1. FINANCIAL ACCOUNTING II BACT 304
INTERNATIONAL FINANCIAL REPORTING STANDARDS
LECTURERS:
DR. JOHN MACCARTHY
&
MR. LEXIS TETTEH

2. LECTURE 3-6: IFRS standards
IAS 23: Overview of Borrowing Costs
Introduction and scope
Definition of Terms
Borrowing of Costs
Recognition
Borrowing Eligible for Capitalization
Disclosure

3. IAS 23: Borrowing Costs
Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds for running the business.
IAS 23 prescribes the criteria for determining when borrowing costs can be capitalized as “qualifying asset”.
Qualifying assets occur as part of the cost of constructing, or producing to produce a “qualifying asset.”
The Standard is applied only to recognition on borrowing costs of qualifying assets.

4. IAS 23: Borrowing Costs
Borrowing costs (IAS 23) that are directly attributable to the acquisition, construction or production of a qualifying asset that form part of the cost of the company’s asset.
Other borrowing costs that are not recognised as “qualifying asset” should be expensed in the SOCI.
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
It is about the capitalization of borrowing costs on a qualifying asset or to expense borrowing costs when incurred.

5. IAS 23: Borrowing Costs (cont.)
Is there a definite period in determining the “substantial period of time?”.
Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are to be capitalized as part of the cost of that asset.
Although the treatment prefers borrowing cost to be expensed unless it happens on qualifying asset.
Not all kinds of borrowing costs are to be capitalized but rather borrowing cost on asset that usually takes more than a year to be ready would be qualifying asset.

6. IAS 23: Borrowing Costs (cont.)
Management should exercise judgement on determination on what should be classified as qualifying assets, taking into accounts, the nature of the asset.
Furthermore, once such an accounting policy is selected, it must be used for all qualifying assets.
Can an intangible asset be a ‘qualifying asset’ under IAS 23?
Yes. An intangible asset that takes a substantial period of time to get ready for its intended use or sale is a ‘qualifying asset’.
Example could be software.

7. IAS 23: Borrowing Costs (cont.)
Definition of Terms
Borrowing costs: Include interest and other costs incurred by an entity in relation to borrowing of funds.
Qualifying asset: An asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
Borrowing costs to many is simply interest cost but to the standard is not just interest costs on short-term borrowings, such as bank overdrafts and notes payable, or long-term borrowings, such as term loans and real estate mortgages.

8. IAS 23: Borrowing Costs (cont.)
Commencement date for capitalisation
The date for capitalisation is the date when the entity first meets all of the following conditions:
It incurs expenditures for the asset;
It incurs borrowing costs; and
It undertakes activities that are necessary to prepare the asset for its intended use or sale.
An entity shall suspend capitalisation of borrowing costs for periods in which it suspends active development of a qualifying asset.
An entity will cease capitalising borrowing costs when substantially activities to prepare the qualifying asset for its intended use or sale is complete.

9. Practising Question
A real estate company incurred financial expenses in acquisition of permit in order to construct a building.
The company also acquired equipment needed to construct various buildings for sales or own uses.
Required to determine whether the borrowing costs on the acquisition of the permit and the equipment be capitalised until the construction of the building is complete?

10. Solution
Yes, for the permit, which is specific to one building. It is part of the construction cost of the building, which meets the definition of a qualifying asset.
No, the borrowing on the equipment can not be capitalised because it is already in place for ‘intended use’ at the acquisition date.
It does not meet the definition of a qualifying asset.

11. Illustration 1
On December 1, 2014, JohLex Limited began construction of homes for families that were hit by the recent gas explosion at Trade Fair and has became homeless.
The construction is expected to take 3½ years to complete. It is being financed by issuance of bonds for Ghc7 million at 12% per annum. The bonds were issued at the beginning of the construction. The bonds carry a 1.5% issuance cost.
The project is also financed by issuance of share capital with a 14% cost of capital. JohLex Limited has opted under IAS 23 to capitalize borrowing costs.
Required to compute the borrowing costs that need to be capitalized under IAS 23 for the first year.

