FINANCIAL REPORTING STANDARDS IMPLEMENTATION COMMITTEE
FRSIC Consensus 14
Impairment of Investment in Equity Instrument Categorised as Available-forSale Financial Asset due to “Significant or Prolonged” Decline in Fair Value
Introduction
FRSIC Consensus 14 “Impairment of Investment in Equity Instrument Categorised as Available-for-Sale
Financial Asset due to “Significant or Prolonged” Decline in Fair Value” was developed by the Financial
Reporting Standards Implementation Committee (“FRSIC”) and issued by the Malaysian Institute of
Accountants (“MIA” or “Institute”) on 23 March 2011.
The Consensus contained herein is issued as part of the Institute’s initiatives to promote best practices in
compliance with the highest standards in financial accounting.
© Malaysian Institute of Accountants
FRSIC Consensus 14
FRSIC CONSENSUS 14
IMPAIRMENT OF INVESTMENT IN EQUITY INSTRUMENT CATEGORISED AS
AVAILABLE-FOR-SALE FINANCIAL ASSET DUE TO “SIGNIFICANT OR
PROLONGED” DECLINE IN FAIR VALUE
FRSIC Consensus is guidance issued by MIA and shall be regarded as best practice. It should be read in
conjunction with the respective applicable accounting standards.
Members of MIA are expected to observe compliance to the consensus issued. In exceptional circumstances
where departure is necessary, members shall be prepared to justify the departure.
FRSIC Consensus need not be applied to immaterial items. Nothing in the FRSIC Consensus is to be
construed as amending or overriding the accounting standards or other statements adopted or issued by the
MASB and other relevant laws.
Background
1
Paragraph 58 of FRS 139 “Financial Instruments: Recognition and Measurement” specifies the
requirement to assess, at the end of each reporting period, whether there is any objective evidence that
a financial asset or group of financial assets is impaired.
2
Objective evidence of impairment exists when one or more events that occurred after the initial
recognition has an impact on the estimated future cash flows of the financial asset or group of financial
assets that can be reliably estimated. If such evidence exists, an impairment loss is recognised in profit
or loss.
3
In addition, the last sentence of Paragraph 61 of FRS 139 states that “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”. Nevertheless, the conceptual meaning of the term “significant or prolonged” as described
in Paragraph 61 of FRS 139 is not further defined or clarified in the Financial Reporting Standards.
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FRSIC Consensus 14
4
The lack of guidance to the conceptual meaning of the term “significant or prolonged” has led to
diversity in the application of Paragraph 61 of FRS 139; some of the existing practices may not be
entirely consistent with FRS 139.
5
This diversity is particularly significant in situation where an investment in equity instrument is
categorised as an available-for-sale financial asset and measured at fair value. While a gain or loss on
subsequent measurement of such available-for-sale financial asset is recognised in other
comprehensive income, an impairment loss is recognised in profit or loss. Moreover, Paragraph 67 of
FRS 139 requires the cumulative fair value loss on an available-for-sale financial asset that had been
recognised in other comprehensive income to be reclassified from equity to profit or loss upon the
recognition of impairment loss, and such impairment loss shall not be reversed through profit or loss.
Scope
6
This Consensus provides guidance to the meaning of the term “significant or prolonged” contained in
Paragraph 61 of FRS 139 in assessing whether there is any objective evidence that an investment in
equity instrument categorised as available-for-sale financial asset and measured at fair value is
impaired.
The Issue
7
The Committee was asked to determine, in applying Paragraph 61 of FRS 139 on equity instrument
categorised as available-for sale financial asset and measured at fair value:
(a)
What is deemed “significant”?
(b)
What is deemed “prolonged”?
(c)
Should the definition of “significant or prolonged” be an accounting policy choice?
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FRSIC Consensus 14
8
In determining what is deemed “significant or prolonged” decline in fair value:
(a)
Should the historical price volatility of an equity instrument be considered?
(b)
Does the fact that the price of an equity instrument has declined in the same proportion as the
overall market decline imply that the decline is not “significant”?
(c)
Should the anticipated period of recovery be included in the assessment of “prolonged”?
(d)
Should an actual recovery after the end of the reporting period but before the issuance of
financial statements be included in the assessment of “significant or prolonged” at the end of
the reporting period?
Consensus and Basis of Consensus
9
The Committee noted that the application of impairment requirements in FRS 139 inevitably requires
the use of judgement. This includes determining the criterion whether a decline in fair value is
“significant or prolonged”.
