Disclosure And Documentation Issues

1. www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#Disclosurewww.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#Disclosure Disclosure And Documentation Issues "New SEC Guidance for Management's Discussion and Analysis" http://www.sec.gov/rules/interp/33-8350.htm

2. IAS 39 Versus FAS 133 www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#Disclosure Under IASB international disclosure rulings, financial statements should include all of the disclosures required by IAS 32, except that the requirements in IAS 32 for supplementary disclosure of fair values (IAS 39 Paragraphs 77 and 88) are not applicable to those financial assets and financial liabilities carried at fair value (Paragraph 166).  The following should be included in the disclosures of the enterprise's accounting policies as part of the disclosure required by IAS 32 Paragraph 47b:

3. IAS 39 Versus FAS 133 www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#Disclosure (1) the methods and significant assumptions applied in estimating fair values of financial assets and financial liabilities that are carried at fair value, separately for significant classes of financial assets (see IAS 39 Paragraph 46)2) whether gains and losses arising from changes in the fair value of those available-for-sale financial assets that are measured at fair value subsequent to initial recognition are included in net profit or loss for the period or are recognized directly in equity until the financial asset is disposed of; and3) for each of the four categories of financial assets defined in paragraph 10, whether 'regular way' purchases of financial assets are accounted for at trade date or settlement date (see paragraph 30)

4. IAS 39 Versus FAS 133 www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#Disclosure IAS 39 Paragraph 169 With the exception of the previously noted differences, Paragraph 169 is a long paragraph that requires virtually all disclosures of FAS 133.

5. FAS 133 DISCLOSURE REQUIREMENTS Required disclosures can be divided into four types: • qualitative disclosures • quantitative disclosures • disclosures relating to OCI and AOCI • U.S. SEC Risk Disclosure Requirements

6. DISCLOSURE REQUIREMENTS (cont.) The Standard requires general derivative disclosures and specific hedge disclosures for cash flow hedges, fair value hedges and hedges of a net investment in a foreign operation

7. DISCLOSURE REQUIREMENTS (cont.) The Standard requires general derivative disclosures and specific hedge disclosures for cash flow hedges, fair value hedges and hedges of a net investment in a foreign operation

8. FAS 161 Summaryhttp://www.cs.trinity.edu/~rjensen/Calgary/CD/fasb/sfas161/ Why Is the FASB Issuing This Statement and When Is It Effective? The use and complexity of derivative instruments and hedging activities have increased significantly over the past several years. Constituents have expressed concerns that the existing disclosure requirements in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, do not provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. Accordingly, this Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption.

9. FAS 161 Summaryhttp://www.cs.trinity.edu/~rjensen/Calgary/CD/fasb/sfas161/ How Does This Statement Improve Financial Reporting? This Statement is intended to enhance the current disclosure framework in Statement 133. The Statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format should provide a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entity’s liquidity from using derivatives. Finally, this Statement requires cross-referencing within the footnotes, which should help users of financial statements locate important information about derivative instruments.

10. FAS 161 Summaryhttp://www.cs.trinity.edu/~rjensen/Calgary/CD/fasb/sfas161/ What Is the Effect of This Statement on Convergence with International Financial Reporting Standards? In August 2005, the International Accounting Standards Board issued International Financial Reporting Standard (IFRS) 7, Financial Instruments: Disclosures. The scope of IFRS 7 includes all financial instruments, not just derivative instruments. The FASB decided to limit the scope of its disclosure project to derivative instruments because of its desire to not delay the improved transparency about the location and amounts of derivative instruments in an entity’s financial statements. The FASB may consider a longer term project to improve disclosures about all financial instruments and to achieve greater convergence with IFRS 7 in the future.

