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the Construction Period, has been superseded.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 Chairperson

Jusuf Halim Secretary
Hein G. Surjaatmadja Member
Katjep K. Abdoelkadir Member
Wahjudi Prakarsa Member
Jan Hoesada Member
M. Ashadi Member
Mirza Mochtar Member
IPG Ary Suta Member
Sobo Sitorus Member
Timoty Marnandus Member
Mirawati Soedjono Member
PSAK 26 (Revision 1997) BORROWING COST

FINANCIAL ACCOUNTING STANDARD

EQUITY ACCOUNTING

CONTENTS

Paragraph

INTRODUCTION
Objective 01 - 05
Scope 01
Definitions 02 - 04

EXPLANATION 06 - 25
Recognition 09 - 10
Capitalization of Borrowing Costs 11 - 15
Difference Between the Carrying Amount of the Qualifying Asset and
Recoverable Amount 16
Commencement of Capitalization 17 - 19
Suspension of Capitalization 20 - 21
Cessation of Capitalization 22 – 25

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 26

(1997 REVISION), BORROWING COSTS 26 - 37
Disclosures 35
Transition 36
Effective Date 37

INTRODUCTION

Objective
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) The accounting for borrowing costs;

(b) The amount of borrowing costs capitalized during the period;
(c) 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.