IAS 23 - BORROWING COSTS

-Definition & Recognition

Interests and other costs thatCriteria of attributable
are directly BorrowingtoCosts
the acquisition, construction or production of a qualifying asset
can be capitalised as part of the asset.

- Borrowing cost is basically the Finance Cost/ Interest expense for loan taken/ used for Qualifying Asset Construction.

What is a Qualifying Asset?

Qualifying assets are assets which are:
(1) Self Constructed

(2) Construction takes a substantial period of time (i.e., more than 1 year)

Example:
Trisakti is constructing a new building in Central Jakarta. Trisakti borrowed a loan from the bank of $800,000 to construct the Building.
The bank charges Trisakti an interest of 10% per Annum (10% per Year).
-IAS 23 (Borrowing Costs) allows Trisakti to capitalise the Interest/finance cost paid to the bank as part of the asset - ONLY relating to the l
which is used for the construction of the new building (NOT loan used for any other purpose).
Trisakti borrowed a loan from the bank of $800,000 to construct the Building.

Interest/finance cost paid to the bank as part of the asset - ONLY relating to the loan
T loan used for any other purpose).
ce cost paid to the bank as part of the asset - ONLY relating to the loan
or any other purpose).
Types of Borrowing:

(1) Specific Loan -

-A Specific loan is a loan taken ONLY for the purpose of constructing the qualifying asset (NOT used for any OTHER PURPOSE)

(a) % of interest x Loan x Time Proportion after commencement of Construction

(b) Investment Interest Income

% of interest x Unused Loan

(a) minus (b) = amount of interest which we can capitalise

Example:
Co A is constructing a building for a client, which is expected to take 3 years to complete.
Co A only
took used
a specific loan
half of theofloan
$100m for the specific
for construction purpose of the
purposes,and constructing
other halfthis
will building, at an Hence,
be used later. interest the
rateother
of 10% Per
50% ofAnnum
the loanonhas
1stbeen
Janua
deposited with the bank to earn interest.
Construction also began on 1st January 2023. The Interest Rate received to deposit money is 8% Per Annum.
Calculate the amount of borrowing costs which will be capitalised as at 31 December 2023.

(a) 10% interest x $100,000 x 12/12 = $10,000

minus
(b) 8% interest x $50,000 x 12/12 = $4,000

interest expense recorded in the SOPL will be $10,000 - $4,000 = $6,000

onstructing the qualifying asset (NOT used for any OTHER PURPOSE)

e of the
and constructing
other halfthis
will building, at an Hence,
be used later. interest the
rateother
of 10% Per
50% ofAnnum
the loanonhas
1stbeen
January 2023.
ing this building, at an interest rate of 10% Per Annum on 1st January 2023.
(2) General Loan
- A General Loan is a loan used not only for constructing a qualifying asset, but for other purposes as well.

Example
Loan A $3,000,000 (10% Interest/P.A.)
Loan B $2,000,000 (9.50% Interest/P.A.)
$5,000,000
For the Construction, you need $2,500,000.

In this case, we will use the "WEIGHTED AVERAGE INTEREST RATE"

Weighted Average Rate =

( $3,000,000
$5,000,000 x 10.00% ) + ( $2,000,000
$5,000,000 x 9.50% )
= 9.80% WEIGHTED AVERAGE INTEREST RATE
example- the company used $2,500,000 starting on 1st January 2021 for the construction. How much interest will be capitalised up to
31st December 2021
Borrowing cost = $2,500,000 x 9.80% x 12/12= $245,000
- the $245,000 borrowing costs for the construction will be capitalised as part of PPE.
- for the interest on the other $2,500,000, it will be expensed in SOPL.
nuary 2021 for the construction. How much interest will be capitalised up to
KEY NOTES:
(1) We Capitalise the Interest Expense only when we start the Construction of the Qualifying Asset

(2) Capitalisation is Suspended/temporarily stopped during extended periods when development is interrupted

(3) Capitalisation ceases/stops when substantially all the acitivites necessary to prepare the asset for its intended use or sale are c
(basically, capitalisation of interest expense willl stop when the construction is complete)

(4) Commencement of capitalisation begins when:

- Expenditures for the asset 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

QUESTION 1:
he acitivites necessary to prepare the asset for its intended use or sale are complete
necessary to prepare the asset for its intended use or sale are complete
QUESTION 2:
IAS 40 - INVESTMENT PROPERTY
What is an Investment Property?
Investment Property is a property held for:
(1) Rental Income
(2) Capital Gain (Appreciation/increase in the price of property)
(3) Unsure use/ Unknown use

Recognition Criteria
(1) Resource controlled by an entity in which probable future economic benefits are expected to flow to the entity.

