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In relation to the ongoing sovereign debt crisis and negative consequences of the economic crisis of 2007-2009, one of the biggest issues for investors are still the risks in financial instruments. To study the subject deeper, experts of the CFA Institute have undertaken their new research “User Perspectives on Financial Instrument Risk Disclosures Under International Financial Reporting Standards: Volume 1” in which they analyzed the necessity to raise quality of information disclosure related to risks in financial instruments in both financial and non-financial organizations. During the research they studied issues related to credits, liquidity, and hedging in accordance with IFRSs (first of all, IFRS 7).
Hedging is examined in the second tome which will be presented in the nearest future.
Conclusions in brief
Results demonstrate that disclosure of risks is widely spread and is one of the key issues for users of financial information. However, they are not satisfied with how it is done today. Reports and analysis show that there are still too many flaws in practical disclosure of risks. Which are those?
- Information is hardly understandable because it is incomplete.
- The category of “market risks” is too broad.
- Data on qualitative characteristics is non-informative.
- Users are not sure in quantitative data either.
- Disclosed data often appears to be contradictive and non-comparable.
- There is no sophisticated multi-level scheme to disclose information on management of aggregate risks.
In relation to this, a few recommendations from experts of the CFA Institute:
- Companies should present aggregate data, disclosing risk factors. The data should include detailed info on risks in the company and effectiveness of risk-management mechanisms separately for all basic categories of risks.
- Market risks should be differentiated into more precise categories (like, for example, related to interest rates, foreign currencies and goods). All newly proposed categories should be presented in accountancy with the same precision as it is done for solvency and liquidity risks in accordance with IFRS 7.
- Disclosure of quantitative and qualitative characteristics should be better coordinated. Qualitative information should be better unified and be more precise. Data should be presented as tables.
Source: CFA Institute
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