11. DISCLOSURE REQUIREMENTS (cont.) • Disclosures are different from prior requirements • Systems may require enhancements to accumulate new information required to be disclosed • Additional qualitative disclosures are encouraged

12. DISCLOSURE REQUIREMENTS ¶44-55QUALITATIVE DISCLOSURES For all derivative instruments the entity shall disclose: • Objectives for holding derivatives • Context needed to understand those objectives • Entity’s risk management policy • Description of the items or transactions that are being hedged

13. QUANTITATIVE DISCLOSURE • Fair Value Hedges • Cash Flow Hedges • Hedges of a net investment in a foreign operation

14. QUANTITATIVE DISCLOSURE REQUIREMENTSFOR FAIR VALUE HEDGES ¶45(a) • Net gain or loss recognized in earnings during the reporting period from hedge ineffectiveness • Component of the derivatives gain or loss excluded from the assessment of hedge effectiveness

15. QUANTITATIVE DISCLOSURE REQUIREMENTSFOR FAIR VALUE HEDGES ¶45(a) • Where the net gain or loss is reported • The amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge

16. QUANTITATIVE DISCLOSURE REQUIREMENTS - CASH FLOW HEDGES ¶45(b) • Net gain or loss recognized in earnings during the reporting period from hedge ineffectiveness • Component of the derivative’s gain or loss excluded from the assessment of hedge effectiveness • Where the net gain or loss is reported

17. QUANTITATIVE DISCLOSURE REQUIREMENTS - CASH FLOW HEDGES ¶45(b) (cont.) • Description of transactions or other events that will result in reclassification of gains and losses reported in accumulated OCI into earnings and net amount expected within next 12 months • Maximum length of time entity is hedging the variability in cash flows of a forecasted transaction

18. QUANTITATIVE DISCLOSURE REQUIREMENTS - CASH FLOW HEDGES ¶45(b) (cont.) • Gains and losses reclassified into earnings from discontinuance of cash flow hedges because it is probable that the forecasted transaction will not occur

19. QUANTITATIVE DISCLOSURE REQUIREMENTSHEDGES OF A NET INVESTMENT • For a hedge of a net investment in a foreign operation, entities must disclose the net amount of gains or losses included in the cumulative translation adjustment during the reporting period

20. DISCLOSURES RELATED TO OCI AND AOCI • Required to display as a separate classification within Other Comprehensive Income the net gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments • As part of disclosures of AOCI, separately disclose the beginning and ending accumulated derivative gain or loss, the related net change, and the net amount of reclassification into earnings.

21. TYPICAL INTEREST RATE EXPOSURES • Variable rate debt • Fixed rate debt • Prospective asset/liability purchases or sales • Interest associated with funding/investing in a non-functional currency

22. TYPICAL CURRENCY EXPOSURES • Prospective currency transactions • Firm commitments • Currency components of prospective cashflows • Assets or liabilities denominated in a non-functional currency • Non-functional currency funding/investing

23. NON-FUNCTIONAL CURRENCY • Borrow fixed non-$ / swap to fixed $ • Borrow floating non-$ / swap to fixed $ • Borrow fixed non-$ /swap to floating $ • Borrow floating non-$ /swap to floating $

24. TYPICAL COMMODITY EXPOSURES • Prospective purchase / sale • Inventory price risk • Firm commitment

25. FAS 107 Disclosures • Requires fair value disclosures for all financial instruments (both on and off balance sheet) for which it is practicable to estimate that value. • What is Fair Value? • Focuses on market price of a single unit times the number of units • Use single unit price even if an order to sell entire holding would move the market. • Amount at which the instrument could be exchanged in a current transaction between willing parties, but not in a forced liquidation

26. FAS 107 Disclosures • Disclose methods and significant assumptions used to make estimates • Excludes core deposit intangibles • A/R and A/P excluded if fair value approximates carrying amount • If not practicable to estimate, disclose • information pertinent to estimating the fair value such as effective interest rate, carrying amount, and maturity • reasons why not practicable

27. Fair Value Hierarchy Quoted Market Prices Estimates based on MVs of similar items Reliability Estimates based on PV of cash flows

28. FAS 157 • Definitional Standard for “Fair Value” • Deleted Controversial Option to Extend Fair Value Accounting to Virtually All Financial Instruments • Jensen Working Paper on Fair Value Controversieshttp://www.trinity.edu/rjensen/FairValueDraft.htm

29. REPORTING TO SENIOR MANAGEMENTKeys to Success • Draft a risk management policy document that identifies exposures to hedge • Require traders to be explicit about choice of hedge strategy and tactics • Demand documentation as to rationale for adjusting strategies and tactics • Implement a control function that measures hedge performance against expected results.