(2) Costs can be measured reliably.

Initial Measurement
Same as PPE, as follows:

Cost of Acquision
+ Directly attributable costs to put the asset into its working condition
(1) Delivery Costs
(2) Installation
(3) Professional Fees
(4) Testing
(5) Site Overheads
(6) Sales Tax if company is not registered.
(7) Import Fees
(8) Dismantling/ Restoration costs at Present Value
Subsequent Measurement
For Subsequent Measurement of Investment Property, we can choose any of the 2 models:

(1) Cost Model:

- Investment Property will be carried at Cost Less Accumulated Depreciation

(2) Fair Value Model:

- We will compare cost of asset with the Fair Value
- If Fair Value Model is used, the investment property is not Depreciated.

-IMPORTANT NOTE: of the investment property (if we use Fair Value Model),
If there is any Gain/Loss
this is recognised in P/L (Profit or Loss) (Goes to other income or other expenses)

- This is different from IAS 16 PPE, where revaluation gains/loss usually go to OCI.

QUESTION
functions to one1:
of its production centres and is now letting out its head office for Rent. company policy is to use the fair value model
investment property.
The Building had an original cost at 1st January 20x0 of $250,000 and was being depreciated over 50 years. At 31st December 20x9
its fair value was judged to be $350,000.

How will this appear in the financial statements for the year ending 31st December 20x9? (which figures go to SOPL)
out its head office for Rent. company policy is to use the fair value model for

50,000 and was being depreciated over 50 years. At 31st December 20x9,
QUESTION 2:
QUESTION 3:
.
IAS 38 - INTANGIBLE ASSETS

Definition of an Intagible Asset

An Intangible Asset is a Non-Monetary Asset without physical substance.

- Non-monetary = cannot be quickly converted into cash (not like current assets, but more like non-current assets)

examples of Intangible Assets:

- Licenses and Quotas
- Intellectual Property, e.g. patents and copyrights
- Brand Names
- Trademarks

Recognition Criteria for Intangible Assets (All Criterias MUST be met):

(i) Identifiable = external party generated (external offer)
(ii) legally controlled = do we have legal control over it? It arises from contractual or legal rights, regardless of whether these are trans
(iii) seperable = capable of being sold seperately, or transferred or exchanged either individually or as a package.
(iv) probable future economic benefits
(v) measured reliably

- If an intangible asset does not meet the recognition criteria, expenditure should be Expensed in SOPL as incurred.
- Once expenditure is charged as expense to SOPL, it cannot be capitalised at a later date (i.e. no reinstatement as an intangible ass

Initial Recognition of Intangible Assets

Initial Recognition = at Cost (Purchase price/cost)
contractual or legal rights, regardless of whether these are transferable or seperable

talised at a later date (i.e. no reinstatement as an intangible asset once expensed in SOPL).
no reinstatement as an intangible asset once expensed in SOPL).
Subsequent Recognition of Intangible Assets (recording at the year end)
For subsequent recognition, we have a choice from the following 2 methods:
(1) The Cost Model
(2) The Revaluation Model
(1) The Cost Model
- Intangible Asset is carried at "Cost LESS Accumulated Amortisation and Any Impairment Losses"

- The amortisation concept is the same as depreciation, where the intangible asset is amortised over its useful life.
- Normally Straight line Method (Of Amortisation/Depreciation) is used if intangible asset has a FINITE USEFUL LIFE (Limited)

- If an intangible asset has a INDEFINITE USEFUL LIFE (Infinite):

(a) Asset should not be amortised
(b) Should be tested
Dr Impairment for impairment
Loss (SOPL) $50,000 Annually (once a year) AND more often if there are indications of Impairment
Cr Intangible Asset $50,000

(2) Revaluation Model

- The Revaluation Model should only be used if the Fair Value can be determined by reference to an "ACTIVE MARKET"

What is an active Market?

