Accounting Guidance Note
No. 2009/1
Accounting guidance notes are intended for use by Australian Government reporting entities
covered by:

S49 of the Financial Management and Accountability Act 1997; or

Clause 2 of Schedule 1, of the Commonwealth Authorities and Companies Act 1997.
The aim of the accounting guidance notes is to provide non-mandatory explanation and examples
relating to the interpretation and application of Australian Accounting Standards and the Finance
Minister’s Orders to the above entities.
Impairment of Available-for-Sale Equity Financial
Instruments – Clarification of Paragraph 61 of
AASB 139
Background
The Global Financial Crisis has had a significant negative effect on the value of assets
and liabilities across the world.
Impairment of these assets and liabilities has the potential to have a very significant
impact on an agency’s operating result.
A particular issue has arisen in respect of the interpretation of a specific provision of
one of the accounting standards, regarding impairment of financial instruments that
are classified as equities.
This accounting guidance note is not intended to fully explain the impairment
provisions of the accounting standards.
Accounting Requirements
Financial instruments are accounted for under Australian Accounting Standards
(AASB 139 Financial Instruments: Recognition and Measurement). Equity financial
instruments would normally be recorded in one of two classifications:


Fair value through profit and loss (FVPL) – in which case all changes in value
of the instruments are recorded in profit and loss;
Available-for-sale – really a ‘miscellaneous’ category – in which case changes
in value are recorded in equity, except to the extent to which the asset is
impaired.
Page 1 of 4
Accounting Guidance Note 2009/1
Department of Finance and Deregulation
This Accounting Guidance Note only deals with available for sale financial
instruments that are classified as equities.
Paragraphs 59 - 62 of AASB 139 set out the circumstances under which an
investigation for impairment should be undertaken for financial instruments, other
than those at FVPL.
One of the circumstances in which impairment should be considered is set out at part
of paragraph 61:
“A significant or prolonged decline in the fair value of an investment in an equity
instrument below its cost is also objective evidence of impairment”.
There is no guidance in the standard about what constitutes “significant” and what
constitutes “prolonged”. In both cases it is left to judgement of the individual
circumstances to determine what is significant or prolonged.
To provide some consistency to assessments, Finance is of the view that the following
should apply:
“Significant”



A reduction in value of more than 20% would normally be considered
significant.
A reduction value of 10-20% may be significant, depending on individual
circumstances. For example, it might not be significant for a speculative stock
that frequently experiences fluctuations in prices.
A reduction in value of less than 10% would normally not be regarded as
significant.
“Prolonged”



A reduction in value for more than 12 months would normally be considered
prolonged.
A reduction in value of 6-12 months may be prolonged, depending on
individual circumstances. For example, fluctuations in a stock that is highly
subject to a bi-annual commodity price cycle would more than likely be
considered significant after six months.
A reduction in value of less than 6 months would normally not be regarded as
prolonged.
Page 2 of 4
Accounting Guidance Note 2009/1
Department of Finance and Deregulation
Other points





The requirements only apply to equity instruments – not debt instruments.
The definition of equity instrument is contained in AASB132 Financial
Instruments: Presentation
The requirement in the standard specifies significant or prolonged – either.
Thus only one criteria needs to be satisfied before impairment would be
applied.
This test relates only to investments with values below their cost. It does not
mean a reduction in value compared to the previous or book valuation.
Common sense should be applied to the “significant or prolonged test”. For
example if the value of the asset dropped more than 20% below cost for one
day, and on all other days in the year was no worse than 12% below cost, the
single day 20% event would be discounted. The impairment provisions are
aimed at assessing the possibility that the agency may not recover the cost of
the investment.
There are other factors to be considered in assessing impairment, contained in
paragraphs 59-62 of AASB 139.
Accounting for Impairment of Available for Sale Financial
Instruments
When there is objective evidence of impairment of an available for sale financial
instrument, the accounting requirements are set out in paragraphs 67-70 of AASB
139. The requirements for determining current value in the absence of an active
market are set out in paragraphs AG66 to AG 82 of AASB 139.
In summary:
A)
B)
C)
D)
to the extent that there is a positive balance in the asset revaluation reserve,
that balance is reversed.
Any remaining reduction in value is recognised in profit and loss.
To the extent that there was a negative balance for that asset in the asset
revaluation reserve.
The full amount of the negative balance and any additional reduction in
value are recognised in the profit and loss.
Agencies should refer to the detailed provisions of paragraphs 67-70 for more
information.
Prepared by Accounting Policy Branch 2009
Contacts
Questions or comments about this Guidance Note should be addressed to Accounting
Policy Branch at accountingpolicy@finance.gov.au
Page 3 of 4
Accounting Guidance Note 2009/1
Department of Finance and Deregulation
Appendix 1
Example
Agency X some years ago purchased 10,000 shares in BAM Corporation for $2 per
share (i.e. $20,000). As of 30 June 2007, the shares had been revalued to $2.25 per
share, with the increased value credited to the asset revaluation reserve. The
following were the share prices at key dates:
30 April 2008
$2.09
31 May 2008
$2.00
30 June 2008
$1.84
31 July 2008
$1.65
30 June 2009
$1.55
(note that between 31 July 2008 and 30 June 2009 the price did not exceed $1.65)
At 30 June 2008 agency X decided that there was no objective evidence of
impairment, as the price had been below cost for one month; and the price was less
than 10% below the original cost of $2.00. (The agency had also considered other
possible indicators of impairment in paragraphs 59-62 of AASB 139 and concluded
that these did not apply either).
Consequently at 30 June 2008, the agency would have taken the changes in value
since the last balance date to the asset revaluation reserve:
Dr Asset Revaluation Reserve
Cr Shares in BAM Corp
$4,100
$4,100
(being $2.25-$1.84 x 10,000)
Note that the asset revaluation reserve in respect of BAM Corp has a negative balance
at 30 June 2008 (2,500-4,100 = -1,600).
At 30 June 2009 Agency X considered there was objective evidence of impairment,
since a) the reduction in value below cost had existed for over 12 months and b) the
reduction in value had been 20% or more at 30 June 2009.
Agency X would have accounted for this impairment at 30 June 2009 as follows:
Dr Profit and loss (impairment)
Cr
Asset Revaluation Reserve
Cr
Shares in BAM Corp
$4,500
$1,600
$2,900
[This is a simplified example and may not incorporate all factors or circumstances that might apply in
such a case]
Page 4 of 4
Accounting Guidance Note 2009/1
Department of Finance and Deregulation