Financial Reporting · Financial Instruments: Disclosures

Liquidity Risk and Market Risk Disclosures under Ind AS 107

Updated 5 October 2026 · Fact-checked

Under Ind AS 107, you disclose liquidity risk through a maturity analysis of financial liabilities (undiscounted contractual cash flows in time bands) and a description of how you manage that risk. You disclose market risk through a sensitivity analysis showing how profit or equity would change for reasonably possible changes in each risk variable, with methods and assumptions.

Understand Liquidity Risk and Market Risk Disclosures

Ind AS 107 asks you to tell users how exposed the entity is to risks arising from financial instruments, and how it manages them. Credit risk, liquidity risk and market risk are the three risk areas. This page covers the last two.

Liquidity risk is the risk that the entity will have difficulty meeting obligations settled by delivering cash or another financial asset. The disclosure has three parts: a maturity analysis for non-derivative financial liabilities (including issued financial guarantee contracts), a maturity analysis for derivative financial liabilities, and a description of how you manage the liquidity risk inherent in those maturities. For derivatives, the maturity analysis covers only those derivative financial liabilities whose contractual maturities are essential to understanding the timing of the cash flows.

The maturity analysis shows remaining contractual maturities. The amounts are contractual undiscounted cash flows, so they include future interest and usually will not match the carrying amount on the balance sheet. Where a counterparty can choose when to be paid, the liability goes in the earliest period in which you can be required to pay. Instalments are placed in the period each one is due. Time bands are chosen by the entity, for example up to 1 year, 1 to 5 years and over 5 years.

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of market prices. It has three types: interest rate risk, currency risk and other price risk (such as equity prices or commodity prices). For each type you give a sensitivity analysis: how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at the reporting date. You also state the methods and assumptions used and any changes from the previous period.

The difference in one line: credit risk is about the counterparty not paying you, liquidity risk is about you not being able to pay others, and market risk is about prices moving. If an entity uses a value-at-risk type method that reflects interdependencies between risk variables and uses it to manage its financial risks, it may give that analysis in place of the sensitivity analysis for that risk only (interest rate, currency and other price risk). It must explain the method, its main parameters and assumptions, and its objective. All the other required disclosures, such as the maturity analysis and the risk management narrative, are still required.

Key rules to remember

Maturity analysis amount: Amount in each time band = undiscounted contractual principal + contractual interest falling due in that band; Not carrying amount and not present value. Total of the table usually exceeds the balance sheet figure.
Fixed vs floating interest sensitivity: Effect on profit before tax = floating-rate net exposure × change in rate (in percentage points) × time fraction; Only floating-rate instruments affect profit from a rate change on cash flows. Fixed-rate instruments at amortised cost have no profit effect from rate changes.
Currency sensitivity: Effect = foreign currency monetary exposure × change in exchange rate (₹ per unit); Use monetary items outstanding at the reporting date, in currencies other than the functional currency.
Other price risk sensitivity: Effect = fair value of exposed instruments × reasonably possible % change in price; Effect goes to profit or loss, or to OCI for equity instruments designated at FVTOCI.
Disclosure requirement for market risk: Sensitivity analysis for each type of market risk + methods and assumptions + changes from prior period; Based on reasonably possible changes, not worst case.

How to solve Liquidity Risk and Market Risk Disclosures questions

Use this sequence for any question on liquidity or market risk disclosure.

1Identify which risk is asked: liquidity (can the entity pay?) or market (interest rate, currency, other price).
2List the financial instruments and mark which are liabilities (liquidity) or exposed to the price variable (market).
3For liquidity, take each liability's contractual terms and compute undiscounted principal plus interest in each time band. Put on-demand items in the earliest band.
4For market risk, separate floating from fixed rate items, and separate foreign currency monetary items from functional currency items.
5Apply the reasonably possible change to the exposure. Compute the effect on profit or loss and, separately, on equity or OCI where relevant.
6Check the sign: an increase in rates raises finance cost on floating borrowings (reduces profit); a weaker rupee raises the rupee value of foreign currency payables.
7Add the narrative: how liquidity risk is managed, and the methods and assumptions for sensitivity.
8Reconcile where asked, for example the maturity total against carrying amounts, and state why they differ.

Quickest way: Table-first approach

When to use it: Use when the question gives a list of loans, payables and foreign currency balances and asks for the disclosure quickly.

Draw a three-column table with bands: up to 1 year, 1 to 5 years, over 5 years.
Fill each liability's principal and interest by due date, undiscounted.
Write the total and note it will not equal carrying amount.
For sensitivity, pick only floating-rate debt and foreign currency monetary items.
Multiply exposure by the given change and write the profit impact with its sign.
Close with one line each on risk management and the method used.

