Sensitivity analysis

Learning objectives

• Explain the sensitivity analysis: reasonably possible changes in the relevant risk variables, effects on profit or loss and equity, methods and assumptions.L2
• Calculate the effect on profit or loss of a reasonably possible change in a rate applied to the exposure.L3

Normative references

• IFRS 7 §40Unless it applies para. 41 (value-at-risk type analysis), the entity discloses, for each type of market risk to which it is exposed at the end of the reporting period, a sensitivity analysis showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date, the methods and assumptions used, and changes from the previous period with the reasons for them.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• Aurore SA has floating-rate borrowings of {floating_debt} at the reporting date, unhedged. Management considers a rise in rates of {rate_change} reasonably possible for the next year (management's judgement, case data). Calculate the effect of this change on profit before tax, in absolute value (a rise in rates reduces profit); the tax effect is ignored.L3
• What does the sensitivity analysis for market risk include? Several answers are possible.L2
• Four employees from different groups describe their practice for the interest rate sensitivity analysis. Which of these practices is wrong?L3