IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

gation). Such information shall be provided both about the change during the period and the cu– mulative change since the asset or liabilit y was designated as at fair value through profit or loss. 3.1.2.3 Without such information, there is a concern that users of financial statements may mis– interp ret the profit or loss effects of changes in credit risk. For instance, if the credit risk of a finan– cial liability increases because of an entity's financial difficult ies, the fair value of the financial li– abilit y will decrease, resulting in a gain for the entity. Some view this as counterintuitive, since the reason for the gain is the entity' s financial problems. Practical Insight To provide this disclosure about the change in fair value attributable to credit risk, an entit y needs to determine what portion of the total change in the fair value of the asset or liability is attributable to credit risk. One way to do this is to estimate the amount of the change in fair value that is attributable to risks other than credit risk (i.e., changes in the fair value of the asset or liability attributable to changes in the benchmark interest rate, foreign exchange rates, and other market conditions), and compare it with the total change in fair value. The difference is the change that is attributable to credit risk. An entity is required to disclose the methods it uses to compute this amount. 3.1.2.4 In addition, for loans and receivables designated as at fair value through profit or loss, an entity is required to disclose information about (a) The maximum exposure to credit risk at the reporting date (b) The amount of credit risk mitigation achieved using credit derivatives or similar instruments (c) The amount of the change in the fair value of those related credit derivatives or similar instruments during the period and cumul atively 3.1.2.5 More over, for financial liabilities designated as at fair value through profit or loss, an en– tity is required to disclo se information about the differenc e between the carrying amount and the amount the entity would be contractually required to repay at maturity to the holder of the obliga– tion (i.e., the principal or settlement amount). Ex amp le Entity A incurs a fi nancial liability by issuing a bond obligation at par (i.e., the proceeds received by Entity A equa l the pri ncipa l or settlement amo unt). Later, Entity A encounters fina ncial difficul– ties such that its creditwo rthiness deteriorates. As a result, the f air value of the liability may decline and be significantly less than the pr incipal or settlement amount in that subsequent period. In this case, disclosure about the difference between the carrying amount and the settlement amount sug– gests that the carrying amount is less than the amou nt that Entity A is contractually required to pay to settle the obligation. 3.1.3 Reclassifications 3.1.3.1 If an entity reclassifies a financial asset such that the reclassification changes the mea– surement of the asset from one that is measured at cost or amortized cost to one that is measured at fair value, or vice versa (from fair value to cost or amortized cost), the entity is required to disclose the amount reclassified and the reason for the reclassification. Such information is useful because recla ssifications affect how the financial asset is measured. 3.1.3.2 lAS 39 severely restricts the ability to reclassify a financ ial asset from one category to another. Please refer to Chapter 26 for a discussion of when reclassifications may occur. 3.1.4 Derecognition 3.1.4.1 As discussed in Chapter 26, in some circumstances, sales or other transfers of financial assets do not qualify for derecognition (i.e., the entit y that transferred the financial asset is not al– lowed to remove the financial asset [or part of it] from its financial statements). For instance, the entity may have sold a financial asset but retained substanti ally all of the risks and rewards of own– ership, such that dereco gnition is not permitted.