Financial Accounting Seminar Borrowing Cost And Impairment Assets

Financial Accounting Seminar Borrowing Cost and Impairment Assets

Fachri Ichwan Bertha Muhammadsyah M. Habib Syukri

Agenda Style

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Case 7.2 Borrowing Cost Brief Explanation , Solution and Standard Related

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 1 Januari 2009 1 April 2009 1 Juli 2009

$ million 60 80 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 Cash

$16,000,000

Cash

$2,020,000

Interest Revenue

$16,000,000

$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

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