Liquidity management
Liquidity management

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Liquidity management

5 IFRS and liquidity

When we examine financial risks we also need to look at what organisations are expected to disclose about them in their financial statements under International Financial Reporting Standards (IFRS). The key document here is Standard 7 (IFRS 7) which deals with disclosures about financial instruments. In doing this we are not just identifying accounting requirements that organisations must abide by: we are also examining risk management. The disclosures on financial instruments, specified in IFRS 7, enable investors and other stakeholders to have information about how an organisation manages its risks and what exposure to financial risks it has. The fact that these disclosures have to be made will, therefore, help to prescribe how organisations go about the business of managing their financial risks.

In respect of liquidity risk, paragraph 39 of IFRS 7 states that entities should disclose:

  • a maturity analysis for financial liabilities that shows the remaining contractual maturities; and
  • a description of how it manages the liquidity risk.

Appendix B of IFRS 7 then goes into some detail about how this contractual maturity analysis should be prepared. The expectations are that:

  • the maturity analysis should use time bands (e.g. up to one month; one to three months; three months to one year; one year to five years)
  • the maturity analysis should be at the earliest possible contractual date at which the entity can be required to repay its liabilities
  • the amounts disclosed should be the actual contractual cash flows and not the discounted value (i.e. the present value) of these future cash flows
  • the analysis should separately disclose the cash flows arising from the use of derivative financial instruments (like foreign currency swaps) that the entity may have employed in structuring its liabilities (e.g. where a foreign currency swap – or FX swap – had been used to change the currency exposure arising from the issue of a bond)
  • where amounts are not fixed (e.g. where the liability is linked to an index) the cash flow reported should be based on the level of the index (or other determinant of the amount) at the end of the financial reporting period (e.g. year-end).

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