Financial Instruments, Fair Value and Risk Reporting

Introduction and context

Financial instruments are central to modern finance: they transfer cash, allocate risk, provide liquidity and support capital formation. They also create some of the most difficult reporting judgments because their economic substance may differ from their legal form, contractual cash flows may be uncertain, and market values may change rapidly.

This chapter integrates four standards:

• IFRS 9 Financial Instruments: classification and measurement, impairment, derecognition and hedge accounting.
• IAS 32 Financial Instruments: Presentation: liability-versus-equity classification and offsetting.
• IFRS 7 Financial Instruments: Disclosures: significance and risk disclosures.
• IFRS 13 Fair Value Measurement: the measurement framework and disclosure hierarchy.

The standards should not be applied independently. For example, classification under IFRS 9 determines subsequent measurement; IAS 32 determines whether an instrument is presented as debt or equity; IFRS 13 governs fair value measurement when fair value is required or permitted; and IFRS 7 explains the resulting exposures and uncertainty to users.

Learning objectives

By the end of this chapter, students should be able to:

1. Classify financial assets and financial liabilities under IFRS 9.
2. Apply the business-model and contractual-cash-flow tests.
3. Explain amortised cost, fair value through other comprehensive income and fair value through profit or loss.
4. Calculate expected credit losses using a probability-weighted approach.
5. Analyse derecognition, modification and continuing involvement issues.
6. Distinguish financial liabilities from equity instruments under IAS 32.
7. Explain derivatives and the mechanics and purpose of hedge accounting.
8. Apply IFRS 13’s fair value principles and hierarchy.
9. Interpret market, credit and liquidity risk disclosures under IFRS 7.
10. Evaluate governance, estimation uncertainty and emerging technology issues in financial-instrument reporting.

1. The architecture of financial-instrument accounting

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another. Examples include cash, trade receivables, bonds, shares, loans, trade payables, leases within the scope of other standards, options, futures, swaps and forward contracts.

A financial asset commonly includes cash, an equity instrument of another entity, a contractual right to receive cash or another financial asset, or a contract settled in specified financial instruments. A financial liability is generally a contractual obligation to deliver cash or another financial asset, or to exchange financial instruments under potentially unfavorable conditions. An equity instrument evidences a residual interest after deducting all liabilities, subject to the IAS 32 “fixed-for-fixed” and other requirements.

The reporting process can be viewed as a sequence:

1. Identify the contractual instrument and its scope.
2. Determine whether it is an asset, liability or equity instrument.
3. Classify the asset or liability under the relevant IFRS 9 category.
4. Measure initially, normally at fair value plus or minus qualifying transaction costs.
5. Measure subsequently and recognise interest, gains, losses and impairment.
6. Assess derecognition, modification and hedge-accounting implications.
7. Provide IFRS 7 and IFRS 13 disclosures.

2. Classification and measurement under IFRS 9

2.1 Financial assets: the two classification tests

Financial assets are classified using two linked assessments:

• the entity’s business model for managing the assets; and
• the contractual cash-flow characteristics, commonly called the SPPI test.

SPPI means that contractual cash flows are solely payments of principal and interest on the principal amount outstanding. Principal is the fair value of the asset at initial recognition, while interest normally represents compensation for the time value of money, credit risk, other basic lending risks, administrative costs and a profit margin.

The business model is assessed at a level reflecting how groups of assets are managed, rather than instrument by instrument merely because management intentions differ. Evidence includes performance reporting, risk-management practices, sales frequency and reasons for sales.

An equity investment is normally measured at FVTPL. For an equity investment that is not held for trading, an entity may make an irrevocable instrument-by-instrument election at initial recognition to present subsequent fair-value changes in OCI. Amounts in OCI are not subsequently recycled to profit or loss, although dividends generally are recognised in profit or loss when the right to receive payment is established.

2.2 Amortised cost and the effective interest method

Amortised cost is the initial amount adjusted for principal repayments, cumulative amortisation using the effective interest method, and loss allowances. The effective interest rate discounts estimated future cash payments or receipts over the expected life of the instrument to its gross carrying amount at initial recognition. For purchased or originated credit-impaired assets, special credit-adjusted effective-interest requirements apply.

