IFRS 7 Financial Instruments Disclosures

Q: What does IFRS 7 apply to?

IFRS 7 Financial Instruments Disclosures apply to all entities with financial instruments, whether they are recognized on the balance sheet or not. This includes loans and receivables, derivatives, credit card contracts, and insurance contracts with financial components (as outlined under IFRS 4).

Q: How does IFRS 7 differ from IFRS 4, IFRS 17, and IAS 32?

IFRS 7 focuses purely on disclosures. IFRS 4 applies to insurance contracts and includes disclosures about financial risks. IFRS 17 replaces IFRS 4 but still defers some disclosure responsibilities to IFRS 7. IAS 32 deals with how financial instruments are presented (equity vs. liability).

Q: Does IFRS 7 apply to insurers?

Yes. Insurers must apply IFRS 7 for the financial instruments they hold or issue. IFRS 4 helps bridge the gap for insurance-related disclosures, especially for contracts with financial guarantees or embedded derivatives.

Q: Are there any exemptions from IFRS 7?

Not in a general sense. However, entities with fewer instruments may have simpler disclosures. Wholly owned subsidiaries are not exempt, despite limited public interest. IFRS 4 and IFRS 17 may override IFRS 7 in specific cases for insurance disclosures.

Q: What are the limitations of IFRS 7?

Many entities struggle with meeting the full scope of IFRS 7 Financial Instruments Disclosures, especially regarding credit and liquidity risk. Key limitations include a disclosure-only focus, complexity for users (particularly for derivatives and hedging), and reliance on management judgment, which may reduce comparability between entities.

IFRS Guide>>

July 24, 2025

Table of Contents

– Introduction

– Key Takeaways

– What is IFRS 7 Financial Instruments Disclosures?

– Objective of IFRS 7 Financial Instruments Disclosures

– What are Financial Instruments?

– History of IFRS 7

– Scope of IFRS 7

– Key IFRS 7 Disclosure Requirements

– IFRS 7 Adoption in Kenya

– Frequently Asked Questions (FAQs)

What does IFRS 7 apply to?
How does IFRS 7 differ from IFRS 4, IFRS 17, and IAS 32?
Does IFRS 7 apply to insurers?
Are there any entities exempt from IFRS 7 compliance?
What are the limitations of IFRS 7?

– Conclusion

– Next Steps

– Disclaimer

– Sources

Introduction

IFRS 7 – Financial Instruments Disclosures is an International Financial Reporting Standard issued by the IASB that mandates companies to disclose detailed and structured information about the financial instruments they hold – such as loans, investments, derivatives, and liabilities.

These disclosures help stakeholders assess an entity’s exposure to financial risks and how those risks are managed.

In this article, we will take an in-depth look at IFRS 7 – Financial Instruments Disclosures – what it entails, its key disclosures and provisions, and where exemptions may apply.

We’ll also explore some FAQs, look at how IFRS 7 works alongside IFRS 4, IFRS 9, and IAS 32, and dive into how Kenya has adopted this standard.

Let’s dive right in!

Key Takeaways

IFRS 7 Financial Instruments Disclosures ensure transparency in how companies present their financial instruments and related risks.
It applies to all entities holding financial instruments, regardless of size or industry.
The standard focuses purely on disclosure, not recognition or measurement – that’s handled by IFRS 9, IFRS 4, and IAS 32.
It requires risk-focused disclosures across the balance sheet, income statement, and notes.

In Kenya, IFRS 7 is mandatory for all IFRS-reporting entities, especially banks and insurers.

What is IFRS 7 Financial Instruments Disclosures ?

IFRS 7 is a disclosure-based reporting standard that obligates companies to provide users of financial statements with information on:

The significance of financial instruments to their financial health.
The nature and extent of risks associated with those instruments.
The company’s approach to managing such risks.

IFRS 7 complements:

i) IFRS 9, which focuses on recognition and measurement

ii) IAS 32 on presentation and classification of Financial Instruments

iii) IFRS 4, which governs disclosures around insurance-related contracts and financial risks.