12. IAS 23: Borrowing Costs (cont.)
Since these homes are “qualifying assets,” borrowing costs can be capitalized and are computed thus: Ghc Interest cost is Ghc7,000,000 bond = 7,000,000 x12% 840,000 Amortisation of issuance costs of the bond (0.015 x 7,000,000)/3.5 30,000 Total borrowing cost to be capitalised 870,000

13. IAS 23: Borrowing Costs (cont.)
Examples of qualifying assets include.
A toll bridge that takes a couple of years to construct before it is ready for use and is opened to the public.
A power plant that takes a substantial period of time to get ready for its intended use.
A hydroelectric dam that services the needs of a village and takes a considerable period of time to construct.
Inventories that are routinely manufactured or are produced on a repetitive basis over a short period of time are obviously not qualifying assets.

14. IAS 23: Borrowing Costs (cont.)
JohLex Limited engaged a consultant to advise on the company’s projects to be taken in order to diversify its operations and enhance its public image and ratings.
The consultant prepare a feasibility study based on the mandate for the company to construct a shopping mall that would house tenants of world-class designers and retail stores.
The consultant advised JohLex Limited that this kind of a project would improve the company’s image.
This shopping mall had certain distinguishing features that were unique in many respects, and it could easily win the popular title of the most popular commercial complex in the country.

15. IAS 23: Borrowing Costs (cont.)
Based on this advice, JohLex Limited began construction of the shopping mall on a huge plot of land in the heart of the city.
Substantial amounts were spent on its construction. Architects from around the globe competed for the project, and the construction was entrusted to the best construction firm in the country.
The construction took over two years from the date the project was launched. The total cost of construction was financed by long term loan from international bank.

16. IAS 23: Borrowing Costs (cont.)
Required to explain whether the shopping mall should be considered as a qualifying asset under the Standard?
Would the interest expense on the long term loan borrowed for the construction of the shopping mall qualify as eligible borrowing costs?
Solution
Yes, the shopping mall would be considered a qualifying asset as envisaged by the Standard because construction took a substantial period of time.
Furthermore, the interest expense on the funds borrowed for the construction of the shopping mall would qualify as eligible borrowing costs..

17. Recognition
Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset shall be capitalized as part of the cost of that asset.
Capitalization of borrowing costs as directly attributable to the acquisition, construction, or production of a qualifying asset as part of the cost of the asset is possible only if both these conditions are met:
It is probable that they will result in future economic benefits to the entity.
The costs can be measured reliably.
(If borrowing costs do not meet these criteria, then they are expensed.)

18. Eligibility to Capitalise Borrowing Cost
When borrowing is used specifically to acquire, construct, or produce an asset.
The borrowing cost that relates to that particular asset is readily identifiable.
Then, we can quantify the borrowing cost to be capitalized through process of elimination.
That is, we capitalize only the borrowing cost that is on qualifying asset and avoid expenditure on the those assets that do not qualified for capitalisation.

19. Illustration 2
A socially responsible multinational corporation (MNC) decided to construct a Highway that would link two sides of the village that were separated by a natural disaster years ago.
Realizing its role as a good corporate citizen, the MNC has been in this village for a couple of years exploring oil and gas in the nearby offshore area.
The highway would take two years to build and the total capital outlay needed for the construction would be not less than Ghc20 million.
To allow itself a margin of safety, the MNC borrowed Ghc22 million from three sources and used the extra Ghc2 million as working capital.

20. Illustration 2 (cont.) Financing was arranged in this way:
Bank term loans: Ghc5 million at 7% per annum
Institutional borrowings: Ghc7 million at 8% per annum
Corporate bonds: Ghc10 million at 9% per annum.
In the first phase of the construction of the tunnel, there were idle funds of Ghc10 million, which the MNC invested for a period of six months.
Income from this investment was Ghc500,000.
Required to calculate the borrowing cost to be capitalised, and what would it do with the investment income.

