Oct 28 2011

Disclosure of off-balance sheet commitments

Category: GuidanceFinancial Translator @ 9:04 am

Disclosure of off-balance sheet commitments in the notes to the consolidated financial statements has been made mandatory under International Financial Reporting Standards and various AMF recommendations.

The AMF also recommends including in the Registration Document a summary of off-balance sheet commitments not required under International Financial Reporting Standards.

Definitions

As per International Financial Reporting Standards

Pursuant to IAS 1, the notes to the consolidated financial statements must include disclosures required under the various International Financial Reporting Standards that are not included in the statement of financial position (formerly the “balance sheet”), statement of income, statement of changes in equity and statement of cash flows (for example certain disclosures required under IAS17,  IAS19, IAS37,  IAS32/IFRS7… ), namely:

  • contingent liabilities as defined in IAS 37 and in particular financial guarantees, representations and warranties (“garanties de passif”)…;
  • restrictions on title, and property, plant and equipment pledged as security for liabilities;
  • commitments to purchase property, plant and equipment;
  • disclosures on operating and finance leases;
  • the fair value of financial assets and liabilities;
  • restrictions on the ability of subsidiaries to transfer funds to the parent;
  • firm contractual commitments (i.e. not options)

 

As per AMF recommendations

In the AMF’s view, the International Financial Reporting Standards do not cover all off-balance sheet commitments, and so some must be covered directly in the Registration Document. To improve transparency of these off-balance sheet commitments, the AMF recommends that issuers aggregate the disclosures and present a two year summary broken down as follows:

  • Off-balance sheet commitments relating to the scope of consolidation;
  • Off-balance sheet commitments relating to an issuer’s financing;
  • Off-balance sheet commitments relating to an issuer’s operations.

In the case of certain more complex commitments, more detailed disclosures are required in order to explain the mechanism and the resulting potential liabilities. What is required is a description of the type of commitment and when it will expire along with the known and likely financial impact.

This is notably the case of disclosures required with respect to business combinations.

 

A. Off-balance sheet commitments relating to the scope of consolidation

These primarily represent:

  • commitments to acquire equity interests that are not recognised because they are deemed not likely to be realised or can’t be reliably estimated;
  •  disclosures on any unconsolidated special purpose entities;
  • commitments given or received as part of particular transactions,  commitments related to competition or the market, or indeed commitments to purchase assets;
  • commitments to retain securities for tax reasons.

 

B. Off-balance sheet commitments relating to an issuer’s financing

This mainly involves disclosures required under IFRS 7 for example: undrawn credit facilities, financial  guarantees….

 

C. Off-balance sheet commitments relating to an issuer’s operations

These primarily represent commitments arising from operations and business development (site, operational maintenance, contractual commitments, investment commitments…) and commitments arising from the performance of operating contracts (performance bonds, pledges, mortgages…).

 

Tags: AMF, IFRS, Off-balance sheet commitments

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