Current Issues in Financial Reporting: the Issue of Financial Instruments - Essay Example

Current Issues in Financial Reporting -ED IFRS7 Affiliation) July 12, 2006 Summary IFRS 7, also known as the Financial Instruments is a disclosure that consolidates and expands existing number of disclosure requirements, to which the also add further challenging disclosures. Thus recently new developments towards these financial instruments were developed, based on/or as a replacement of IAS 32, to further enhance the capability of this instruments in terms of disclosure, information management and others specific factors which can contribute towards the improvement of GAAP. The disclosure that we are referring to are those whom the IFRS 7 deals with, these are the financial instruments disclosures and replaces the requirements in IAS 30 (which are the disclosure requirements for banks and similar financial institutions and IAS 32). (IFRS News 2006). In addition, the IFRS also deals will amending the existing risk disclosure requirements for other insurance contracts of the IFRS 4. Recently, most companies and huge industries in the United States and Europe has come to comply and revised their system in order to adapt their system into the new field of financial strategy. This means that these financial instruments are also applicable to financial and non-financial institutions. This is because the extend of the disclosure strictly requires the dependency of the institution's extent of their entity's used of their financial instruments and its exposure to its risk. One example that can define this explanation is the loan commitment (as an un recognized financial instrument). Prior to any information being disseminated in the institutions, it was announced that the latest disclosure requirements are applicable for periods starting before on after 1 January 2007 (IFRS News, 2006). Through this, all of the institutions are encouraged to submit their application. What is interesting and significant in IFRS 7 We all know that there are a lot of financial instruments, which have been designed for various institutions and will all of these; one of the most distinct assets that the IFRS 7 holds amongst of them is that has a way of providing boundaries to financial institutions which can help them protect and at the same time sustain their financial operation. Also, since it was implemented to disclose their financial records, the IFRS 7 allows them to have a further understanding on how each institution can further generate a more profitable income for the next five years. At some point, this method works in favor for the institutions. One of the unique and interesting features that I found regarding this was that it is distinctly divided into two sections. The first covers disclosures are about the figures in the balance sheets or income statements, while the other deals with the risk disclosure. (IFRS News, 2006). From this division, we can see that there is a unique way of approaching the financial aspect of the each institution, such that the second section is the one who solves or takes charge with the risk disclosures that normally and consistently arise from a financial instrument, giving the approach and the system, an eye to oversee the whole situation, through the perspective of the management. Furthermore, the information, which was provided for disclosure and also for the main personnel in the management division, is the one that disclosed the information. This new scope or system of developing the financial instrument is quite interesting such that for the past years, if we would look into the picture and scenario of businesses and corporations that have probably was on the top chart once in the business reviews and then suddenly disappeared, or have lost their momentum into the big picture, have a common analogy and reason behind the collapse of their institution, can be rooted mostly from the dysfunction in the management system with regards to their perspective on financial stability. Thus, since the IFRS 7 holds the new method for financial disclosure, it now provides a more constructive and more aggressive way of having the management over see as constructive yet objective as possible their financial operation and system internally. Critical factor in Business is the Financial Reporting If we are going to analyze and observed the system and management style some of the corporations or institutions that have made it through thick and thin in the ball game is because they concretely and systematically hold firm their internal division as significant as possible. Most companies like Deliotte, Ernest and Young and others have come about to give highly regards on understanding and critically over seeing their financial operation and record as strictly as possible. There are several reasons as to why most companies fail to address this issue or internal concern, even though it is a common knowledge that financial records should be kept disclosed strictly to the right management and personnel and should consistently be observed and oversee all the time. First, Most companies often time fail to thoroughly assess their financial records such that often times the management and staff have an incorrect notion of "respecting privacy" without prior pinning down the aspects as to why there are increase and looses in the financial records. Furthermore, most of the time, the only way that these corporations would start to look at the financial records in amore distinct and speculative manner is when there is a huge loss that the company have had for like a period of at least 6 months and above. Thus, these companies who have no desire or suspicion of analyzing according their financial records creates a notion to the staff in it the system that it is just fine, they can still recover it. In business management, it is always taught that nothing is small and insignificant, everything that happens in the company especially inside the financial operation, management and others should be kept close to and with because nothing is permanent in the business, if systems like these are not carefully observed and speculated, then greater damages and unforeseen fracture will come about in the later part of their business years. Second, records are kept and observed consistently in order to create a more manageable business plan (both long term and short term). Currently, there is indeed a significant realization for most companies who have quite failed in their respective industry for sometime realized that there is a need to understand and have a concrete honest report of the financial records. This is because, in the minute details and discrepancies that happened inside the financial recording, it cannot hide the reality that at present the global market is changing in all different directions, the best way to keep with this tide is to have a solid foundation within the company and one of the factors and assets that can bind the success of a company is through a solid foundation of reporting financial records. Everything in the financial records holds up like a domino, you move one either false or true it will create a reaction that can either trigger a