Psak 26 (1997 Revision)

PSAK 26 (Revision 1997)

BORROWING COST

FINANCIAL ACCOUNTING STANDARDS 26 INDONESIAN INSTITUTE OF ACCOUNTANTS

BORROWING COSTS

PSAK 26 (Revision 1997)

BORROWING COST

Statement of Financial Saccounting Standrads (SFAS) No. 26 (1997 Revision), Borrowing Costs, was adopted by a meeting of the Indonesian Accounting Principles Committee on October 17, 1996 and was ratified by the National Council of the Indonesian Institute of Accountants on January 14, 1997. As the effective of this Statement, the previous SFAS No. 26, Accounting for Interest During the Construction Period, has been superseded.

Jakarta, September 14, 1997 National Council Indonesian Institute of Accountants Indonesian Accounting Principles Committee Hans Kartikahadi Jusuf Halim Hein G. Surjaatmadja Katjep K. Abdoelkadir Wahjudi Prakarsa Jan Hoesada M. Ashadi Mirza Mochtar IPG Ary Suta Sobo Sitorus Timoty Marnandus Mirawati Soedjono

Chairperson Secretary Member Member Member Member Member Member Member Member Member Member

PSAK 26 (Revision 1997)

BORROWING COST

FINANCIAL ACCOUNTING STANDARD EQUITY ACCOUNTING CONTENTS Paragraph INTRODUCTION Objective Scope Definitions

01 - 05 01 02 - 04

EXPLANATION Recognition Capitalization of Borrowing Costs Difference Between the Carrying Amount of the Qualifying Asset and Recoverable Amount Commencement of Capitalization Suspension of Capitalization Cessation of Capitalization

16 17 - 19 20 - 21 22 – 25

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 26 (1997 REVISION), BORROWING COSTS Disclosures Transition Effective Date

26 - 37 35 36 37

INTRODUCTION Objective

06 - 25 09 - 10 11 - 15

PSAK 26 (Revision 1997)

BORROWING COST

The objective of this Statement is to prescribe the accounting treatment for borrowing costs. This Statement generally requires the immediate expensing of interest costs incurred. However, borrowing costs which could be directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized. Scope 02

This Statement should be applied in accounting for borrowing costs.

03 This Statement supersedes PSAK No. 26, Accounting for Interest During the Construction Period, which has been effective since 1988. 04

This Statement does not address actual or imputed cost of equity.

Definitions The terms used in this Statement are defined as follows: Borrowing Costs are interest and other related costs incurred by an enterprise in connection with the borrowing of funds. Certain assets that meet requirements which will subsequently be called Qualifying Assets are assets that necessarily take a substantial period of time to get them ready for their intended use or sale. EXPLANATION Borrowing costs includes the following: Interest on borrowed funds, either short-term or long-term. Amortization of discounts or premiums related to the borrowings. Amortization of costs incurred in connection with obtaining the borrowing such as consultant’s fees, legal fees, commitment fees and the like. Exchange differences arising from borrowings denominated in foreign currencies (as long as the exchange differences are adjustments to interest costs) or amortization of premiums related to contracts to hedge against borrowings denominated in foreign currencies. 07 Qualifying assets include qualifying inventory, manufacturing plants and power generation facilities. Assets that are ready for their intended use or sale at the acquisition date are not qualifying assets. 08 Qualifying inventory is defined as inventory that requires a substantial period of time to bring them to a saleable condition. A substantial period of time is defined as 12 months or more. Inventory which is ready for sale at the acquisition date is not a qualifying asset.

