IFRS 7 Financial Instruments disclosures is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB). Which requires the entities to provide disclosures about the significance of financial instruments for the entity’s financial position along with the items of income, expense, gains and losses for each class of financial instrument. And the nature and extent of risks (credit risk, liquidity risk, market risk) faced by the entity due to the financial instruments.
IFRS 9 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB). It addresses the accounting for financial instruments. It contains three main topics: classification and measurement of financial instruments, impairment of financial assets and hedge accounting.
IFRS 13 provides guidance on how to perform fair value measurement. RaPID covers the following functionality:
Classification of financial instruments
The software can classify financial instruments as assets (IFRS 9 §4.1), liabilities (IFRS 9 §4.2) and equities. Also, the software can classify the embedded derivatives (IFRS 9 §4.3) and does the SPPI test based user defined formula.
Cash flow generation
RaPID provides a mapping mechanism for all financial instruments (eg: loans, mortgages, bonds, time deposits, interest rate swaps, stock options etc.), Also, RaPID determines the factors needed as the basis for the amortized cost calculation, and the model based fair value calculation (discounted cash flow method or option pricing models) in case there is no observed market value available.
Initial and subsequent measurements
Based on the business model (§4.1 and §4.1) the financial instrument (whether it is an asset or a liability) is measured either at
- Amortized cost (IFRS 9 §4.1.2, §4.2.1)
- Fair value through other comprehensive income (IFRS 9 §4.1.2A)
- Fair value through profit and loss (IFRS 9 §4.1.4, §4.2.1)
Amortized cost is based on the effective interest rate method. It is calculated based on the cash flow stream and the Newton method.
In the event where the observed market value is available, RaPID calculates the fair value by generating the cash flows and discounting them by using the appropriate zero-coupon curve.
Impairment / loss allowance (IFRS 9 §5.5)
There are 3 stages for impairment (expected credit loss):
- Stage 1 (no change or no significant increase in credit risk)
- Stage 2 (Significant increase in credit risk)
- Stage 3 (Financial assets is credit impaired)
In reference to stage 1 and stage 2 RaPID calculates either the 12 months or the lifetime expected credit loss based on the generic formula ECL = E (EADt * MPDt * LGDt * Dt), whereas
- EAD (Exposure at Default) taken into account any collaterals or guarantees
- MPD (Marginal Probability of Default)
- LGD (Loss Given Default)
- D (Discount factor)
Workflow and interplay with the general ledger
Assuming there is a general ledger in place the following interplay is recommended.
- By using RaPID’s ETL (extract / transform / load) the financial instruments from the core banking system are mapped and loaded into RaPID. A second load happens from the accounting for reconciliation purpose if needed.
- A reconciliation report allows the comparison of the loaded financial instrument with a reference (usually from the general ledger).
- The job control allows automating all relevant process steps.
- The administration module defines access rights, roles and main configuration of the system.
- The IFRS engine take care of the cash flow generation, constant effective yield, amortized cost, fair value, impairment, and book entries.
- The parametrization handles the chart of accounts, currencies, yield curves and so on.
- For each step there is an audit trail.
- The user may validate (principle of 4-eyes) the book entries before sending them as the output to the general ledger.
Reporting / output
RaPID offers various types of final or intermediate reporting:
- Cash flow and event tables for each financial instrument or aggregated for the complete balance sheet (liquidity and interest sensitivity gap).
- Balance sheets according to IFRS and local GAAP.
- Book entries to be inputted into the general ledger
- Reconciliation reports.
- Self-service reporting
- Special reports for expected credit loss (ECL).
- Historical reports for Audit trails (Includes all modifications occurred).
Print screens
The below print screen shows the freely parametrizable chart of accounts.
The following print screen shows the job scheduler for automating jobs.
The following print screen shows the cumulative default probabilities.
Qualitative and quantitative disclosure (IFRS 7, §34)
Credit risk (maximum exposure, collaterals held) Liquidity risk (maturity analysis) Market risk (sensitivity analysis) Transfer of financial assets) Additional IFRS 9 reporting