IFRS Risk Assessment and Management 2 — Questions and Answers
Question 1: Under IFRS 7, which category of risk requires entities to disclose both the carrying amount and the maximum exposure to credit risk?
- Market risk
- Credit risk (Correct answer)
- Liquidity risk
- Operational risk
Correct answer: Credit risk
IFRS 7 requires disclosure of carrying amounts and maximum credit risk exposure for financial assets subject to credit risk.
Question 2: An entity measures the fair value of a financial liability using observable market inputs. Which IFRS 13 fair value hierarchy level applies?
- Level 1
- Level 2 (Correct answer)
- Level 3
- Level 4
Correct answer: Level 2
Level 2 inputs are observable market data other than quoted prices in active markets (Level 1), such as interest rates and yield curves.
Question 3: Which IFRS standard specifically addresses hedge accounting and the designation of hedging relationships?
- IFRS 9 (Correct answer)
- IFRS 7
- IAS 39
- IFRS 13
Correct answer: IFRS 9
IFRS 9 introduced a revised hedge accounting model aligning risk management with accounting treatment.
Question 4: A company's treasury sells a floating-rate bond and simultaneously enters into a pay-fixed, receive-floating interest rate swap. This strategy is best described as:
- Fair value hedge
- Cash flow hedge (Correct answer)
- Net investment hedge
- Speculation
Correct answer: Cash flow hedge
A cash flow hedge is used to fix variable cash flows — here, the swap converts floating receipts to fixed to hedge variability.
Question 5: Under IFRS 7, qualitative disclosures about market risk must describe how risks arise from financial instruments and the entity's:
- Tax planning strategies
- Objectives, policies, and processes for managing risk (Correct answer)
- Revenue recognition policies
- Depreciation methods
Correct answer: Objectives, policies, and processes for managing risk
IFRS 7 paragraph 33 requires qualitative disclosures on risk objectives, policies, and processes for managing each type of risk.
Question 6: When an entity discontinues a cash flow hedge because the hedged transaction is no longer expected to occur, what happens to amounts previously recognized in OCI?
- They remain in OCI indefinitely
- They are reclassified to profit or loss immediately (Correct answer)
- They are transferred to retained earnings
- They offset the hedging instrument's gain or loss
Correct answer: They are reclassified to profit or loss immediately
Under IFRS 9, if a hedged forecast transaction is no longer expected to occur, cumulative OCI amounts must be reclassified immediately to profit or loss.
Question 7: An entity with significant foreign currency receivables wants to hedge exchange rate risk. Which instrument would most directly create a fair value hedge of those receivables?
- A forward contract to sell the foreign currency (Correct answer)
- A forward contract to buy the foreign currency
- A floating-to-fixed interest rate swap
- A credit default swap
Correct answer: A forward contract to sell the foreign currency
Selling the foreign currency forward locks in the exchange rate, offsetting changes in the fair value of the foreign currency receivable.
IFRS Risk Assessment and Management 2
Under IFRS 7, which category of risk requires entities to disclose both the carrying amount and the maximum exposure to credit risk?