10 Although the assessment requires the use of judgement, the Committee is unanimous that the criterion
in determining a “significant or prolonged” decline in fair value is a matter of fact that requires the
application of judgement, not an accounting policy choice. Paragraph 61 of FRS 139 specifically
requires the assessment of objective evidence of impairment by considering whether there has been a
“significant or prolonged” decline in the fair value. An entity must apply the requirement as an
accounting policy in accordance with FRS 108 “Accounting Policies, Changes in Accounting Estimates
and Errors”.
11 An entity may develop internal guidance to aid consistent application of such judgement, but the
internal guidance should be consistently applied based on objective facts. A “significant or prolonged”
decline in the fair value should not merely be regarded as an indicator of possible impairment. If the
conclusion is that a decline in fair value of an investment in equity instrument is “significant or
prolonged” after applying the internal guidance, impairment loss shall be recognised as it is a matter of
fact and no longer a matter of judgement.
12 The Committee expects the application of judgement described in Paragraph 11 above to be disclosed
in the financial statements in accordance with FRS 101 “Presentation of Financial Statements”.
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FRSIC Consensus 14
13 Generally, each investment in equity instrument has its own unique risk profile. Therefore, each
investment in equity instrument should be considered separately to determine whether there is any
“significant or prolonged” decline in fair value. The sole use of “bright line” tests across all equity
instruments in a portfolio is inappropriate.
14 In applying the judgement described in Paragraph 11 on, for example, equity instrument, an entity may
take into consideration available market information, such as the respective instrument’s historical or
expected volatility or, if appropriate, historical or expected volatility of instruments with similar risk
profile. Where appropriate, due care shall be exercised by taking into regard sufficient input to avoid
distorted judgement.
15 In determining what is deemed to be a “significant or prolonged” decline in fair value of an investment
in equity instrument, an entity may consider the normal volatility in the value of the said equity
instrument in the market to determine the appropriate quantitative thresholds of percentage or duration
of decline to be considered as “significant or prolonged” respectively. Such quantitative thresholds
could be developed through statistical observation of historical market volatility described in Paragraph
14.
16 The Committee has observed that, in practice, some constituents would generally consider a decline in
fair value below the original cost of the equity instrument by more than 20% as “significant”. Whilst this
should not be perceived as a “bright line”, the Committee considers that it could be difficult to argue
that a decline of more than 20% is not “significant” unless judgement based on prevailing facts such as
historical or expected volatility suggests otherwise.
17 In addition, Paragraph 59 of FRS 139 states that a financial asset is impaired when one or more events
has occurred after the initial recognition and has a negative impact on the estimated future cash flows
of the financial asset. Therefore, the Committee believe that it is inappropriate to justify that a decline in
fair value of an investment in equity instrument is not “significant” solely on grounds that such decline is
in line with the one-off overall level of decline in the relevant market.
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FRSIC Consensus 14
18 Similarly, it was observed that some constituents would typically consider a decline to be “prolonged” if
the decline in fair value below the original cost had persisted for more than nine to twelve months. The
Committee consider that it could be difficult to argue that a decline that had persisted for more than
twelve months is not “prolonged”.
19 The assessment on objective evidence of impairment is carried out based on the facts and
circumstances as at the end of each reporting period. Therefore, the existence of a “significant or
prolonged” decline in fair value of investment in equity instrument at the end of the reporting period
cannot be over-ridden by forecasts of expected recovery of market values.
20 In a situation where a decline in fair value of an investment in equity instrument is determined as
“significant or prolonged” at the end of the reporting period but an actual recovery occurred before the
financial statements of the said reporting period are authorised for issue, the Committee believe that
such recovery is irrelevant to the recognition of impairment, as the recovery does not relate to the
condition of the investment in equity instrument at the end of reporting period. Hence, the actual
recovery that occurred is merely a non-adjusting event after the reporting period.
21 Where an investment in equity instrument is impaired at the end of an interim reporting period due to
“significant or prolonged” decline in fair value, the impairment loss recognised shall not be reversed in
the subsequent interim reporting period within the same annual reporting period, even if the conditions
may have so change that the impairment loss would have been reduced or avoided (Reference: MASB
IC Interpretation 10 “Interim Financial Reporting and Impairment”).
Issuance date of this Consensus
22 This Consensus is issued on 23 March 2011.
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FRSIC Consensus 14
References
FRS 101 “Presentation of Financial Statements”
FRS 108 “Accounting Policies, Changes in Accounting Estimates and Errors”
FRS 110 “Events after the Reporting Period”
FRS 139 “Financial Instruments: Recognition and Measurement”
IC Interpretation 10 “Interim Financial Reporting and Impairment”
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Malaysian Institute of Accountants
Dewan Akauntan, 2 Jalan Tun Sambanthan 3 Brickfields, 50470 Kuala Lumpur, Malaysia
[Web] http://www.mia.org.my [Phone] + 60 3 2279 9200 [Fax] + 60 3 2274 1783