The basic interest calculation for a reporting period is:

For a non-credit-impaired asset, the relevant carrying amount is generally the gross carrying amount. If the asset subsequently becomes credit-impaired, interest income is generally calculated on amortised cost, which is the gross amount less the loss allowance. The rate is assumed constant for a fixed-rate instrument, and cash-flow estimates must reflect contractual terms and relevant fees included in the effective interest rate.

Illustration. A bond is acquired for CU 950. Its effective interest rate is 8%, and the annual coupon is CU 60. Before impairment, interest income is CU 76 (CU 950 × 8%). The difference between CU 76 and the CU 60 cash coupon, CU 16, increases the carrying amount, subject to impairment and other adjustments.

2.3 Financial liabilities

Most financial liabilities are subsequently measured at amortised cost using the effective interest method. Exceptions include liabilities at FVTPL, derivative liabilities, financial guarantee contracts and certain commitments. An entity may designate a liability at FVTPL when permitted if doing so eliminates or significantly reduces an accounting mismatch, or where a documented fair-value-based management strategy is used.

For a liability designated at FVTPL because of an accounting mismatch, the change in fair value attributable to changes in the entity’s own credit risk is generally presented in OCI, unless that treatment would create or enlarge an accounting mismatch. The remaining fair-value change is recognised in profit or loss.

3. Expected credit losses

3.1 The impairment model

IFRS 9 uses a forward-looking expected-credit-loss model. It applies principally to debt assets at amortised cost or FVOCI, lease receivables, contract assets, loan commitments and financial guarantee contracts within scope.

The model has three stages:

• Stage 1: on initial recognition and while credit risk has not increased significantly, recognise 12-month ECL.
• Stage 2: when credit risk has increased significantly since initial recognition, recognise lifetime ECL.
• Stage 3: when the asset is credit-impaired, recognise lifetime ECL and calculate interest on the net carrying amount.

Twelve-month ECL is not the cash shortfall expected only during the next twelve months. It is the portion of lifetime expected credit losses arising from default events possible within the next twelve months.

A useful conceptual expression is:

where pᵢ is the probability of a relevant default scenario or outcome, LGDᵢ is loss given default, EADᵢ is exposure at default, and DFᵢ is the discount factor. The summation covers scenarios and relevant future periods. The calculation must be probability-weighted, reflect reasonable and supportable information including forecasts, and discount cash shortfalls using the original effective interest rate, or an appropriate credit-adjusted rate where required.

If cash shortfalls are measured directly, the underlying principle is:

The two expressions are consistent when scenario probabilities, recoveries, timing and discounting are modelled properly.

Worked example. A lender has exposure of CU 1,000. It estimates two one-year outcomes: a 2% probability of default with a 40% loss rate, and a 98% probability of no loss. Ignoring discounting for simplicity:

ECL = 0.02 × 0.40 × CU 1,000 = CU 8

The CU 8 is a 12-month ECL only if the estimate relates to default events possible during the next twelve months and the asset remains in Stage 1. If credit risk has increased significantly, the estimate must cover expected losses over the instrument’s lifetime.

3.2 Significant increases in credit risk

An entity compares the risk of default at the reporting date with the risk at initial recognition. The comparison is not simply a comparison of expected loss amounts. Relevant evidence may include delinquency, internal or external credit ratings, probability-of-default changes, adverse economic conditions, covenant breaches and watch-list status. The assessment should use reasonable and supportable information available without undue cost or effort.

A rebuttable presumption commonly applies that credit risk has increased significantly when contractual payments are more than 30 days past due. This is not an automatic substitute for a robust risk assessment. Similarly, default is generally presumed no later than 90 days past due unless an entity has reasonable and supportable evidence for a later definition.

For trade receivables and contract assets without a significant financing component, entities commonly use the simplified approach: lifetime ECL is recognised from initial recognition. A provision matrix may group receivables by shared risk characteristics and apply historical loss rates adjusted for current and forecast information.

4. Derecognition and modification

A financial asset is derecognised when contractual rights to cash flows expire or when it is transferred and the transfer qualifies for derecognition. The entity must assess whether it has transferred substantially all risks and rewards of ownership. If neither substantially all risks and rewards are transferred nor retained, control is assessed. Continuing involvement can require recognition of an associated asset or liability.

A financial liability is derecognised when the obligation is discharged, cancelled or expires. An exchange or substantial modification of terms between the same parties is accounted for as extinguishment of the original liability and recognition of a new liability. The difference between the carrying amount of the old liability and consideration paid, including transferred non-cash assets or assumed liabilities, is recognised in profit or loss.

