An entity possesses the risk if the fair value or cash flow of financial instrument will fluctuate as a result of change in market prices.

Following disclosures need to be shown in financial statement:

• A sensitivity analysis of each type of market risk to which the entity is exposed showing how profit or loss and equity is affected.
• The methods and assumption used
• Sensitivities must be reasonably possible
• The changes from the previous period in the methods and assumptions and the reason for changes

 There are three types of market risk that an IFRS 7 addresses:

Currency exchange Risk, Interest Rate Risk & Price Risk

Currency Exchange risk is risk that an entity possess due to fluctuation in fair value or future cash flow because of change in exchange rate.

Generally the Corporate with frequent sale and purchase transactions in foreign denominated currency are more exposed to currency risk. Also Bank Borrowings held in foreign currency is also exposed to this type of risk.

Presentation of Exchange currency risk will require quantitative data about the entity’s exposure to a risk at the reporting date as:

 Disclosure would include as to much will be the impact on Profit or Loss and Equity if Dollar appreciate by X % against Rupee

And

Impact on Profit or Loss and Equity if dollar depreciate by X % against Rupee

This has to be given in respect of all the currencies to which an entity is exposed to.

Interest Rate Risk is risk that an entity possesses due to fluctuation in fair value or future cash flow because of changes in market interest rate. Example: Variable rate Borrowings

Interest rate primarily relate with respect to cash, short term deposits and external borrowings. External borrowings are mostly linked to LIBOR rates while cash and short term borrowings are affected by local markets prevailing in country.

All this has to be continuously tracked by an entity and disclosure has to be made in financial statement.

Price Risk is risk that an entity possesses due to fluctuation in fair value or future cash flow because of changes in market conditions other than Interest rate and Currency Exchange risk. An example is quoted equity investments held

Moreover an organization has to disclose as part of Risk Management policy the method / model adopted to measure those risk with respect to changes in Currency price, Interest rate and price risk changes and underlying assumptions used

All these information are available with organization for internal reporting but matter of attention with respect to management of an organization is that there needs to be drawn thin line which comply requirement of IFRS 7 as well as sensitive information is not disclosed to competitors.

Thus Companies has to be informative and well versed with requirement of IFRS 7.

 Author name: CA Shalini Tibe

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