IFRS 7, titled Financial Instruments: Disclosures, is an International Financial Reporting Standard (IFRS) published by the International Accounting Standards Board (IASB). It requires entities to provide certain disclosures regarding financial instruments in their financial statements.[1] The standard was originally issued in August 2005 and became applicable on 1 January 2007, superseding the earlier standard IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and replacing the disclosure requirements of IAS 32, previously titled Financial Instruments: Disclosure and Presentation.[2][3]
According to accounting expert David Grünberger, qualitative disclosures are essential to explain how management perceives and manages risk.[8] Steffen Kuhn and Dirk Hachmeister emphasize that a central goal of IFRS 7 is to enable users to evaluate the entity's exposure to risk and the way those risks are managed based on the internal perspective of management.[9] This must cover management's objectives and policies for managing those risks, and any changes in the year.[10]
Accounting policies that the entity adopts regarding financial instruments.[11]
The three-level "fair value hierarchy" is used to measure the fair values of each class of financial instruments.[15] Kuhn and Hachmeister point out that the auditing of Level 3 measurements presents significant challenges, as the valuation relies heavily on entity-internal models and non-observable parameters.[9]
Level 1
Unadjusted quoted prices of identical instruments in active markets.[16]
Level 2
Observable data from less active markets or of instruments that are similar but not the same.[17]
As an illustrative disclosure for IFRS 13 requirements, Deutsche Bank categorizes its financial instruments held at fair value into a three-level hierarchy. This classification is based on whether the inputs to the valuation technique are observable or unobservable (Level 1, 2, or 3).[19]
Financial instruments held at fair value by hierarchy level (€ m)
Financial Assets / Liabilities
Dec 31, 2024
Dec 31, 2023
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Financial assets held at fair value:
Trading assets
52,387
78,237
9,148
53,095
62,760
9,420
Positive market values (Derivatives)
912
282,909
7,933
2,198
241,460
8,198
Financial assets at FVOCI
21,901
16,806
3,383
18,273
14,324
2,949
Total financial assets at fair value
78,034
484,008
26,281
77,193
398,894
25,599
Financial liabilities held at fair value:
Trading liabilities
30,765
12,614
119
36,361
7,617
27
Negative market values (Derivatives)
2,238
265,450
8,707
2,333
228,261
7,666
Liabilities designated at FVTPL
0
87,479
4,569
169
80,309
3,248
Total financial liabilities at fair value
33,543
369,113
13,382
39,349
317,884
10,856
Disclosure of fair value is not required if the carrying amount is a reasonable approximation of fair value.[12] Kuhn and Hachmeister further note that the depth of disclosure must correspond to the risk relevance of the respective financial instruments.[9]
Illustrative Accounting Examples
1. Credit Risk: Expected Credit Loss (ECL) Disclosure
Scenario: An entity calculates an impairment for trade receivables.
Event
Debit
Credit
Amount
Rationale
Recognition of ECL
Impairment Loss (P&L)
$12,000
Required disclosure of the reconciliation of changes in the loss allowance.[20]
Allowance for ECL (SoFP)
$12,000
Net credit exposure must be disclosed clearly.
2. Market Risk: Interest Rate Sensitivity
Scenario: An entity has a floating-rate bank loan of $1,000,000.
Market Shift
Impact on Profit
Impact on Equity
Rationale
Interest Rate +1%
($10,000)
($10,000)
Required sensitivity analysis showing impact on profit or loss.[21]
Interest Rate -1%
$10,000
$10,000
Sensitivity analysis must reflect reasonably possible changes.
Illustrative disclosure
As an illustrative disclosure for IFRS 7 requirements regarding credit risk concentrations, Deutsche Bank provides a granular industry breakdown of its loan book in its notes. This presentation includes all assets classified under IFRS 9—specifically those at amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit and loss (FVTPL)—using the European NACE system for counterparty classification.[22]
Credit risk concentration
Loans by industry classification (Deutsche Bank Group)
To satisfy the requirements of IFRS 7.35H, Deutsche Bank provides a reconciliation of the allowance for credit losses in its notes, showing the movement between Stage 1 (12-month ECL), Stage 2 (Lifetime ECL – non-impaired), and Stage 3 (Lifetime ECL – credit-impaired) for financial assets at amortized cost.[23]
Development of allowance for credit losses (Amortized Cost)
Movement in Allowance (€ m)
Stage 1
Stage 2
Stage 3
Stage 3 POCI
Total
Balance, beginning of year (2024)
447
680
3,960
198
5,285
Movements (new business and credit extensions)
(150)
194
1,814
3
1,861
Transfers due to changes in creditworthiness
128
(128)
0
N/M
0
Changes in models
(2)
(7)
0
0
(9)
Financial assets derecognized (incl. charge-offs)
0
0
(1,229)
0
(1,229)
Recovery of written off amounts
0
0
157
0
157
Foreign exchange and other changes
15
(3)
(290)
11
(267)
Balance, end of reporting period
438
736
4,412
213
5,799
Provision for Credit Losses (excl. country risk)
(24)
59
1,814
3
1,852
Disclosure Requirements (IFRS 7)
IFRS 7 requires entities to provide disclosures that enable users to evaluate the significance of financial instruments for the entity's financial position and performance, and the nature and extent of risks arising from those instruments.[24]
Paragraph
Category
Disclosure Requirement
Description / Examples
IFRS 7.8
Significance
Carrying Amounts
Disclosure of the carrying amounts of each category of financial assets and liabilities (e.g., Amortized Cost, FVTPL, FVOCI).
IFRS 7.25
Fair Value
Fair Value Hierarchy
For each class of financial instrument, the fair value must be disclosed and categorized into Level 1, 2, or 3 based on the observability of inputs.
IFRS 7.33
Risk Management
Qualitative Risk
For each type of risk (Credit, Liquidity, Market): the exposures to the risk and how they arise, and the objectives/policies for managing them.
IFRS 7.34
Quantitative Data
Summary quantitative data about the entity's exposure to risk at the end of the reporting period based on information provided internally to key management.
IFRS 7.35
Credit Risk & ECL
Information about an entity’s credit risk management practices and how they relate to the recognition and measurement of Expected Credit Losses (ECL).
IFRS 7.39
Liquidity Risk
Maturity Analysis
A maturity analysis for financial liabilities showing the remaining contractual maturities (e.g., <1 year, 1-5 years, >5 years).
IFRS 7.40
Market Risk
Sensitivity Analysis
A sensitivity analysis for each type of market risk (e.g., currency, interest rate) showing how profit/loss and equity would have been affected by "reasonably possible" changes.
IFRS 7.13
Collateral
Pledged Assets
The carrying amount of financial assets the entity has pledged as collateral for liabilities and the terms and conditions relating to its pledge.
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