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Q&As on the global economic downturn
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Decrease in market value of investments since 30 June? 
as reported in ANT32/2008 
 
Q: The market values of some of my client's listed investments, classified as available for sale and therefore carried at fair value, have shown a substantial decline since balance date in line with the decline in the market as a whole. What are the implications of this for their 30 June financial statements? Does a post 30 June market price movement get taken into account when considering the 30 June fair value? 
 
A: This issue is within the scope of AASB 110 Events After the Balance Sheet Date. This standard classifies events occurring after balance date into two types - adjustable and non adjustable. 
 
Adjustable events are those that provide evidence of conditions that existed at the reporting date, and so the standard requires that their effect is to be recognised in the financial statements by adjusting the relevant items in the financial records (paragraph 8). Non-adjusting events are those that are indicative of conditions that arose after balance date and therefore are not to be adjusted, but may be required to be disclosed (see paragraphs 10 and 21).  
 
Paragraph 11 of AASB 110 states that a decline in the market value of investments post balance date is an example of a non-adjusting event. This is because the decline does not usually relate to the conditions that existed at balance date, but rather to conditions that arose subsequently. 
 
Therefore, the change in market value should not normally be included in assessing fair value for June 30 – but if material, does require disclosure (under paragraph 21) which sets out the nature of the event and an estimate of the financial effect involved. 

 
Dealing with the current global economic downturn(part 2) 
as reported in ANT27/2008 
 
Q: Last week’s ANT warned of a potential trap in the application of IFRS in this particular reporting season, due to the current economic climate. 
Are there any other areas of IFRS that have taken on added significance for this year’s reporting season which preparers and auditors need to be aware of? 
 
A: Yes. The current economic climate is the first time AIFRS standards have been applied to a period of economic downturn and therefore the use of the impairment and fair value models that underlie many asset valuations may need to be reviewed. 
 
The following major areas have been identified by the Institute and ASIC as areas of concern for the 2008 reporting season. Members are advised to consider the impacts of these carefully, especially given the operation of the force of law standards. These include:
  • Impairment of asset values
    •  
  • Determining fair market values
    •  
  • Significant judgements and sources of estimation uncertainty
    •  
  • Classification of debt and cash balances
    •  
  • Breaching of debt covenants
    •  
  • Foreign currencies
    •  
  • The use and disclosure of off-balance sheet arrangements
    •  
  • Going concern
A variety of articles and other guidance is available, which may assist members by providing more detailed guidance in a number of these areas. For more information click here (pdf).  
 
ASIC has also reminded preparers and auditors of financial reports of the potential pitfalls that are likely to arise in their 30 June reports as a result of the current market turbulence and the liquidity squeeze. For more details on ASIC’s areas of concern, refer to ANT24/2008 or visit the ASIC website. 
 
Dealing with the current global economic downturn: current/non-current liabilities (part 1) 
as reported in ANT26/2008 
 
Q: In recent weeks there has been discussion in the financial press about the significance of the classification of current and non current liabilities in the current global economic downturn. Has there been a change to the accounting standard on this issue? 
 
A: No. The relevant paragraph is AASB 101 paragraph 69 which sets out the conditions for classifying a liability as current. While this paragraph has been subject to some minor redrafting in the interest of clarity when AASB 101 was recently revised it has not changed in substance. 
 
What has changed is the economic climate this reporting season which has had a significant effect on the availability of credit. As a result, the requirements in paragraph 69(d) may prove of more significance than in previous years in assessing this classification. This paragraph requires, as one of the conditions for a “current” classification, that "the entity does not have an unconditional right to defer settlement of a liability for at least twelve months after the reporting date". 
 
The current liquidity crisis may have made the renegotiation of existing facilities less automatic than in previous years and there may be delays in obtaining documentation that proves the rollover of facilities. There is also the possibility that current market conditions have so dramatically reduced asset values that the entity is in breach of debt covenants which may make the loans callable at any time.  
 
Without an “unconditional right to defer settlement” such balances would have to be classified as current at balance date, regardless of any intentions to renegotiate facilities or rectify any breaches of covenants and any history of so doing.  
 
Further guidance on the current / non current classifications with respect to loans is contained in paragraphs 72-76 of AASB 101. In particular paragraph 76 says that if a loan is refinanced, a breach of a covenant is rectified or the lender grants a twelve month grace period between the balance date and the date the financial statements are authorised for issue, this fact is disclosed as a non-adjusting post balance date event. 
 
In addition paragraphs 18 and 19 of AASB 7 requires Financial Instruments Disclosures requires an entity to provide additional disclosures about loans payable or loan agreements existing at the reporting date where there have been breaches or defaults on those loans during the reporting period.  
 
Members should also note that this is one of the areas ASIC have announced that they will be looking at in their oversight of this year's reporting season - see ASIC website. 
 
For further articles on the impact of the credit crunch on this year’s reporting season, go to this month’s Charter article ‘Changing markets make an impact’ by Patricia Stebbens.