## **Learning Outcomes**

After reading this article, you will be able to explain the requirements for presenting and disclosing financial instruments under IAS 32 and IFRS 7, including how to prepare and interpret sensitivity analyses and maturity analyses. You will understand the purpose of these disclosures, recognise the different types of risks that must be reported, and apply the principles to exam scenarios with confidence.

## **ACCA Strategic Business Reporting (SBR) Syllabus**

For ACCA Strategic Business Reporting (SBR), you are required to understand how financial instruments are presented and disclosed under IAS 32 and IFRS 7, including sensitivity and maturity analyses. You should focus your revision on:

- Classifying financial instruments as liabilities or equity under IAS 32
- Presenting financial instruments in the financial statements
- Disclosing information about risks arising from financial instruments under IFRS 7
- Preparing and interpreting sensitivity analyses for market risk
- Completing maturity analyses for liquidity risk
- Explaining the significance and practical application of these disclosures for users of financial statements

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which risk does a maturity analysis under IFRS 7 address?  
   a) Credit risk  
   b) Liquidity risk  
   c) Market risk  
   d) Operational risk

2. What does a sensitivity analysis disclose in relation to financial instruments?  
   a) The carrying amount of all liabilities  
   b) The hypothetical impact of changes in market variables  
   c) The fair values of equity instruments  
   d) The volume of transactions in the year

3. True or false? IFRS 7 requires entities to provide both qualitative and quantitative information about the risks arising from financial instruments.

4. Briefly describe how contractual maturities are presented in a maturity analysis note for non-derivative liabilities.

## **Introduction**

Presentation and disclosure of financial instruments is governed by IAS 32 and IFRS 7. IAS 32 sets out how to classify and present financial instruments as liabilities or equity in the primary statements. IFRS 7 details the information entities must disclose to help users assess the risks arising from these instruments—specifically credit risk, liquidity risk, and market risk.

Key elements of IFRS 7 include the requirement to provide both qualitative and quantitative disclosures about risk exposures. Among the most examined topics are sensitivity analyses for market risk, and maturity analyses for liquidity risk. These disclosures allow users to understand an entity’s financial risk profile and the potential impact on financial position and performance.

> **Key Term: Financial instrument**  
> A contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

## **Presentation under IAS 32**

IAS 32 requires issuers of financial instruments to classify each instrument as a financial asset, financial liability, or equity instrument according to its substance. Clear classification is essential, as this determines how amounts are presented in the statement of financial position and how associated interest, dividends, gains, and losses are recognised.

> **Key Term: Equity instrument**  
> Any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities.
>
> **Key Term: Financial liability**  
> A contractual obligation to deliver cash or another financial asset to another entity.

### Disclosures Overview

The classification under IAS 32 flows through to the disclosures required under IFRS 7. Amounts presented as financial liabilities or equity in the statements must be appropriately separated and described in the notes.

## **Disclosure Requirements under IFRS 7**

IFRS 7 mandates two main types of disclosures:

- **Information about the significance of financial instruments**—helps users assess how these instruments affect the financial position and performance.
- **Information about risks arising from financial instruments**, split into:
  - _Credit risk_: exposure to loss from counterparty failure.
  - _Liquidity risk_: inability to meet financial obligations as they fall due.
  - _Market risk_: fluctuations in market variables such as interest rates, currency, and price.

Entities must provide both narrative (qualitative) and numeric (quantitative) disclosures. This section focuses on maturity and sensitivity analyses, which are quantitative requirements that commonly appear in exam scenarios.

> **Key Term: Qualitative disclosures**  
> Narrative disclosures describing an entity’s objectives, policies, and processes for managing risks from financial instruments.
>
> **Key Term: Quantitative disclosures**  
> Numeric disclosures that include data about an entity’s exposure to risk, such as tables of maturity dates or sensitivity to market changes.

## **Maturity Analysis for Liquidity Risk**

Liquidity risk relates to the risk that an entity may not have sufficient funds to meet its payment obligations. IFRS 7 requires a maturity analysis to show when payments are contractually due.