Among the various IFRS disclosures, IFRS 7 stands out for its detailed treatment of financial risk

IFRS 7 Financial Instruments Disclosures apply to all entities that hold financial instruments, regardless of industry.

Objective of IFRS 7 Financial Instruments Disclosures

The primary goal of IFRS 7 is to provide financial statement users with clear, decision-useful information on:

The importance of financial instruments to the business’s financial position and performance.
The types of risks (credit, liquidity, and market risk) that arise from these instruments.
How those risks are managed, including the methods, controls, and sensitivity assessments used.

What are Financial Instruments?

Financial instruments are contracts that represent a financial asset to one party and a financial liability or equity instrument to another.

They can be tangible or virtual and are used to raise capital, manage risks, or facilitate investment.

Example:

If a company borrows KSh 5 million from a bank, the bank records a financial asset (the right to receive repayments), while the borrower records a financial liability (the obligation to repay).

Types of Financial Instruments Recognized by IFRS 7

Some common examples of Financial Statements include:

Bonds
Treasury bills
Shares (equity)
Derivatives (forwards, options, swaps)
Loans and receivables
Insurance-linked financial instruments governed under IFRS 4

The disclosure of financial instruments under IFRS 7 ensures users of financial statements understand the associated risks.

History of IFRS 7 - Financial Instruments Disclosures

Year	Event
August 2005	The International Accounting Standards Board issued IFRS 7 as part of its broader initiative to improve disclosures about financial instruments and risk exposures.
January 2007	IFRS 7 became effective replacing the former disclosure requirements in IAS 30 and Parts of IAS 32.
2009 – 2011	Various amendments were made to improve disclosures in response to the global financial crisis, particularly relating to fair value hierarchy and liquidity risks. One of the amendments is the introduction of a 3-level fair value disclosure
2014 onwards	IFRS 9 replaced IAS 39 in the measurement and recognition of financial instruments. However, IFRS 7 remained as the key standard for disclosures and was updated to align with IFRS 9
Ongoing	IFRS 7 has undergone minor amendments and clarifications in order to improve its clarity and harmonize with IFRS 9 and IFRS 13 (Fair Value Measurement).

Scope of IFRS 7 Financial Instruments Disclosures

IFRS 7 applies to all entities that hold or issue:

Recognised or unrecognised financial instruments under IFRS 9.
Derivatives embedded in insurance contracts (as required under IFRS 9 and IFRS 4).
Financial guarantees, credit cards, or investment components tied to insurance contracts.
Contracts to buy/sell non-financial items, if within IFRS 9.
Hybrid financial instruments, if they contain embedded derivatives.

IFRS 7 does NOT apply to:

Interests in subsidiaries, associates, or joint ventures (IFRS 10, IAS 27, IAS 28).
Employee benefits under IAS 19.
Certain insurance contracts with discretionary participation features (IFRS 4/17).
Share-based payment transactions unless falling under IFRS 9.
Financial Instruments classified strictly as equity under IAS 32.

Key IFRS 7 Financial Instruments Disclosure Requirements

1. Statement of Financial Position

Entities must disclose the carrying amounts of the following categories:

Financial assets at fair value through profit or loss (split between designated vs. held for trading).
Held-to-maturity investments.
Loans and receivables.
Available-for-sale financial assets.
Financial liabilities (by fair value or amortised cost).

2. Allowance for Credit Losses

If impairment is tracked in a separate account, companies must disclose a reconciliation of changes in the allowance for each asset class.
This links closely to IFRS 9’s ECL model and complements IFRS 4 in insurance contract reporting.

3. Defaults and Breaches

Disclose:

Defaults on loans at the reporting date.
Whether the default was remedied or renegotiated before the financial statements were authorized.

4. Statement of Comprehensive Income

Include:

Net gains/losses by instrument class.
Interest income/expense (excluding fair value items).
Fee income/expense on trust/fiduciary activities.
Interest on impaired assets.
Impairment losses by class.