PSAK 26 (Revision 1997)

BORROWING COST

Recognition 09 Borrowing costs should be recognized as an expense in the period in which they are incurred, except for borrowing costs that should be capitalized in accordance with paragraph 10. 10 Borrowing costs that are directly attributable to the acquisition, construction, or production of qualifying assets should be capitalized as part of the acquisition cost of the qualifying assets. The amount of borrowing costs capitalized should be determined in accordance with this Statement. Capitalization of Borrowing Costs 11 If borrowing costs can be directly attributable to a qualifying asset, then they should be capitalized to that qualifying asset. If borrowing costs cannot be directly attributable to a qualifying asset, then capitalization of these costs should be determined in accordance with paragraph 15. 12 Under certain circumstances, it is difficult to identify the direct relationship between the particular borrowing and the acquisition of a qualifying asset, and to determine that a particular borrowing could otherwise have been avoided if the acquisition of qualifying asset did not occur. For instance: when the financing activity of an enterprise is coordinated central. It can also difficult if the enterprise obtains several debt instruments with varying interest rates. Under such circumstances, it is difficult to determine the total borrowing costs which are directly attributable to the acquisition of a qualifying asset and hence the exercise of judgement is required. 13 If the borrowing is specifically used for the purpose of acquiring a qualifying asset, the total borrowing costs capitalized would comprise of all borrowing costs incurred on that borrowing during the period less any interest income from temporary investment earned on the unused proceeds from the borrowings. 14 The financing arrangements for the acquisition of a qualifying asset may result in an enterprise obtaining the borrowed funds and incurring borrowing costs before all or part of the funds are used for the acquisition of the qualifying asset. In such circumstances, an enterprise generally invests the unused funds for a temporary period. To determine the amount of borrowing costs to be capitalized during the period, the amount of borrowing costs are reduced by the investment income on the unused proceeds from the borrowing. 15

If borrowed funds were not specifically for the purpose of acquiring qualifying assets but were subsequently used to acquire qualifying assets, the amount of borrowing costs eligible for capitalization should be determined by applying a capitalization rate to the expenditures on those assets. The capitalization rate is calculated based on the weighted average of borrowing costs divided by total borrowings for the period (not including borrowings specifically for the purpose of obtaining qualifying assets). The amount of borrowings costs capitalized during a period should not exceed the total borrowing costs incurred during that period. Difference Between the Carrying Amount of the Qualifying Asset and Recoverable Amount

PSAK 26 (Revision 1997)

BORROWING COST

16 When the carrying amount or the expected ultimate cost of the qualifying asset exceed its recoverable or net realizable value, the carrying amount should be written down in accordance with other Statement of Financial Accounting Standards. Commencement of Capitalization 17 Capitalization of borrowing costs as a part of the acquisition cost of an asset commence when: (a) Expenditures for the asset have started being incurred; (b) Borrowing costs are being incurred; (c) Activities that are necessary to prepare the construction or the production of the qualifying asset are in progress. 18 Expenditures on qualifying assets include only those expenditures that have resulted in payments of cash, transfers of other assets, or the arising if interest-bearing liabilities. The capitalization of borrowing costs is calculated proportionally based on total borrowing costs less investment income which is related to the qualifying asset. The average carrying amount of a qualifying asset during a period, including previously capitalized borrowing costs, is normally a reasonable approximation of the expenditures to which the capitalization rate is applied in that period. 19 The activities that are necessary to prepare the construction or the production of qualifying asset encompass more than physical construction of the asset. They include technical and administrative activities required for the commencement of physical construction, such as the activities associated with obtaining permits required for the commencement of the physical construction of a qualifying asset. It is considered that no activities have taken place if there is no construction or production activities to change the condition of the asset. For instance, borrowing costs incurred during the period in which land is being developed should be capitalized. However, if the enterprise purchases land for building purposes and there are no associated development activities, the borrowing costs should not be capitalized. Suspension of Capitalization 20 Capitalization of borrowing costs should be suspended if the enterprise postponed or delays the acquisition, construction, or production activities for an extended period. 21

Borrowing costs may continue to be incurred during a period in which the enterprise delays or temporarily discontinues the activities of acquisition, construction or production; however, the borrowing costs during this period should not be capitalized. Under certain circumstances, physical construction activities could be delayed or temporarily discontinued when technical and administrative tasks are being carried out. Under this circumstances, capitalization of borrowing costs should not be suspended. Capitalization of borrowing costs is also not suspended when a temporary delay/interruption is technically required or necessary in the process of acquiring, constructing or producing the qualifying asset. For example, during the construction of a bridge, physical construction activities are temporarily interrupted due to high water levels. Under this situation, capitalization of borrowing costs should not be suspended if such high water levels are common in that geography location