30. SEC REG. S-X & S-K Risk Disclosrueshttp://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#Disclosure • a tabular format --- a presentation of the terms, fair value, expected principal or transaction cash flows, and other information, with instruments grouped within risk exposure categories based on common characteristics; • a sensitivity analysis --- the hypothetical loss in earnings, fair values, or cash; (the minumum percentage change seems to be 10% in Item 3.A of the Instructions to Paragraphs 305a and 305b.) • flows resulting from hypothetical changes in rates or prices; • value-at-risk --- a measure of the potential loss in earnings, fair values, or cash; • flows from changes in rates or prices.

31. IFRS 7 Summary http://www.iasplus.com/standard/ifrs07.htm • Adds certain new disclosures about financial instruments to those currently required by IAS 32; • Replaces the disclosures now required by IAS 30; and • Puts all of those financial instruments disclosures together in a new standard on Financial Instruments: Disclosures. The remaining parts of IAS 32 deal only with financial instruments presentation matters.

32. IFRS 7 Disclosure Requirements http://www.iasplus.com/standard/ifrs07.htm • An entity must group its financial instruments into classes of similar instruments and, when disclosures are required, make disclosures by class. [IFRS 7.6]   • The two main categories of disclosures required by IFRS 7 are:1. Information about the significance of financial instruments.2. Information about the nature and extent of risks arising from financial insturments.  Information about the significance of financial instruments

33. IFRS 7 Balance Sheet http://www.iasplus.com/standard/ifrs07.htm • Disclosure of the significance of financial instruments for an entity's financial position and performance. [IFRS 7.7] This includes disclosures for each of the following categories: [IFRS 7.8]   • Financial assets measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition. • Held-to-maturity investments. • Loans and receivables. • Available-for-sale assets. • Financial liabilities at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition. • Financial liabilities measured at amortised cost.

34. IFRS 7 Balance Sheet http://www.iasplus.com/standard/ifrs07.htm • Special disclosures about financial assets and financial liabilities designated to be measured at fair value through profit and loss, including disclosures about credit risk and market risk and changes in fair values [IFRS 7.9-10] • Reclassifications of financial instruments from fair value to amortised cost or vice versa [IFRS 7.12] • Disclosures about derecognitions, including transfers of financial assets for which derecogntion accounting is not permitted by IAS 39 [IFRS 7.13] • Information about financial assets pledged as collateral and about financial or non-financial assets held as collatersl [IFRS 7.14-15] • Reconciliation of the allowance account for credit losses (bad debts). [IFRS 7.16] • Information about compound financial instruments with multiple embedded derivatives. [IFRS 7.17] • Breaches of terms of loan agreements. [IFRS 7.18-19]

35. IFRS 7 Income Statement http://www.iasplus.com/standard/ifrs07.htm • Items of income, expense, gains, and losses, with separate disclosure of gains and losses from: [IFRS 7.20(a)]   • Financial assets measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition. • Held-to-maturity investments. • Loans and receivables. • Available-for-sale assets. • Financial liabilities measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition. • Financial liabilities measured at amortised cost.

36. IFRS 7 Income Statement http://www.iasplus.com/standard/ifrs07.htm • Interest income and interest expense for those financial instruments that are not measured at fair value through profit and loss [IFRS 7.20(b)] • Fee income and expense [IFRS 7.20(c)] • Amount of impairment losses on financial assets [IFRS 7.20(d)] • Interest income on impaired financial assets [IFRS 7.20(e)]

37. IFRS 7 Other Disclosureshttp://www.iasplus.com/standard/ifrs07.htm • Accounting policies for financial instruments [IFRS 7.21] • Information about hedge accounting, including: [IFRS 7.22]   • Description of each hedge, hedging instrument, and fair values of those instruments, and nature of risks being hedged. • for cash flow hedges, the periods in which the cash flows are expected to occur, when they are expected to enter into the determination of profit or loss, and a description of any forecast transaction for which hedge accounting had previously been used but which is no longer expected to occur.

