IFRS reporting – Matters arising on Derivatives

It is over six years that Nigeria adopted the International Financial Reporting Standards (IFRS) to align the country with global reporting. Initially, there was deep apprehension around the success potentials of the implementation roadmap. Some people/entities thought that the road map may be hitched and may have to be suspended at a point in time; but that is not the reality at this moment. The reality is that IFRS reporting has debuted successfully and every stakeholder (private and public sector) is expected to hone their understanding and skills for compliance with this global reporting framework.

This week our focus is on derivative financial instruments and our readers are expected to relate the theories to actual implementation results to ensure that identified gaps are addressed. I do not envisage a material gap that may trigger the application of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. However, where material gaps are identified, it will be imperative to notify those charged with governance in the organisation and the Independent Auditors.

All derivatives are accounted for in the statement of financial position at fair value, irrespective of whether they are used as part of a hedging relationship. Changes in fair value are recognised in profit or loss unless the contract is designated in an effective hedging relationship under which some or all of the derivative gains and losses are required to be presented in other comprehensive income.

The definition of a derivative is broad enough to scope in contracts that were not intended to result to a derivative financial instrument. But, by nature of the wording of the contract and available documentation, a derivative instrument could ensue. This involuntary derivative instrument could be very costly to the organisation if the counterparty intended the contract to be a derivative or decided to capitalised on the professional ineptitude of the other counterparty. In instances of mutual misunderstanding, contracts could be redrafted at the transition date. This window is not available post IFRS transition. It is imperative to seek independent accounting opinion and/or legal opinion (from a practitioner that is registered under FRCN Act, 2011) on complex financial transactions.

At this post-implementation phase, there is need to revisit the sections on recognition, measurement, and classification of financial instruments in the entities’ IFRS accounting manual. Entities without IFRS accounting manual are expected to fix this gap and ensure that the manual is available to all financial reporting personnel.

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