how does pfrs 7 define “liquidity risk”?
How does PFRS 7 define “liquidity risk”?
Answer:
The Philippine Financial Reporting Standard (PFRS) 7 defines liquidity risk as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. It explains that liquidity risk encompasses both funding liquidity risk and market liquidity risk.
Funding liquidity risk is the risk that an entity will not be able to meet its obligations as they fall due. Market liquidity risk, on the other hand, is the risk that an entity will not be able to sell or buy assets quickly enough at a price that reflects their value.
PFRS 7 requires entities to disclose their exposure to liquidity risk, including qualitative and quantitative information about their risk management policies and procedures. This standard aims to provide users of financial statements with a better understanding of an entity’s liquidity risk profile and how it is being managed.