Page 25 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

CIMA NOVEMBER 2018 – STRATEGIC CASE STUDY

The requirements of IFRS 7 in general terms

Three types of risk are highlighted in IFRS 7: credit risk, liquidity risk and market risk.
Both qualitative disclosures and quantitative disclosures have to be made.

Qualitative disclosures describe management’s objectives, policies and processes for managing
these risks, while quantitative disclosures provide information about the extent to which the
entity is exposed to each risk. Together, the disclosures provide an overview of the entity’s use of
financial instruments and the exposures to risks they create.

The requirements of IFRS 7 in the case of Novak
I have identified below some specific examples of the sort of information Novak will have to
disclose when we prepare this year’s accounts.
Credit risk

This is the risk that one party to a financial instrument will cause a financial loss for the other
party. So for example the risk that a customer might go into liquidation and its debt might not be
recoverable. We should review the status of all our customers and disclose any significant
overdue amounts.
Liquidity risk
This is the risk that Novak will have difficulties in paying its financial liabilities.

Therefore, we should prepare a maturity analysis for financial liabilities that shows the maturity
dates for all financial liabilities (that is the C$ 32,000 million of borrowings in our latest statement
of financial position, and also our trade payables and taxation liability).

Market risk
This is the risk that the fair value or cash flows of a financial instrument will fluctuate due to
changes in market prices.
Novak is a massive global company, so its exposure to market risk could be assessed by
presenting an analysis of the sensitivity of financial results to reasonably probable market price
changes (e.g. what would the revenue figure have been if the C$ had strengthened / weakened by
5%?)

Conclusion
IFRS 7 is an important accounting standard. Disclosing all this extra information as part of the
company’s annual report will enable users of the accounts to assess the risk associated with a
company’s financial instruments, rather than just the value of those financial instruments at one
point in time.

86 KAPLAN PUBLISHING