- Market where products are homogeneous (Similar) (such as a stock exchange for intanigble assets).
- Willing buyers and sellers to be found at all times (like a stock exchange for intangible assets)
- Prices are available to the public
(because each intangible asset is usuaully different in nature).
That is why, usually, it is very rare for intangible assets to follow the revaluation model.
ed if intangible asset has a FINITE USEFUL LIFE (Limited)

ar) AND more often if there are indications of Impairment

evaluation model.
Internally Generated Intangible Assets
- Internally Generated means that the intangible asset has been produced internally within a company.
- Generally, internally generated intangible assets CANNOT BE CAPITALISED (as an intangible Asset).
WHY CANNOT BE CAPITALISED?
- as the cost associated with these cannot be identified seperately from the costs associated with the business.

- The following internally generated items may never be Capitalised/recognised as an intangible Asset:
(a) Goodwill ("Inherent/Internally
of purchasing thegenerated
subsidiaryGoodwill")
from another company. Hence, this is internally-generated and cannot be
recognised as an intangible asset.
-(NOTE- this is different from Goodwill arising on acquisition, which can be capitalised)
(b) Brands
(c) Mastheads (Like people wearing Mickey mouse costumes at disney world).
(d) Publishing Titles
(e) Cusomer Lists

- However, EXTERNALLY PURCHASED Brands, Goodwill, and other intangible assets CAN be recorded/capitalised as an Intangibl

Research and Development

(1) Resarch
- Definition of Research - Research is original and planned investigation undertaken with the prospect of gaining new scientific knowle

- we write off ALL Research Expenditure to Profit Or Loss (PNL) as Expense

-e.g. there we obtain information from a new scientific research that Hydrogen can be used as a renewable Fuel (without any harmful waste
seperately from the costs associated with the business.

er company. Hence, this is internally-generated and cannot be

intangible assets CAN be recorded/capitalised as an Intangible Asset.

on undertaken with the prospect of gaining new scientific knowledge and understanding

rogen can be used as a renewable Fuel (without any harmful waste substances)
(2) Development
- Definition of Development - 'Development is the application of research findings or other knowledge to a plan or design for the produ
of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial produc
-e.g. applying the research about hydrogen fuel to actually produce hydrogen fuel (this is the development).

- Development Expenditure is Capitalised as an intangible asset, if ALL the following CRITERIA'S are met (can use Acronym - PIRA

- Probable flow of economic benefit from the asset, whether through sale or internal cost savings
- Intention to complete the intangible asset and use or sell it
- Reliable measure of development cost
- Adequate resources to complete the project (adequate financial resources to complete the project)
- Technical feasibility of completing the intangible asset so that it will be available for use or sale
- Expected to be profitable, i.e. the benefits generated from the project will exceed the costs incurred

- ONLY DEVELOPMENT EXPENDITURE which have met the Criteria's above can be Captilised as an INTANGIBLE ASSET
- Development expenditure which DO NOT MEET above CRITERIA is EXPENSED IN PROFIT OR LOSS
- Development Expenditure recognised as an expense CANNOT be subsequently reinstated as an asset

Amortisation
- Capitalised- Development Expenditure
ONLY When Commercial should bebegins,
Production Amortised over
we can its amortisation.
start useful life as soon as Commercial Production begins
- If Commercial Production does not begin, it means that we cannot start amortisation.

It will be taken to the statement of profit or loss as amortisation within the amortisation of the development costs

Example:
ch findings or other knowledge to a plan or design for the production
sses, systems or services before the start of commercial production or use.

ALL the following CRITERIA'S are met (can use Acronym - PIRATE):

s above can be Captilised as an INTANGIBLE ASSET

useful life as soon as Commercial Production begins

e amortisation of the development costs

Can use Any of the following Amortisa
(1) Straight-line Method

(2) Reducing Balance

Can use Any of the following Amortisation Methods:
Questions:

Q1:

Q2:
Q3:
Q4:
Q5:
Q6:
Q7:
Q8:

Q9:
Q10: