Financial Accounting Seminar

Borrowing Cost and Impairment Assets

Fachri Ichwan
Bertha Muhammadsyah
M. Habib Syukri
Agenda Style
01 Case 7.2 Borrowing Cost
Brief Explanation , Solution and Standard
Related

02 Case 8.3 Impaiment Assets

Brief Explanation , Solution and Standard

Related
Borrowing Cost
Case 7.2
Brief Explanation
• On January 1, 2009, Lau Limited decided to borrow $ 200 million to
build a property that would take 2 years of development.
• Construction starts on the same date when borrowing money on
January 1, 2009.
• Interest on loan is 8% per year. And invested the unused money
with a return of 4% per year
• Lau make the expenditures in three times. January 1, April 1 and
July 1. The funds used in development are as follows:

Date $ million

1 Januari 2009 60
1 April 2009 80
1 Juli 2009 60
Required

1.Determine the borrowing cost and cost of property .

Journalize account of borrowing cost capitalization

2.Determine the borrowing cost and cost of property if the

fund are draws all in 1 january 2009. Journalize account of
borrowing cost capitalization
Issues Related Case Study 7.3

Capitalize the borrowing cost

For qualifying asset at the year ended 2009
Standard Related
IAS 23 Borrowing Cost

The core principle of IAS 23 Borrowing Costs is that you should

capitalize borrowing costs if they are directly attributable to the
acquisition, construction or production of a qualifying asset
Qualifying assets are assets that take a substantial period of
time to get ready for their intended use or sale.
IAS 23 specifically mentions 3 types of borrowing costs that can be
capitalized:
1.Interest expenses (refer to the effective interest method under IFRS
9/IAS 39);
2.Finance charges on finance leases under IAS 17; and
3.Exchange differences on borrowings in foreign currencies, but only
those representing the adjustment to interest costs.
Standard Related
IAS 23 Borrowing Cost
Recognition
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form
part of the cost of that asset and, therefore, should be capitalised. Other borrowing costs are recognised as an expense.
[IAS 23.8]

Measurement
Where funds are borrowed specifically, costs eligible for capitalisation are the actual costs incurred less any income earned
on the temporary investment of such borrowings. [IAS 23.12] Where funds are part of a general pool, the eligible amount
is determined by applying a capitalisation rate to the expenditure on that asset. The capitalisation rate will be the
weighted average of the borrowing costs applicable to the general pool. [IAS 23.14]
Capitalisation should commence when expenditures are being incurred, borrowing costs are being incurred and activities
that are necessary to prepare the asset for its intended use or sale are in progress (may include some activities prior to
commencement of physical production). [IAS 23.17-18] Capitalisation should be suspended during periods in which active
development is interrupted. [IAS 23.20] Capitalisation should cease when substantially all of the activities necessary to
prepare the asset for its intended use or sale are complete. [IAS 23.22] If only minor modifications are outstanding, this
indicates that substantially all of the activities are complete. [IAS 23.23]
Where construction is completed in stages, which can be used while construction of the other parts continues,
capitalisation of attributable borrowing costs should cease when substantially all of the activities necessary to prepare
that part for its intended use or sale are complete. [IAS 23.24]
Solution
Number 1

a. Calculating capilazation :
$ 200,000,000 X 0.08 = $16,000,000
$ 3/12 X 0.04 X 140,000,000 = $1,420,000
$ 3/12 X 0.04 X 60,000,000 = $ 600,000

Total Capitalization = $16,000,000-($1,420,000+$ 600,000)

= $13,980,000
Solution
Number 1

b. Journal
Interest expense $16,000,000
Cash $16,000,000

Cash $2,020,000
Interest Revenue $2,020,000
Number 2

a. Calculating Cost
$ 200,000,000 X 0.08 = $16,000,000
Total Capitalization = $16,000,000
b. Journal
Interest expense $16,000,000
Cash $16,000,000
Because it draw all fund and pay to construction so the
borrowing cost is bigger than if they partially draw and invest the
unutilized fund for get revenue from interest.
Conceptual Framework Relation
Impairment Assets
Case 8.3
Brief Explanation
• Perfect Industry company limited is an company that
make a original eqipment manufacturing in cameras.
• It focus on the film camera production.
• while the compact digital camera (CDC) accounts only
10% of production.
• The traditional camera market has declining. The
company decide some option that they will do in other
to fight against the declining problem. There are the
three option :
1.Upgrade as OEM manufacturing for consumer CDC’s
They need invest at least $40 million to replace their
facilities and CDC as the major brand
2.Become the Original Brand Manufacturing (OBM) for budget CDC
the PRC using “Perfection” brand
Modification cost need is $10 million , the expenditure are
needed in other to develop the brand of perfection in next few years
and reposition their self as a market oriented organization rather than
a manufacturing oraganization
3.Shifting to an OEM for non-CDC product’s
Avoid competition on CDC , the company shifting into the
something different like a camera for PC or camera for to. Although
sales will decreased not many competitor will oprating in this
segment.
Required
Key financial reporting issues from three option regarding
impairment of production facilities
Solution
The objective of IAS 36 Impairment of assets is to
make sure that entity’s assets are carried at no more than
their recoverable amount.
The Standard also defines when an asset is impaired,
how to recognize an impairment loss, when an entity
should reverse this loss and what information related to
impairment should be disclosed in the financial statements.
We need need to assess whether there is any
indication that an asset might be impaired at the end of
each reporting period
External sources of information

a. Observable indications that the asset’s value has declined

during the period significantly more than would be expected
as a result of the passage of time or normal use.
b. Significant changes with an adverse effect on the entity in
the technological, market, economic or legal environment in
which the entity operates or in the market to which an asset
is dedicated.
Internal sources of information

Significant changes with an adverse effect on the

entity related to the use of an asset, for example: an asset
becoming idle, plans to discontinue or restructure the
operation to which an asset belongs, plans to dispose of an
asset before the previously expected date, and reassessing
the useful life of an asset as finite rather than indefinite.
Based On explanation :

Option 1
In this option say that they will replace the existing
facilities. We can recognize the impaiment value by
calculating the carrying amount and the recoverable
amount of assets that they replace .

Option 2
In this option say that they will expend their money
for develop their brand and doesn't related with the criteria
to reconize the impairment of assets
Option 3
In this option say that the company decided to
explore something different and it doesn't related to the
criteria to recognize assets because they will continue their
business by not modification facilities
Conceptual Framework Relation
Disclosure [IAS 23.26]
• amount of borrowing cost capitalised during the period
• capitalisation rate used

Disclosures for case 6.3

Ammount of the borrowing cost for build the property (qualifying asset)
the at the end of year 2009 is $13,980,000
THANK YOU