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Corporate financial risk management:governance e disclosure dopo IFRS 7

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  • Arnaldo MAURI

    ()

  • Cesare CONTI

    ()

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

Suggested Citation

  • Arnaldo MAURI & Cesare CONTI, 2007. "Corporate financial risk management:governance e disclosure dopo IFRS 7," Departmental Working Papers 2007-22, Department of Economics, Management and Quantitative Methods at Universit√† degli Studi di Milano.
  • Handle: RePEc:mil:wpdepa:2007-22
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    File URL: http://wp.demm.unimi.it/files/wp/2007/DEMM-2007_022wp.pdf
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    References listed on IDEAS

    as
    1. Amy Hutton, 2004. "Beyond Financial Reporting An Integrated Approach to Disclosure," Journal of Applied Corporate Finance, Morgan Stanley, vol. 16(4), pages 8-16.
    2. Zhao, Longkai, 2004. "Corporate risk management and asymmetric information," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(5), pages 727-750, December.
    3. Lisa K. Meulbroek, 2002. "A Senior Manager'S Guide To Integrated Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(4), pages 56-70.
    4. Peter Dadalt & Gerald D. Gay & Jouahn Nam, 2002. "Asymmetric information and corporate derivatives use," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(3), pages 241-267, March.
    5. George J. Benston, 1997. "Accounting For Derivates: Back To Basics," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(3), pages 46-58.
    6. DeMarzo, Peter M. & Duffie, Darrell, 1991. "Corporate financial hedging with proprietary information," Journal of Economic Theory, Elsevier, vol. 53(2), pages 261-286, April.
    7. DeMarzo, Peter M & Duffie, Darrell, 1995. "Corporate Incentives for Hedging and Hedge Accounting," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 743-771.
    8. Neil A. Doherty, 2005. "Risk Management, Risk Capital, and the Cost of Capital," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(3), pages 119-123.
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    More about this item

    Keywords

    IFRS 7; Financial Risk; Risk Management; Risk Disclosure; Financial Reporting;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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