What’s Changing: IFRS 7 Amendment Effective 1 January 2026

Disclaimer: This article is intended for general information only and does not constitute personal financial advice under UAE regulations governing financial blogs and advertisements.

On 18 July 2024, the International Accounting Standards Board (IASB) issued a set of narrow-scope changes under its “Annual Improvements to IFRS Accounting Standards – Volume 11,” which includes amendments to IFRS 7 (Financial Instruments: Disclosures) and its accompanying guidance. The amendments — along with parallel changes to IFRS 9 (Financial Instruments) — are effective for annual reporting periods beginning on or after 1 January 2026, though early adoption is permitted if disclosed.

The aim is not a sweeping overhaul but targeted clarification and improvement — correcting wording ambiguities, updating references, improving consistency across standards, and enhancing disclosure requirements in certain circumstances.

Key Changes Introduced by the Amendment

1. Enhanced Disclosure Requirements for Financial Instruments

The amendment to IFRS 7 introduces additional disclosure obligations, particularly for:

• Equity instruments designated at fair value through other comprehensive income (FVOCI);

• Financial instruments whose contractual terms permit changes in the timing or amount of contractual cash flows — for example, contingent cash flows or contingent features.

These disclosures aim to provide users of financial statements with clearer insight into the nature of the entity’s financial instruments and any embedded risks — including variability and uncertainty of future cash flows.

2. Derecognition of Financial Liabilities Settled via Electronic Transfers

Under the parallel amendments to IFRS 9, a financial liability settled through an electronic payment system may — under specified conditions — be derecognised before the actual settlement date. Corresponding disclosures under IFRS 7 have been updated.

3. New Disclosure Requirements for Contracts Involving Nature-Dependent Electricity

In December 2024, the IASB published further narrow-scope amendments titled Contracts Referencing Nature‑dependent Electricity — also affecting IFRS 7. These are particularly relevant for entities purchasing electricity from renewable sources (e.g., wind or solar) under contracts where delivered volumes may vary due to natural conditions. The key changes:

• Clarification of the “own-use” exemption for such electricity contracts under IFRS 9.

• Permitting hedge accounting where a contract references a variable volume of electricity (i.e., not just fixed-price hedging).

• New disclosure requirements under IFRS 7: entities must disclose the contractual features that cause variability in the electricity volume, any commitments to buy electricity, estimated future cash flows under such contracts, and potential risks — such as purchasing electricity when the firm cannot use it, or buying beyond need.

These amendments take effect from 1 January 2026 (with retrospective application for the “own-use” part and prospective application for hedge-accounting designations).

4. Editorial and Reference Updates

As part of the “Annual Improvements,” IFRS 7’s guidance has been refined: certain obsolete cross-references have been updated (e.g., paragraph B38 amended), wording clarified, and the implementation guidance adjusted to reinforce that practical-guidance examples do not cover every possible scenario.

Why It Matters: Practical Consequences for Corporates and Financial Institutions

For entities reporting under IFRS — including those based in the UAE or the broader Gulf region — these amendments matter because they:

• Increase transparency over complex financial instruments. Disclosure of contingent features, variable cash-flow instruments, and equity instruments measured at FVOCI will allow investors, regulators, and other stakeholders to better assess risk exposures.

• Improve clarity in derecognition practices, especially for liabilities settled electronically — an increasingly common scenario in modern financial systems. This helps avoid divergence in practice.

• Reflect evolving business models — for example, in power purchase agreements (PPAs) tied to renewable energy contracts. The new disclosure and hedge accounting provisions for nature-dependent electricity contracts align accounting with evolving commercial and environmental practices.

• Promote consistency and comparability across jurisdictions and industries, especially as more firms globally — including in the UAE — adopt IFRS.

What Does Not Change

These amendments are narrow in scope. They do not fundamentally rewrite IFRS 7’s core objectives: disclosure remains geared toward enabling users of financial statements to understand the significance of financial instruments for financial position and performance; the nature and extent of related risks; and how the entity manages those risks.

There is no wholesale change to classification or measurement rules — those continue to lie primarily within IFRS 9. The IFRS 7 amendments deal only with disclosure, derecognition timing for certain liabilities, and enhancements reflecting new types of contracts (e.g., nature-dependent electricity).

What Preparers Should Do Ahead of 2026

1. Review financial-instrument portfolios to identify any instruments with contingent features, or with contractual terms that could vary cash flows — instruments that now require additional disclosures under IFRS 7.

2. Evaluate payment and settlement processes — particularly for financial liabilities settled via electronic transfers — to determine if early derecognition is possible under the new guidance, and document the accounting policy accordingly.

3. For entities with electricity purchase contracts (or similar nature-dependent supply contracts): assess whether such contracts meet the criteria under the new amendments, consider whether to treat them under own-use or as financial instruments, and prepare for the new disclosure and hedge-accounting rules.

4. Update disclosure templates and notes to financial statements — ensure that the additional required disclosure fields (contingent terms, credit risk, commitments, contingent cash-flows, electricity contracts if relevant) are included.

5. Train accounting and treasury/contract teams — make sure that both accounting and operational staff (e.g., those negotiating contracts) understand the implications for accounting and disclosures.

Conclusion

The 1 January 2026 amendment to IFRS 7 may appear, at first, modest in scope — refining disclosure requirements, updating derecognition rules for certain liabilities, and adding clarity around specific contracts (notably nature-dependent electricity). However, in an evolving financial and economic environment — with greater use of contingent-feature instruments, electronic settlements, and green-energy contracts — these changes are timely and important.

For companies operating in the UAE and internationally, the amendments reinforce the importance of transparent financial reporting and risk disclosure. Entities should use the remaining lead time to review portfolios, update accounting policies and disclosure frameworks, and coordinate between finance, treasury, and contract-management teams.

By doing so, firms can ensure compliance with the updated IFRS requirements and provide stakeholders with financial statements that reflect both traditional and emerging financial-instrument risks in a clear, comparable, and compliant manner.

Photo by Carlos Muza