N/B: Entities must disclose exposure to credit risk, market risk, and liquidity risk as part of IFRS 7 Financial Instruments Disclosures

IFRS 7 Adoption in Kenya

IFRS 7 was officially adopted in 2007 for Kenyan companies reporting under IFRS.

Here’s how it has evolved:

Year	IFRS 7 Development
2007	IFRS 7 was adopted by listed firms, banks, and insurers.
2016	Post the 2016 Banking crisis, The Central Bank of Kenya enforced more granular disclosures on credit and liquidity risks.
2018	IFRS 9 rollout triggered alignment with IFRS 7’s credit loss disclosures, requiring enhanced risk transparency.

Insurance compliance: Insurers follow both IFRS 7 and IFRS 4/17, especially where financial instruments are embedded in insurance products.

Professional training: ICPAK and the Financial Reporting Centre continue to run ongoing programs to build capacity.

Implementation hurdles: SMEs and state corporations still face complexity issues – but regulatory agencies are pushing for practical compliance models.

Frequently Asked Questions (FAQs) on IFRS 7 Financial Instruments Disclosures

1. What does IFRS 7 apply to?

IFRS 7 Financial Instruments Disclosures apply to all entities with financial instruments, whether they are recognized on the balance sheet or not.

This includes:

Loans and receivables
Derivatives
Credit card contracts
Insurance contracts with financial components (as outlined under IFRS 4)

2. How does IFRS 7 differ from IFRS 4, IFRS 17, and IAS 32?

IFRS 7: Focuses purely on disclosures.
IFRS 4: Applies to insurance contracts and includes disclosures about financial risks.
IFRS 17: Replaces IFRS 4 but still defers some disclosure responsibilities to IFRS 7.

IAS 32: Deals with how financial instruments are presented (equity vs. liability).

3. Does IFRS 7 apply to insurers?

Yes. Insurers must apply IFRS 7 for the financial instruments they hold or issue.
IFRS 4 helps bridge the gap for insurance-related disclosures, especially for contracts with financial guarantees or embedded derivatives.

4. Are there any exemptions from IFRS 7?

Not in a general sense. However:

Entities with fewer instruments may have simpler disclosures.
Wholly owned subsidiaries are not exempt, despite limited public interest.
IFRS 4 and IFRS 17 may override IFRS 7 in specific cases for insurance disclosures.

5. What are the limitations of IFRS 7?

Many entities struggle with meeting the full scope of IFRS 7 Financial Instruments Disclosures, especially regarding credit and liquidity risk.

Some key limitations of IFRS 7 include:

Disclosure-only focus: It doesn’t provide guidance on measurement or recognition.
Complexity for users: Risk disclosures (especially for derivatives and hedging) can be highly technical.
Judgment-heavy: Relies on management assumptions, which may reduce comparability between entities.

Conclusion

IFRS 7 Financial Instruments Disclosures continue to play a critical role in financial reporting, particularly in emerging markets like Kenya.

While it doesn’t handle recognition or classification, it ensures that investors, regulators, and stakeholders understand a company’s risk exposures and how those risks are being handled.

To fully comply, companies must integrate IFRS 7 with IFRS 4 (insurance disclosures), IFRS 9 (measurement), and IAS 32 (presentation).

For Kenyan companies, the regulatory environment is increasingly pushing for transparency, especially in banking and insurance sectors.

In conclusion, understanding IFRS 7 Financial Instruments Disclosures is essential for compliance, comparability, and investor confidence.

Next Steps

Are you interested in further understanding how IFRS 7 can be implemented in your firm’s financial reporting and which clauses to adhere to?

Clear the brain fog and contact our experts at Mugo & Co.

We’ll help you break down compliance into simple, actionable steps.

Disclaimer

This article doesn’t constitute professional advice.

For any specific enquiry on IFRS 7 Adoption in Kenya, please Contact your financial adviser or reach out to our team at Mugo & Co. today to schedule a consultation.