21. Solution
Under the allowed treatment under IAS 23, borrowing costs would be capitalized as part of the cost of the asset.
In order to capitalize the borrowing costs, a weighted-average cost of funds borrowed is computed:
= Ghc5 x 7% + Ghc7 x 8% + Ghc10 x 9% 𝐺ℎ22
= x100% = 8.22%
Total borrowing cost = Ghc20 million × 8.22 % per annum × 2 years = Ghc3.288million
Borrowing costs to be capitalized = Interest expense – investment income (gains rom investing idle funds)
= Ghc3,288,000 – 500,000 = Ghc2,788,000

22. Suspension of Capitalization
Capitalization shall be suspended during extended periods in which active development is interrupted unless that period is a necessary part of the process for the production of the asset.
For example, capitalization would be suspended during an interruption to the construction of a bridge during very high water levels, which are common in the area where construction is taking place.
However, capitalization of borrowing costs should not be suspended when there is only a temporary delay that is caused by certain expected and anticipated reasons, such as while an asset is getting ready for its intended use.

23. Disclosure An entity shall disclose:
The amount of borrowing costs capitalised during the period; and
The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.

24. IAS 36: Impairment of Assets
IAS 36: Overview of Impairment of Assets
Objective and scope
Identifying Impairments of Assets
Recognizing and measuring an impairment loss for an individual asset
Recognizing and measuring an impairment loss for cash-generating units and goodwill
Reversing an impairment loss
Disclosure

25. IAS 36: Impairment of Assets (cont.)
Objective
IAS 36 requires that assets that are reported on the statement of financial position at not more than the amount that entity can recover from their sale or use. 
Impairment loss: It is the amount by which the carrying amount of an asset or a cash-generating unit (CGU) of the asset exceeds its recoverable amount.
That is when the recoverable amount is greater than the carrying amount of the asset then the asset in question is impaired.

26. IAS 36: Impairment of Assets (cont.)
The scope of IAS 36:
IAS 36 EXCLUDES the following:
Inventories
Assets arising from construction contracts
Employee benefit assets
Deferred tax assets
Financial assets under IAS 39
Non-current assets or disposal groups held-for-sale
Investment property, biological assets based on FV measurements

27. IAS 36: Impairment of Assets (cont.)
Identifying an Impairment Loss
At the end of each balance sheet date (presumably 31st December or any other date) the entity should assess whether there is an indication that an asset is impaired.
Even when there is indication of impairment to the assets, these specific assets should be tested for impairment:
An intangible asset that has an indefinite useful life.
An intangible asset that is not yet available for use.
Goodwill that has been acquired in a business combination.

28. IAS 36: Impairment of Assets (cont.)
Recoverable amount:
This is higher of:
Fair value (i.e., transaction at arm’s length) less the disposal costs.
Value in use
Fair value less disposal costs = Proceeds from the sale of an asset/CGU between knowledgeable willing parties less incremental direct costs of its disposal.
Disposal costs: This is the legal costs, removal costs, costs to put in condition for sale.

29. IAS 36: Impairment of Assets (cont.)
Indication that the asset is impaired: External and internal sources of information.
If there is an indication that an asset is impaired, the asset’s useful life, depreciation, or residual value may need adjusting.
External Sources
Internal Sources
There is significant reduction in the asset’s market value.
There is evidence of obsolescence or physical damage of an asset.
There is a significant change in the technological market, economic, or legal environment that has affected adversely (negatively) the entity.
There is a significant change that adverse effect has taken place or expected to take place in how the asset is used.
There is increase in the market rate of return with a negative effect on the asset’s value and recoverable amount.
Internal reports about the asset indicate its performance is or will be worse than expected.
The entity’s net asset is greater than its market capitalisation.

30. IAS 36: Impairment of Assets (cont.)
Value in use = This is present value of the future cash flows expected from asset/CGU’s use and ultimate disposal
Two approaches:
Most likely cash flows from use and disposal discounted using risk-adjusted discount rate.
2. Probability-weighted cash flows from use and disposal discounted using remaining risk-adjusted discount rate.

