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IASB Risk Disclosure Proposals

IASB Risk Disclosure Proposals. Russell Picot Group Chief Accounting Officer HSBC Holdings plc. Outline of Presentation. Existing IAS 30 IFRS 7 Timetable Implementation challenges. Existing IAS 30: Disclosures in the Financial Statements of Banks and Similar Financial Institutions.

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IASB Risk Disclosure Proposals

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  1. IASB Risk Disclosure Proposals Russell Picot Group Chief Accounting Officer HSBC Holdings plc

  2. Outline of Presentation • Existing IAS 30 • IFRS 7 • Timetable • Implementation challenges

  3. Existing IAS 30: Disclosures in the Financial Statements of Banks and Similar Financial Institutions • Prescriptive • Applied only to banks and similar financial institutions • Not risk-based • To be superseded by IFRS 7

  4. Financial Activities Advisory Committee • Consists of preparers, auditors, financial analysts and regulators • Met quarterly • Active forum for debating issues with IASB staff

  5. IFRS 7 Financial Instruments:Disclosures • IFRS 7’s principles complement those for recognising, measuring and presenting financial assets and liabilities in IAS 32 and IAS 39 • Scope - covers all entities that have financial instruments (same as IAS 32) • Disclosure not measurement (which is covered by IAS 39) • Principles-based • Risk-based • Flexible

  6. IFRS 7: Significance of Financial Instruments for Financial Position and Performance Paragraph 7: “An entity shall disclose information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance”.

  7. IFRS 7 Financial Risk Disclosure Principle: Paragraph 30: “An entity shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date”.

  8. Basis of Disclosure Qualitative information about financial risk exposures and risk management policies; and Quantitative data: basis is “through the eyes of management” i.e. based on information provided internally to the entity’s key management personnel

  9. Minimum Risk Information Required About: Credit risk: • quality of assets - past-due and impaired; Market risk (including interest rate risk) Liquidity risk

  10. Credit Risk Disclosures required: • Amount that represents the maximum credit exposure at the balance sheet date; • Description of collateral; and • Information about credit quality of assets that are not past-due or impaired

  11. Quality of Assets Information to include: • Analysis of credit exposures using an external or internal grading system; • Nature of the counterparty; and • Description of collateral held

  12. Quality of Assets (Continued) Disclosure required of: • Ageing analysis of past-due unimpaired assets; and • Analysis of assets that are individually impaired

  13. Liquidity Risk • Maturity analysis for financial liabilities based on remaining contractual maturity • Management discussion of how it manages the liquidity risk inherent in these liabilities • Sets out the framework for the management discussion

  14. Market Risk Disclosure required of: • Sensitivity analysis for each type of market risk including interest rate risk showing the effect of reasonably expected changes in the relevant risk variable; • Methods and assumptions used; and • Any changes

  15. Other Areas: Operational risk: Advisory group’s recommended operational risk disclosure has become an input to the MD&A project Hedge accounting/fair value • comprehensive disclosures Note - Fair Value Option and day 1 profits

  16. IAS 32 Amendment: Balance Sheet/Income Statement • Should be based on the measurement basis of the financial asset and/or financial liability (IAS 39) • Reconciliation of the allowance account for credit losses, when an allowance account is used • Does not mandate formats or location of disclosure

  17. Capital Disclosure (IAS 1) • Principle in paragraph 124A: an entity shall disclose information that enables users of its financial statements to evaluate the entity’s capital • Does not require disclosure of entity-specific capital requirements. The expectation is that such requirements would factor into how capital resources are managed.

  18. Capital Disclosure (Continued) • Does require disclosure where an entity has not complied with externally imposed capital requirements • Disclose consequences of non-compliance (if not complied)

  19. Timetable • ED 7 published with final comment deadline of 22 October 2004 • Standard to be published 15 July 2005 • Proposed effective date 1 January 2007 with early adoption encouraged • If adopted before 1 January 2006 not required to present comparative information in IFRS 7

  20. Implementation Challenges • Flexible but rigorous • Comprehensive and all-embracing • Management challenge both to identify and measure all risk • Insurance business dealt with under IFRS 4 but IAS 39 has major impact

  21. Implementation Challenges (Cont’d) • Consistent of approach across all sites and risk areas • Data quality up to audit standard • Alignment of external/internal performance and risk monitoring

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