A typical maturity analysis groups non-derivative financial liabilities by time bands—such as due within 1 year, 1–2 years, 2–5 years, and more than 5 years—from the reporting date. This enables users to assess the timing of outflows and identify potential funding issues.

> **Key Term: Maturity analysis**  
> A table or note grouping financial liabilities by their contractual maturities, showing expected undiscounted cash outflows.

Entities must explain how they manage liquidity risk, including any undrawn credit facilities available and strategies for meeting cash flow needs.

### **Worked Example 1.1**

At 31 December 20X4, Metro Ltd has the following non-derivative liabilities:

- Bank loan: \$1m due in 3 years
- Trade payables: \$0.5m due within 3 months
- Lease liabilities: \$0.6m in 1 year, \$0.4m in year 2

Prepare the required maturity analysis disclosure.

> **Answer:**  
> The maturity analysis would show:
>
> | Within 1 year | 1–2 years | 2–5 years | After 5 years |
> | ------------- | --------- | --------- | ------------- |
> | \$1.1m        | \$0.4m    | \$1.0m    | $–            |
>
> (Trade payables \$0.5m + lease \$0.6m = \$1.1m in year one; lease \$0.4m in year two; bank loan \$1.0m in years 2–5.)

## **Sensitivity Analysis for Market Risk**

Market risk arises from changes in market variables (interest rates, currency rates, prices) that can affect the value or future cash flows of financial instruments. IFRS 7 requires disclosure of a sensitivity analysis that shows the hypothetical impact of reasonably possible changes in relevant market risk variables on profit or loss and equity.

Entities must:

- Specify the variables (e.g. 100 basis points increase in interest rates, 10% currency depreciation)
- Present the effect both before and after tax (if relevant)
- Explain methods and assumptions used in the analysis

> **Key Term: Sensitivity analysis**  
> A disclosure quantifying the impact on profit or equity of reasonably possible changes in market risk variables.

### **Worked Example 1.2**

Dawn plc has borrowings of \$2 million at variable interest rates. Interest rates at the reporting date are 5%. Management considers a 1% increase in rates to be reasonably possible during the next year. What sensitivity analysis disclosure must be provided?

> **Answer:**  
> Dawn plc must disclose the effect on profit or loss of a 1% increase in rates: \$2m × 1% = \$20,000 additional interest expense. This must be shown in the notes, along with the method used for calculation.

### **Exam Warning**

> Do not confuse sensitivity analysis with stress testing. Sensitivity analysis covers reasonably possible changes, not extreme or remote events. Always state the chosen change and justify why it is considered reasonably possible.

## **Other Quantitative Risk Disclosures**

Entities must also disclose additional quantitative information, such as:

- The carrying amounts of financial instruments exposed to each type of risk
- Information about significant terms and conditions (for derivative instruments, disclosures by type and class)

> **Revision Tip**  
> In your exam, ensure that maturity and sensitivity analyses are clearly presented in tabular form, with all assumptions and bases for preparation explained in concise notes.

## **Summary**

IAS 32 requires clear presentation of financial instruments by classifying them as financial liabilities or equity. IFRS 7 requires comprehensive disclosures on risks arising from financial instruments, including both narrative and numerical data. Maturity analyses provide the timing of contractual cash outflows for funding risk. Sensitivity analyses show the estimated profit or equity impact of market variable changes. These disclosures enable users to assess how instruments affect the entity and its exposure to risk.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Present financial instruments as liability or equity under IAS 32
- Explain the purpose and format of IFRS 7 quantitative risk disclosures
- Prepare and interpret maturity analyses for liquidity risk
- Prepare and interpret sensitivity analyses for market risk
- Distinguish between qualitative and quantitative risk disclosures

## **Key Terms and Concepts**

- Financial instrument
- Equity instrument
- Financial liability
- Qualitative disclosures
- Quantitative disclosures
- Maturity analysis
- Sensitivity analysis

Presentation and disclosure (ias 32/ifrs 7) - Sensitivity and maturity analyses