Common mistakes in Liquidity Risk and Market Risk Disclosures

Showing discounted or carrying amounts in the maturity analysis
Students copy balance sheet figures because they are easy to find.
Fix: Always use undiscounted contractual cash flows including future interest.
Placing a repayable-on-demand liability in a later band
Students follow the expected repayment pattern or the lender's past behaviour.
Fix: Use the earliest date the entity can be required to pay.
Applying an interest rate change to fixed-rate borrowings at amortised cost
Students treat every borrowing as rate-sensitive.
Fix: Apply the change to floating-rate items; fixed-rate amortised cost items show no profit effect.
Including functional-currency balances or non-monetary items in currency risk
Students include all balances regardless of currency.
Fix: Include only monetary items denominated in a currency other than the functional currency.
Mixing up credit, liquidity and market risk disclosures
All three sit under the same standard and sound alike.
Fix: Link each to its question: counterparty default, inability to pay, price movement.
Giving only numbers with no methods, assumptions or management description
Students focus on computation.
Fix: Always add the narrative lines the standard requires; marks are often attached to them.

Worked examples

Example 1

Case: Kaveri Ltd has a term loan of ₹10,00,000 repayable in two equal annual instalments of ₹5,00,000 at the end of year 1 and year 2, with interest at 10% p.a. paid annually on the outstanding balance. It also has trade payables of ₹2,00,000 due within 3 months. Prepare the maturity analysis for the bands up to 1 year and 1 to 5 years (reporting date is the start of year 1, so no interest has accrued yet).

Show the solution

At the reporting date no interest has accrued, so the carrying amount is only the principal: ₹10,00,000 loan + ₹2,00,000 payables = ₹12,00,000. All the interest is future interest.
Year 1 loan flows: principal ₹5,00,000 + interest 10% × ₹10,00,000 = ₹1,00,000, so ₹6,00,000.
Year 2 loan flows: principal ₹5,00,000 + interest 10% × ₹5,00,000 = ₹50,000, so ₹5,50,000.
Trade payables ₹2,00,000 fall due within 3 months, so they go in the up to 1 year band.
Up to 1 year: ₹6,00,000 + ₹2,00,000 = ₹8,00,000.
1 to 5 years: ₹5,50,000.
Total contractual cash flows: ₹8,00,000 + ₹5,50,000 = ₹13,50,000. Future interest is ₹1,00,000 + ₹50,000 = ₹1,50,000. Check: ₹12,00,000 + ₹1,50,000 = ₹13,50,000. The difference arises because the analysis is undiscounted contractual cash flow and includes interest not yet accrued.

Answer: Up to 1 year: ₹8,00,000; 1 to 5 years: ₹5,50,000; total ₹13,50,000 against carrying amount ₹12,00,000, the difference being ₹1,50,000 of future interest not accrued at the reporting date.

Example 2

Case: At the reporting date, Meera Ltd (functional currency ₹) has a floating-rate bank loan of ₹20,00,000 and a fixed-rate loan of ₹10,00,000 at amortised cost. It also has a US dollar payable of USD 50,000 and the closing rate is ₹80 per USD. Management considers a reasonably possible change of 1% in interest rates and ₹2 in the USD rate. Compute the effect on profit before tax for a full year, ignoring hedges.

Show the solution

Interest rate risk: only the floating loan is exposed. 1% × ₹20,00,000 = ₹20,000.
If rates rise by 1%, finance cost rises and profit falls by ₹20,000. If rates fall by 1%, profit rises by ₹20,000.
The fixed-rate loan at amortised cost has no profit effect from a rate change.
Currency risk: USD payable is a monetary item in a non-functional currency. Change = USD 50,000 × ₹2 = ₹1,00,000.
If USD strengthens to ₹82, the payable rises from ₹40,00,000 to ₹41,00,000 and profit falls by ₹1,00,000. If USD weakens to ₹78, profit rises by ₹1,00,000.
Disclose these amounts with the methods and assumptions, and state that the analysis assumes other variables are constant.

Answer: Interest rate: ±₹20,000 (profit falls if rates rise). Currency: ±₹1,00,000 (profit falls if USD strengthens by ₹2). The fixed-rate loan has no effect.

Exam tips

In maturity table questions, state clearly that amounts are undiscounted contractual cash flows and explain any difference from carrying amount.
For sensitivity, show the direction (increase or decrease) and the effect on both profit and equity where the case gives FVTOCI items.
Write the definition of each risk in one line first; theory questions often ask you to distinguish credit, liquidity and market risk.
Do not forget the narrative: how liquidity risk is managed, and the methods and assumptions used in sensitivity analysis.
In case-scenario MCQs, check whether an item is floating or fixed, and monetary or non-monetary, before computing.

Practice questions from Financial Instruments: Disclosures

Liquidity Risk and Market Risk Disclosures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Liquidity Risk and Market Risk Disclosures: frequently asked questions

What is the difference between credit, liquidity and market risk disclosures in Ind AS 107?

Credit risk is the risk a counterparty fails to pay the entity. Liquidity risk is the risk the entity cannot meet its own cash obligations. Market risk is the risk that fair values or cash flows change because of interest rates, exchange rates or other prices.

Are maturity analysis amounts discounted?

No. The maturity analysis uses undiscounted contractual cash flows, so future interest is included. The total therefore usually differs from the carrying amount.

What changes should I use in a sensitivity analysis?

Use changes in the risk variable that were reasonably possible at the reporting date. These are not worst-case scenarios. The question will usually give the percentage or rate change.

Does the sensitivity analysis cover equity as well as profit?

Yes. You show the effect on profit or loss and on equity. Equity price changes on instruments designated at FVTOCI affect other comprehensive income rather than profit.