38. IFRS 7 Other Disclosures http://www.iasplus.com/standard/ifrs07.htm • If a gain or loss on a hedging instrument in a cash flow hedge has been recognised directly in equity, an entity should disclose the following: [IAS 7.23]   • The amount that was so recognised in equity during the period. • The amount that was removed from equity and included in profit or loss for the period. • The amount that was removed from equity during the period and included in the initial measurement of the acquisition cost or other carrying amount of a non-financial asset or non- financial liability in a hedged highly probable forecast transaction.

39. IFRS 7 Other Disclosures http://www.iasplus.com/standard/ifrs07.htm • For fair value hedges, information about the fair value changes of the hedging instrument and the hedged item. [IFRS 7.24] • Hedge ineffectiveness recognised in profit and loss (separately for cash flow hedges and hedges of a net investment in a foreign operation). [IFRS 7.24]

40. IFRS 7 Fair Values http://www.iasplus.com/standard/ifrs07.htm Information about the fair values of each class of financial asset and financial liability, along with: [IFRS 7.25-30]   Comparable carrying amounts. Description of how fair value was determined. Detailed information if fair value cannot be reliably measured. Note that disclosure of fair values is not required when the carrying amount is a reasonable approximation of fair value, such as short-term trade receivables and payables, or for instruments whose fair value cannot be measured reliably. [IFRS 7.29]

41. IFRS 7 Risk (Qualitative)http://www.iasplus.com/standard/ifrs07.htm • The qualitative disclosures describe:   • Risk exposures for each type of financial instrument. • Management's objectives, policies, and processes for managing those risks. • Changes from the prior period.

42. IFRS 7 Risk (Quantitative)http://www.iasplus.com/standard/ifrs07.htm   The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity's key management personnel. These disclosures include: [IFRS 7.34]   • Summary quantitative data about exposure to each risk at the reporting date. • Disclosures about credit risk, liquidity risk, and market risk as further described below. • Concentrations of risk.

43. IFRS 7 Risk (Quantitative) http://www.iasplus.com/standard/ifrs07.htm • Maximum amount of exposure (before deducting the value of collateral), description of collateral, information about credit quality of financial assets that are neither past due nor impaired, and information about credit quality of financialassets whose terms have been renegotiated. [IFRS 7.36] • For financial assets that are past due or impaired, analytical disclosures are required. [IFRS 7.37] • Information about collateral or other credit enhancements obtained or called. [IFRS 7.38]

44. IFRS 7 Liquidity Riskhttp://www.iasplus.com/standard/ifrs07.htm • Disclosures about liquidity risk include: [IFRS 7.39] • A maturity analysis of financial liabilities. • Description of approach to risk management

45. IFRS 7 Market Riskhttp://www.iasplus.com/standard/ifrs07.htm Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk, and other price risks. • Disclosures about market risk include:   • A sensitivity analysis of each type of market risk to which the entity is exposed. • IFRS 7 provides that if an entity prepares a sensitivity analysis for management purposes that reflects interdependencies of more than one component of market risk (for instance, interest risk and foreign currency risk combined), it may disclose that analysis instead of a separate sensitity analysis for each type of market risk.

46. IFRS 7 Application Guidance http://www.iasplus.com/standard/ifrs07.htm Application Guidance • An appendix of mandatory application guidance is part of the standard. • There is also an appendix of non-mandatory implementation guidance that describes how an entity might provide the disclosures required by IFRS 7. Effective Date • IFRS 7 is effective for annual periods beginning on or after 1 January 2007, with earlier application encouraged. Early appliers are given some relief with respect to comparative prior period disclosures.