A modification of a financial asset that does not result in derecognition requires recalculation of the gross carrying amount using the original effective interest rate. The modification gain or loss is the adjustment needed to reflect the present value of modified cash flows, with relevant fees considered according to IFRS 9.

5. IAS 32: liability versus equity

The decisive IAS 32 question is whether the issuer has a contractual obligation to deliver cash or another financial asset. If so, the instrument is generally a financial liability, even if it is legally described as “share capital” or “preferred equity.” Substance and contractual terms prevail over labels.

An equity instrument exists only when there is no such obligation and the instrument meets the relevant requirements. A compound instrument contains both liability and equity components. A convertible bond that can be converted into a fixed number of the issuer’s own ordinary shares for a fixed amount of cash may contain a liability component and an equity conversion component—the fixed-for-fixed principle. The liability component is measured first at the fair value of a comparable non-convertible liability; the residual is allocated to equity.

Illustration. A convertible bond is issued for CU 1,000. The fair value of an equivalent straight-debt instrument is CU 930. Subject to the instrument’s terms and applicable requirements, CU 930 is initially recognised as the liability component and CU 70 as the equity component. Subsequent interest on the liability uses the effective interest method; the equity component is not remeasured.

Offsetting a financial asset and liability is permitted only when the entity currently has a legally enforceable right of set-off and intends either to settle net or to realise the asset and settle the liability simultaneously. Mere master netting arrangements are not sufficient without the required current right and intention.

6. Derivatives and hedge accounting

A derivative typically has a value that changes in response to an underlying variable, requires little or no initial net investment compared with similar contracts, and is settled at a future date. Forwards, futures, options and swaps are common examples. Derivatives are generally measured at FVTPL unless designated in an eligible hedging relationship.

Hedge accounting aligns the accounting treatment of a hedging instrument and hedged item when an entity manages risk together. IFRS 9 recognises:

• Fair-value hedges, which hedge exposure to changes in fair value.
• Cash-flow hedges, which hedge variability in cash flows.
• Hedges of a net investment in a foreign operation.

At designation, the entity must document the hedging relationship, the risk-management objective, the hedged item, hedging instrument, nature of the risk and method for assessing hedge effectiveness. The relationship must meet the economic-relationship, credit-risk-dominance and hedge-ratio requirements.

In a fair-value hedge, the hedging instrument gain or loss is recognised in profit or loss, while the hedged item’s carrying amount is adjusted for the hedged risk, with the adjustment generally recognised in profit or loss. In a cash-flow hedge, the effective portion of the hedging instrument’s gain or loss is recognised in the cash-flow hedge reserve in OCI; the ineffective portion goes to profit or loss. When the forecast transaction creates a non-financial asset or liability, the accumulated amount may be included in the initial carrying amount; otherwise, recycling may occur when the hedged cash flows affect profit or loss.

Hedge accounting is not a mechanism for hiding losses. It requires disciplined designation, reliable measurement, ongoing monitoring and transparent disclosure.

7. IFRS 13 fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is an exit price, not necessarily the transaction price or an entity-specific value.

The principal market is the market with the greatest volume and level of activity for the asset or liability. If no principal market exists, the most advantageous market is used. The entity does not normally adjust fair value for transaction costs because transaction costs are not a characteristic of the asset or liability, although transport costs may be considered when location is a characteristic.

For non-financial assets, fair value considers the asset’s highest and best use, even if the entity intends a different use, provided the use is physically possible, legally permissible and financially feasible. For financial instruments, valuation focuses on market-participant assumptions, contractual features, credit risk, non-performance risk and relevant market inputs.

7.1 Valuation techniques

Three commonly used approaches are:

1. Market approach: uses prices and other information from market transactions involving identical or comparable instruments.
2. Income approach: converts future amounts, such as cash flows or earnings, into a single present value using an appropriate discount rate.
3. Cost approach: reflects the amount currently required to replace the service capacity of an asset; it is less common for complex financial instruments.

The selected technique should maximise observable inputs and minimise unobservable inputs. Examples of inputs include quoted prices, yield curves, credit spreads, volatility, prepayment assumptions and default probabilities.

7.2 The fair-value hierarchy

The hierarchy ranks inputs, not valuation techniques or the quality of the entity. A valuation can use several levels; classification is based on the lowest-level input that is significant to the entire measurement. Transfers between levels require appropriate policy and disclosure, including the reasons for transfers where required.

