The Institute of Chartered Accountants of Sri Lanka, in terms of the Sri Lanka Accounting and Auditing Standards Act No 15 of 1995, has decided to issue Sri Lanka Accounting Standard No 46, Financial Instruments: Disclosure as an Exposure Draft (ED).

This ED is based on the corresponding International Financial Reporting Standard No 7 Financial Instruments: Disclosure, and is expected to be effective for financial periods beginning on or after January 1, 2011, the institute said.

It said the reasons for issuing the SLAS was because in recent years, the techniques used by entities for measuring and managing exposure to risks arising from financial instruments have evolved and new risk management concepts and approaches have gained acceptance. “In addition, many public and private sector initiatives have proposed improvements to the disclosure framework for risks arising from financial instruments,” it said.

Globally users of financial statements need information about an entity’s exposure to risks and how those risks are managed. Such information can influence a user’s assessment of the financial position and financial performance of an entity or of the amount, timing and uncertainty of its future cash flows. Greater transparency regarding those risks allows users to make more informed judgements about risk and return, the institute added.

Among the main features of the ED are that it pplies to all risks arising from all financial instruments, except those instruments listed in paragraph 3 of the Exposure Draft. This Standard once adopted applies to all entities, including entities that have few financial instruments (eg a manufacturer whose only financial instruments are accounts receivable and accounts payable) and those that have many financial instruments (eg a financial institution most of whose assets and liabilities are financial instruments). However, the extent of disclosure required depends on the extent of then entity’s use of financial instruments and of its exposure to risk.