A Quick Guide On IFRS 7 For Audit Firms In UAE

A Quick Guide On IFRS 7 For Audit Firms In UAE By : Audit Firms in Dubai Contact : +971 4 2500251

The financial instruments are perhaps the most complicated part of IFRS, and it’s a challenge for many audit firms in Dubai & UAE. In this article, Audit Firms in Dubai will guide you through the fundamentals of IFRS 7 and its reporting procedures. We shall reflect the explanations and opinions herein and arrive at a solid conclusion for streamlined reporting on IFRS 7.

IFRS 7 requires companies in Dubai & UAE to disclose quantitative risk analysis, which is hard to find in places other than front-office trading desks. Interestingly, many audit firm experts in Dubai & UAE don’t know where to start.

Notably, IFRS 7 features four quantitative areas of concern: 1.

Market Risk: A detailed summary of how changes in the business environment and markets in the future will affect assets.

2.

Liquidity Risk: Auditors need to evaluate when cash flow payments from illiquid assets are due.

3.

Credit Risk: When it comes to credit risk, there are higher chances businesses don’t see scheduled payments, which are essential to quantify.

4.

Concentration Risk: It is also essential to describe if we are exposed to certain geographies, companies, currencies, etc.

Unsafe Business Before embarking on each requirement in detail, let us consider risk analysis. Risk is intangible yet practical and tangible. Usually, people feel potential danger and do their best to avoid the feeling.

Like any other risk, financial risk can not entirely be measured directly. Quantitative risk analyses are meant to approximate various risks feeling. When stakes are appropriately accounted for, it makes everything else smooth.

Market Risk Analysis To begin with, audit firms in Dubai are expected to create an overview of sensitivity analysis for the market risk factor. Discovering various risk factors is a work of art itself.

However, the risks are often derived from the data required to value a security.

For instance, the market risk factors of a bond are its issuer’s interest rate and credit quality. Employee stock option is the underlying price and volatility of the cost. The sensitive analysis will shock these elements. The shock values will then be fed into the quantitative valuation models to determine a loss figure.

While this may sound easier theoretically, it demands a lot of care. Keep in mind that if the management of a company already uses other market risk measures, the internal auditors can leverage them too. The goal is to have a clear picture of corporate risk mitigation.

Liquidity Risk To begin with, audit firms in Dubai are expected to create an overview of sensitivity analysis for the market risk factor. Discovering various risk factors is a work of art itself.

However, the risks are often derived from the data required to value a security.

For instance, the market risk factors of a bond are its issuer’s interest rate and credit quality. Employee stock option is the underlying price and volatility of the cost. The sensitive analysis will shock these elements. The shock values will then be fed into the quantitative valuation models to determine a loss figure.

While this may sound easier theoretically, it demands a lot of care. Keep in mind that if the management of a company already uses other market risk measures, the internal auditors can leverage them too. The goal is to have a clear picture of corporate risk mitigation.

Credit Risk Ever-topically, analytical credit risk measures are required for assets that have run into trouble or those without any other means to assess their credit quality.

Luckily this is not difficult if we already have the quantitative models to calculate market and liquidity risk.

We are usually looking for a credit spread for each fixed income asset. We find this by jotting down the asset’s current fair value and then valuing it as if it were valued like a government bond.

The difference is the ‘Credit Value Adjustment’ or CVA. The larger the difference, the larger the credit difficulties, of course. With the suitable quantitative model, we can encapsulate this risk in a number called the credit spread.

Concentration Risk Summarizing this information correctly is often an art rather than a science. Most of the time, for example, duration needs to be aggregated as a weighted average of each security’s current net present value—most of the time.

Once we summarize at the top level, we can also buckle our risk by more qualitative means. Are we exposed to a specific country, industry or currency more than is ideal? Apart from anything else, identifying these concentrations is sound management practice.

Summing up Glady, we auditors in Dubai have given you a taste of risk analysis and convinced you to take a bite. If you still need more understanding into this topic, you can hover through our blog section for detailed explanation.

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