For Level 3 measurements, entities disclose valuation techniques, significant unobservable inputs, quantitative sensitivity information and a reconciliation of opening to closing balances. Sensitivity analysis should explain how reasonably possible alternative assumptions could affect fair value.

8. IFRS 7 risk reporting

IFRS 7 requires information enabling users to evaluate the significance of financial instruments and the nature and extent of risks arising from them. Risk disclosures should connect quantitative data with governance, policies, concentrations and management actions.

8.1 Market risk

Market risk includes currency risk, interest-rate risk and other price risk. Disclosures commonly include exposures at the reporting date, sensitivity analysis and methods used. A simplified linear sensitivity can be expressed as:

where ∆P is the approximate change in price, D is modified duration in years, P is current price, and ∆y is the change in yield expressed as a decimal. This approximation assumes a relatively small yield change and ignores convexity. It is an analytical tool, not a substitute for the entity’s required disclosure methodology.

For example, if a bond has a price of CU 1,000, modified duration of 4.5 and yields increase by 1% (0.01), the approximate price change is −4.5 × CU 1,000 × 0.01 = −CU 45. The estimated price is CU 955, before considering convexity and other effects.

8.2 Credit risk

Credit-risk disclosures should explain maximum exposure, collateral and other credit enhancements, concentrations, credit-quality information, past-due and impaired assets, loss allowances and changes in those allowances. ECL disclosures should make clear how forward-looking information, macroeconomic scenarios, probability weights, collateral and model adjustments affect the estimate.

8.3 Liquidity risk

Liquidity risk is the risk that an entity cannot meet obligations when due. Maturity analyses usually present undiscounted contractual cash flows, including principal, interest and other contractual amounts. The analysis should explain how the entity manages liquidity, including committed facilities, liquid assets, cash-flow forecasting, covenant monitoring and funding diversification.

9. Integrated illustrative case: Northbridge Manufacturing plc

This is a fictional illustrative case.

Background

Northbridge holds a portfolio of corporate bonds, issues convertible debt, enters into interest-rate swaps and sells goods on credit. Management reports that the bonds are “long-term investments,” but the treasury policy permits regular sales to manage liquidity and credit concentration.

Problems

At year-end, Northbridge must determine:

1. The classification of the bond portfolio.
2. The ECL allowance on bonds and receivables.
3. The presentation of its convertible notes.
4. The accounting for an interest-rate swap.
5. Fair-value hierarchy and risk disclosures.

Analysis and solution

Because the bonds are managed both to collect contractual cash flows and to sell, and because the cash flows pass the SPPI test, the portfolio is generally eligible for FVOCI debt classification. The conclusion depends on documented portfolio-level evidence, not the label “long-term.”

A bond with a CU 10 million exposure, a 3% probability-weighted default estimate and a 45% loss given default has an undiscouted one-period expected loss of:

CU 10,000,000 × 0.03 × 0.45 = CU 135,000

The reported ECL would also reflect timing, recoveries, multiple scenarios, discounting and whether lifetime rather than 12-month ECL is required.

The convertible notes require analysis of the conversion terms. If Northbridge must deliver a variable number of its own shares equal in value to a fixed monetary amount, the conversion feature generally fails fixed-for-fixed and is not equity. If the terms provide conversion into a fixed number of ordinary shares for a fixed amount, a compound classification may be appropriate.

The interest-rate swap is a derivative and is normally FVTPL. If it is formally designated in a qualifying cash-flow hedge of variable-rate debt, the effective portion may be recognised in OCI, subject to documentation and effectiveness requirements.

A quoted bond in an active market is likely Level 1. A swap valued from observable yield curves and credit spreads is generally Level 2. A structured bond relying significantly on internally estimated default correlations may be Level 3. Northbridge should disclose valuation techniques, inputs, sensitivity and movements in Level 3 balances.

Risk reporting should reconcile exposures with treasury policies. It should show credit concentrations, ECL movements, liquidity maturities and sensitivity to interest rates and foreign exchange. The board should challenge whether models remain calibrated to current conditions and whether incentives could encourage optimistic assumptions.