positive side of the company or the other way. What ever it is, financial record should be kept accordingly. A lot of companies especially now creates this volume of their financial and business history so they are able to observe, study and learn from it. Since nothing is stable in this business, the records will keep as a tool to help the management decide what would be the best alternative solution incase a certain loss occur and discrepancy occur. Another fact that financial records is significant is it holds as evidence and records for further and unexpected events that may happen within the department that would need further action which sometimes leads to legal suits. Observed carefully, there is a couple of news around that quite relates to proper bookkeeping of financial records. Sometime the management can get away with having stolen money from the company because of the discrepancy in bookkeeping or that there is no in-depth understanding and further investigation as to why there was a complete loss or decline in the sales and revenues, or sometimes they can hide the figures and allow the spare income get away to go to their own pockets, either whatever fact it may have the point is that financial records should never be taken forgranted at all cost. Furthermore, these records should provide a significant value and can be seen only by the respective personnel inside the system. IFRS 7 provides a secure management of the financial instruments within. This is also one of the speculated reasons as to why the IAS 32 was respectively replaced with this, because it secures the following: It Adds a new disclosure on the financial instruments to those currently required by the IAS 32 Financial Instruments: Disclosure and Presentation; It replaces the disclosure requirements, which are currently imposed on financial institutions by IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institution and lastly, It provides all of the financial instruments disclosed together in a new combined standard. (Deliotte, 2005) Alternative Views Based on the facts that was presented and also based on the procedures provided regarding the IFRS 7, the institutions are given these options: first, the IFRS 7 addressed the different classes for the financial instrument which according to the IASB News last 2006, these new strategy would allow to provide a level of detail for a specific class to determine the entity it is in. So in effect the alternative viewpoint for the current financial IFRS 7 is that is generally specify the specific needs of each institution as it categorized its financial instruments. In effect, it would allow a more sustainable and controllable management system for the disclosure of the financial instruments. In addition, another alternative views that can be notice and picked from this new avenue of financial instrument of disclosure is that even funding costs (either related to trading activities and others) are still required to be presented as part of the interest expense and not to be noted under the trading line. This is because the bank always has a need to present an income statement (that its group needs to see as careful and as objective as possible) as raw as possible. This means the funding costs (by nature), and its represented interest, which is separated by the trading activities (this is based on the IAS 39. AG 15 that states the fact that a liability, which is used to fund any, trade activities is completely not held under a trading division). (IFRS News, 2006). Since the IFRS 7 has a more constricted and bounded financial system in an organization or institution, it also notes the management to have a strictly professional and bounded rule as that they should disclose the gains and losses of their company on the hedge instrument and also on the hedge item for the current reporting period. This hedge is valuable and is stated IFRS 7.4 (a). Lastly, another safeguard fact that is provided by the IFRS7 was that incorporated in the financial instruments and also for a company is that it does not affect the materiality of the foreign currency risk of the bond. It is assessed without having to exchange the forward contract. This is because base on the IAS1.29 the materiality assessment of the foreign currency risk continues on even prior or during the transaction. This is interesting because what the financial instrument does really offer is that the strict calculations and observations that it provides during the reporting process of the institutions would be held disclosed and assess thoroughly based on the performance. Foreign exchange currency would fall under additional input incase there is a need to counter check it for any founded miscalculations and reports seen. Furthermore, it is guaranteed that the same approach will be applied to the assessment of credit risk, liquidity risk and other market risk involved during the process. In general, the IFRS 7 has provided three aspects used in the financial instruments and these are the following: credit risk, liquidity risk, and market risk. Briefly, the credit risk is the financial lost of a group that when a customer which is c counterpart to a financial instrument fails to meet its contractual obligations. The liquidity risk happens when a group is unable to meet its financial obligations up until its due time. The tendency for this as an effect is that the group should provide proper and careful planning as to secure the company's liquid assets at all time. Lastly, the market risk is when there are changes in the currency, market price, interest rates and others will affect the fluidity of income and also the value of holdings of the financial instruments. What is done mostly under this aspect is that the give enable sot have a thorough observation of the market infrastructure that can be manage inspite of the risk being faced with. Future Developments Indeed, it is always consider in the business realm that best way to sustain a company is to be flexible with it. A lot of financial and market instruments have been introduced to the institutions that serve one purpose, to sustain and maintain its momentum it its corresponding institution. IFRS 7 will be an advantage to address the flaws in the internal financial instruments, such that the new methods will allow a more constructive mechanism to understand the involvement of proper recording and reporting towards the development of any company. If companies are able to understand the significance and also felt the advantage of the IFRS 7, then there is a possibly also that the market scenario and financial concerns will be resolved. References ARMSTRONG, CHRISTOPHER, Mary E. Barth. Market Reaction to the Adoption of IFRS in Europe. June 2007 ASB. Financial Reporting. 36 Exposure Draft. July 2005 http://www.frc.org.uk/images/uploaded/documents/FRED36%20web%20optimized.pdf ASB. Reporting Statement: Operation and Financial Review. Accounting Standards Board. January 2006. http://www.frc.org.uk/images/uploaded/documents/Reporting%20Statements%20OFR%20web.pdf BRACKNEY, KENNARD S. and Philip R. Wither. The European Union's Role in International Standards Setting. 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