Cessation of Capitalization

PSAK 26 (Revision 1997)

BORROWING COST

22 Capitalization of borrowing costs should cease when activities to acquire, construct or produce the qualifying asset to satisfy its intended purpose are substantially complete. 23 An asset is normally ready for its intended use or sale when activities in the physical construction are complete, even though routine administrative activities related to the asset may still be required. Under such circumstances, borrowing costs should no longer be capitalized. 24 When the construction of an asset can be completed in parts and each completed part is capable of being used while construction continues on other parts, capitalization of borrowing costs is applied only to the uncompleted parts. 25

In a business park comprising several building, each building can be considered individually as qualifying asset because the first completed building could be used, sold or rented to satisfy its intended purpose without depending on completion of the second building. On the contrary, for an industrial plant involving several stages of production processes, construction is considered complete only when the whole plant is complete. This is because the parts physically completed earlier cannot be used until the final part of the plant is completed.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NUMBER 26 (1997 REVISION)

BORROWING COSTS Statement of Financial Accounting Standards No. 26 consists of paragraph 26-37. This Statement should be read in the context of paragraphs 1-25. 26

The terms used in this Statement are defined as follows:

Borrowing Costs are interest and other related costs incurred by an enterprise in connection with the borrowing of funds. Certain assets that meet requirements which will subsequently be called Qualifying Assets are assets that necessarily take a substantial period of time to get them ready for their intended use or sale. 27 Borrowing costs should be recognized as an expense in the period in which they are incurred, except for borrowing costs that should be capitalized in accordance with paragraph 10. 28 Borrowing costs that are directly attributable to the acquisition, construction, or production of qualifying assets should be capitalized as part of the acquisition cost of the qualifying assets. The amount of borrowing costs capitalized should be determined in accordance with this Statement. 29 If the borrowing is specifically used for the purpose of acquiring a qualifying asset, the total borrowing costs capitalized would comprise of all borrowing costs incurred on that borrowing during the period less any interest income from temporary investment earned on the unused proceeds from the borrowings.

PSAK 26 (Revision 1997)

BORROWING COST

30 If borrowed funds were not specifically for the purpose of acquiring qualifying assets but were subsequently used to acquire qualifying assets, the amount of borrowing costs eligible for capitalization should be determined by applying a capitalization rate to the expenditures on those assets. The capitalization rate is calculated based on the weighted average of borrowing costs divided by total borrowings for the period (not including borrowings specifically for the purpose of obtaining qualifying assets). The amount of borrowings costs capitalized during a period should not exceed the total borrowing costs incurred during that period. 31 Capitalization of borrowing costs as a part of the acquisition cost of an asset commence when: (a) Expenditures for the asset have started being incurred; (b) Borrowing costs are being incurred; (c) Activities that are necessary to prepare the construction or the production of the qualifying asset are in progress. 32 Capitalization of borrowing costs should be suspended if the enterprise postponed or delays the acquisition, construction, or production activities for an extended period. 33 Capitalization of borrowing costs should cease when activities to acquire, construct or produce the qualifying asset to satisfy its intended purpose are substantially complete. 34 When the construction of an asset can be completed in parts and each completed part is capable of being used while construction continues on other parts, capitalization of borrowing costs is applied only to the uncompleted parts. Disclosure 35

The financial statements should disclose:

(a) (b) (c)

The accounting for borrowing costs; The amount of borrowing costs capitalized during the period; The capitalization rate used.

Transition 35

This Statement should be applied on a prospective basis. Prior years’ financial statements before the effective date of this Statement do not have to be restated. Effective Date

36

This Standard becomes operative for financial statements covering periods beginning on or after January 1, 1997. Earlier application is encouraged.