + 12 4 + 11 2
Unquoted + 10 9 + 10 14
Example 13 Commodity price risk
The following example illustrates the disclosure a fund might make
in accordance with paragraph 40 of IFRS, which requires a fund to
disclose a sensitivity analysis for commodity price risk to which the
fund is exposed.
Commodity price risk is the risk that the fair values of commodities decrease as a
result of changes in the levels of the commodity indices and the value of individual
commodities. The trading commodity price risk exposure arises from the Funds
investment portfolio.
Managements best estimate of the effect on net assets due to a reasonably possible
change in commodity indices, with all other variables held constant, is as follows.
In practice, the actual trading results may differ from the sensitivity analysis and that
difference could be material below.
Market
indices
Change in
equity price
Effect on
net assets
and prot
Change in
equity price
Effect on
net assets
and prot
2007
%
2007
( m)
2006
%
2006
( m)
S&P GSCI + 11 2 + 10 4DJ AIG + 8 8 + 8 6
If all commodities are within one of the categories above, e.g., metals, then a more
detailed segregation may be of greater benet to the users of the nancial statements.
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