Outcome and learning points

The case demonstrates that classification is driven by contractual characteristics and management evidence; ECL is forward-looking rather than purely historical; legal form does not determine equity classification; hedge accounting requires designation and effectiveness; and fair-value and risk disclosures are most useful when they explain assumptions and governance rather than merely present numbers.

10. Governance, limitations and contemporary developments

Financial-instrument reporting depends heavily on models and judgement. Important limitations include thin markets, stale prices, model risk, uncertain recoveries, correlations that change in crises, incomplete historical data and the difficulty of distinguishing temporary volatility from permanent credit deterioration.

Effective governance should include independent model validation, clear approval of assumptions, back-testing, sensitivity analysis, documented overrides, segregation of duties and audit-trail controls. Boards and audit committees should ask whether assumptions are consistent with budgets, stress scenarios and observable market evidence.

Technology can improve data aggregation, real-time exposure monitoring and anomaly detection. Machine-learning models may assist default prediction, but they do not remove IFRS 9 accountability. Black-box models create explainability, bias, validation and governance risks. AI-generated classifications or disclosures should therefore be subject to qualified professional review, version control and evidence retention.

Contemporary reporting increasingly focuses on climate-related and other forward-looking risk drivers. Such factors may affect probability of default, collateral values, cash-flow forecasts, fair values and scenario weights when they are relevant and supportable. They should not be inserted mechanically into models without a defensible causal link. Consistency between risk management, prudential reporting, financial statements and sustainability reporting is essential.

Best practice is to maintain a standards-to-process map linking each instrument population to classification, valuation source, impairment method, hedge designation, owner, control and disclosure. Reconciliations between subledgers, valuation systems, general ledger balances and IFRS 7 tables should be performed before reporting is finalised.

Chapter Summary

IFRS 9 classifies financial assets through the business-model assessment and SPPI test, producing amortised cost, FVOCI or FVTPL outcomes. Its impairment model recognises forward-looking 12-month or lifetime ECL depending on changes in credit risk. Derecognition depends on expired rights, transfers of risks and rewards, control and continuing involvement.

IAS 32 focuses on contractual obligations and substance when distinguishing liabilities from equity. Compound instruments require separate component analysis, while offsetting is permitted only when strict legal and settlement conditions are satisfied. Derivatives are generally measured at FVTPL, but qualifying hedge relationships can align accounting with risk management.

IFRS 13 defines fair value as an orderly-market exit price and prioritises observable inputs through the Level 1–3 hierarchy. IFRS 7 requires transparent reporting of market, credit and liquidity risk, including concentrations, sensitivity, collateral, maturity information and ECL movements. Sound reporting requires integrated systems, documented judgement, model governance and professional scepticism.

Key Terms

Financial instrument: Contract creating a financial asset for one entity and a liability or equity instrument for another.

Financial asset: Cash or a contractual or ownership-based financial right.

Financial liability: Contractual obligation to deliver cash or another financial asset.

Equity instrument: Residual interest with no qualifying contractual obligation to deliver cash.

SPPI test: Assessment of whether cash flows are solely payments of principal and interest.

Business model: How an entity manages groups of financial assets to generate cash flows.

Amortised cost: Initial amount adjusted for repayments, effective-interest amortisation and impairment.

FVTPL: Fair value through profit or loss.

FVOCI: Fair value through other comprehensive income.

Effective interest rate: Rate that discounts estimated future cash flows to initial carrying amount.

Expected credit loss: Probability-weighted present value of expected cash shortfalls.

Credit-impaired: Condition in which one or more events adversely affect estimated future cash flows.

Derecognition: Removal of a recognised financial asset or liability from the statement of financial position.

Derivative: Instrument whose value responds to an underlying variable, usually with limited initial investment and future settlement.

Hedge accounting: Accounting alignment for a qualifying risk-management relationship.

Fair value: Exit price in an orderly transaction between market participants at the measurement date.

Principal market: Market with the greatest volume and level of activity for the item.

Level 3 input: Significant unobservable input used in fair-value measurement.

Liquidity risk: Risk of difficulty meeting obligations when due.

Market risk: Risk arising from changes in rates, prices, currencies or other market variables.

Review Questions

Short Answer Questions

1. What are the two principal tests used to classify financial assets under IFRS 9?
2. Distinguish 12-month ECL from lifetime ECL.
3. What is the fixed-for-fixed principle under IAS 32?
4. Define fair value under IFRS 13.
5. Name the three principal categories of market risk commonly disclosed under IFRS 7.

