Corporate Financial Risk Management: Governance and Disclosure after IFRS 7

Università degli Studi di Milano Economics, Business and Statistics Working Paper No. 2007-22

17 Pages Posted: 16 May 2007

See all articles by Arnaldo Mauri

Arnaldo Mauri

Università Degli Studi di Milano

Cesare Conti

Bocconi University - Department of Finance

Date Written: May 2007

Abstract

Corporate Financial Risk Management (CFRM) concerns the management of financial price risks in corporate entities, namely interest rates, exchange rates and the prices of commodities. Since its first implementation in the 80s, CFRM has evolved in three main steps. In the first step, banks designed new structured products, exploiting their deep knowledge of financial engineering. Secondly, practitioners have developed best practices concerning the correct use of derivatives in corporate entities, focusing on the organization and the reporting of the process of CFRM. The third step is now under way. In this step the main change concerns the regulatory and accounting context of CFRM.

Up to now, the new regulatory context has deeply influenced the operations of corporate entities. A first very evident impact concerns the less frequent use of complicated structured derivative products. Moreover, new protagonists of the process of CFRM have developed rapidly. Accounting managers have been obliged to thoroughly understand the economics of derivatives, while the Board, the auditors and external financial analysts have become more deeply involved in the process of CFRM. Unfortunately, this revolution has not been accompanied by an adequate change in the language of CFRM, which is actually too complex for both the Board and external analysts. The Board is not in the position to guide and control the process of CFRM, while external analysts have not the necessary information to understand if CFRM has an impact on earning quality and value creation. Only the language of value creation could help in overcoming those problems. Such a language could allow the Board to improve the governance of the process of CFRM and, consequently, to communicate what analysts really need through proper risk disclosure. From January 2007, IFRS 7 (International Financial Reporting Standard 7) has introduced a new approach to risk disclosure. This is a good opportunity to design and implement a reporting system which exploits the language of value creation.

The first paragraph of this paper describes the main aspects of the new regulatory context of CFRM. The second paragraph explores some revolutionary improvements brought about by IFRS 7. The remaining paragraphs pose the main steps to create a language of CFRM that is apt for the governance and the disclosure of CFRM.

Note: Downloadable document is in Italian.

Keywords: IFRS 7, Financial Risk, Risk Management, Risk Disclosure, Financial Reporting

JEL Classification: D82, G32, M42

Suggested Citation

Mauri, Arnaldo and Conti, Cesare, Corporate Financial Risk Management: Governance and Disclosure after IFRS 7 (May 2007). Università degli Studi di Milano Economics, Business and Statistics Working Paper No. 2007-22. Available at SSRN: https://ssrn.com/abstract=986544 or http://dx.doi.org/10.2139/ssrn.986544

Arnaldo Mauri (Contact Author)

Università Degli Studi di Milano ( email )

Milan, 20122
Italy

Cesare Conti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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