Long Answer Questions

1. Explain the classification and subsequent measurement of financial assets under IFRS 9, using examples of each category.
2. Discuss the IFRS 9 expected-credit-loss model, including staging, forward-looking information and model governance.
3. Explain liability-versus-equity classification and the accounting for compound financial instruments under IAS 32.
4. Compare fair-value hedges and cash-flow hedges, including the treatment of effective and ineffective portions.
5. Evaluate how IFRS 13 and IFRS 7 together improve users’ understanding of valuation uncertainty and financial risk.

Analytical / Application Questions

1. An entity holds bonds whose cash flows pass SPPI, but it regularly sells portions of the portfolio to manage liquidity. Analyse the likely business-model classification and identify evidence management should document.
2. A loan has an exposure of CU 2,500,000, a probability of default of 4% and loss given default of 50%. Calculate the one-period undiscounted expected loss, state the assumptions, and explain why it may differ from reported lifetime ECL.
3. A company issues a convertible note exchangeable for a variable number of its own shares equal to CU 5 million. Analyse the likely IAS 32 classification and explain what additional contractual facts would be needed before finalising the conclusion.

Multiple Choice Questions with Answers

Question 1

Which combination generally results in amortised-cost classification for a financial asset under IFRS 9?

A. Hold to collect business model and SPPI cash flows

B. Hold to sell business model and non-SPPI cash flows

C. Trading business model and SPPI cash flows

D. Any business model if the asset has a quoted market price

Correct Answer: A. Hold to collect business model and SPPI cash flows

Question 2

What does 12-month expected credit loss represent?

A. All losses expected over the asset’s entire life

B. Losses from default events possible within the next twelve months, probability weighted

C. The amount of cash overdue for twelve months

D. The decline in fair value during the next twelve months

Correct Answer: B. Losses from default events possible within the next twelve months, probability weighted

Question 3

Under IAS 32, which feature generally indicates a financial liability?

A. A discretionary dividend with no contractual obligation

B. A residual claim after all liabilities

C. A contractual obligation to deliver cash

D. A fixed number of shares issued for no consideration

Correct Answer: C. A contractual obligation to deliver cash

Question 4

Which input is normally a Level 1 fair-value input?

A. An internally estimated recovery rate

B. A quoted price for an identical instrument in an active market

C. A management forecast of volatility

D. An unobservable correlation assumption

Correct Answer: B. A quoted price for an identical instrument in an active market

Question 5

A bond has a price of CU 1,000 and modified duration of 4. If yield increases by 0.5%, what is the approximate price change using the duration approximation?

A. Increase of CU 20

B. Decrease of CU 20

C. Increase of CU 2

D. Decrease of CU 2

Correct Answer: B. Decrease of CU 20

Question 6

Which condition is required for offsetting a financial asset and financial liability under IAS 32?

A. The instruments have the same maturity date

B. The entity has a current legally enforceable right of set-off and intends net or simultaneous settlement

C. Both instruments are measured at amortised cost

D. The instruments are held by the same treasury department

Correct Answer: B. The entity has a current legally enforceable right of set-off and intends net or simultaneous settlement

Question 7

For a qualifying cash-flow hedge, where is the effective portion of the hedging instrument’s gain or loss generally recognised initially?

A. Other comprehensive income

B. Revenue

C. Share capital

D. Deferred tax expense only

Correct Answer: A. Other comprehensive income

Question 8

An exposure of CU 1,000,000 has a probability of default of 2% and loss given default of 40%. Ignoring discounting, what is the one-period expected loss?

A. CU 4,000

B. CU 8,000

C. CU 20,000

D. CU 400,000

Correct Answer: B. CU 8,000

Question 9

Which statement about IFRS 13 is correct?

A. Fair value is always the entity’s intended-use value

B. Transaction costs are normally deducted from fair value

C. Fair value is an exit price in an orderly transaction between market participants

D. Only quoted prices can be used to measure fair value

Correct Answer: C. Fair value is an exit price in an orderly transaction between market participants

Question 10

Which item is most directly associated with liquidity-risk disclosure under IFRS 7?

A. A maturity analysis of contractual cash flows

B. A reconciliation of Level 3 fair-value balances only

C. A sensitivity to foreign-exchange rates only

D. The issuer’s basic earnings per share

Correct Answer: A. A maturity analysis of contractual cash flows