31. Illustration 3 The following information relates to three assets:
Required:
In accordance with IAS 36, calculate the amount at which each asset will be impaired.
Plant
Motor vehicle
Equipment
Ghc
Carrying value
100,000
150,000
120,000
Net realizable value
110,000
125,000
Value in use
130,000
90,000

32. Solution Computation of Impairment Loss Plant Motor vehicle Equipment
Plant
Motor vehicle
Equipment
Ghc
Carrying value
100,000
150,000
120,000
Recoverable amount
130,000 -
20,000

33. Illustration 4
Bortey Limited produces and exports wooden hunger. The book value of the plant was Ghc1,800 as at 1st January 2013.
The Government of Ghana passed a legislation that restricts the exportation of lumber.
Consequently, Bortey has to reduce production significantly.
Cash flow forecast for the next four years included in the budget submitted for management approval in January 2013 shows the following:
Year
2013
2014
2015
2016
Ghc
Cash flows
550
500
300
700

34. Illustration 4 (cont.)
The cash flow forecast for 2016 includes expected proceeds from disposal of the plant.
The cash flow projections also ignore the effects of general upwards movement in prices.
It is estimated that if the plant is sold in January 2013, it would realize a net proceeds of GH₵ 1,320.
The costs of capital for Bortey is 15% (ignoring inflationary effect).
Required to calculate the recoverable amount of the plant and impairment loss (if any).

35. Solution
It is necessary to estimate the value in use and compare it with the fair value less cost to sell of the plant in order to determine whether an impairment has occurred and to quantify impairment loss.
NPV = Ghc1,454.30
Year
2013
2014
2015
2016
Ghc
Cash flow
550
500
300
700
15%
0.870
0.756
0.658
.572 PV
478.50
378
197.40
400.4

36. Solution To determine the recoverable is the higher of:
Fair value (i.e., transaction at arm’s length) less the disposal costs.
Value in use.
The recoverable amount is Ghc1,454.50
Computation of impairment loss
Fair value
Value in use
Determination
Recoverable amount
1,320
1,454.50
Ghc
Carrying amount
1,800
Recoverable amount
1,454.50
Impairment loss
345.70

37. Disclosure Requirements
For each class of asset an entity shall disclose:
Impairment losses recognized in the SOCI
Impairment losses reversed in the SOCI
The line item in the SOCI in which the impairment losses are included.
Additionally, any impairment losses recognized directly in equity should be disclosed, including reversals of impairment losses.

38. IAS 40: Investment Property
Overview of IAS 40:
Objective and scope
Recognition
Measurement at recognition
Measurement after recognition
Transfers
De-recognition
Disclosures

39. IAS 40: Investment Property (cont.)
Objective and scope
The standard is applied for the recognition, measurement and disclosure of investment property.
The standard provides guidelines on accounting treatment for investment property and, disclosures relating to investment property.
IAS 40 also applies to all investment property including those:
Held by a lessee’s financial statements under a finance lease
Held by a lessor’s financial statements and under an operating lease

40. IAS 40: Investment Property (cont.)
Definition of Terms:
Investment property: This is property held to earn rentals or for capital appreciation or both.
They are not meant to be :
Used in the production/ supply of goods or services or for administrative purposes; or
Sale in the ordinary course of business.

41. IAS 40: Investment Property (cont.)
Recognition
Investment property is recognized as an asset when:
It is probable that would be future economic benefits associated with the asset to the entity, and
That the cost can be measured reliably.

42. IAS 40: Investment Property (cont.)
Measurement after Recognition
Example:
Investment property was acquired on January 11, 2014, at a cost of GH₵200,000.
Fair values:
December 31, GH₵ 190,000
December 31, GH₵ 198,000
December 31, GH₵ 205,000

43. Solution The entries are as follows: Details Dr. Cr. Dec 31, 2014
Loss in the SOCI
10,000
Investment property
Dec 31, 2015
8,000
Gain in the SOCI
Dec 31, 2016
7,000

44. IAS 40: Investment Property (cont.)
De-recognition
Derecognize of investment property
On disposal : That is when the asset is sold or transferred under a finance lease, or
On retirement: That is when the asset is permanently removed from use and no benefits are expected from its disposal.
Gains and losses on disposal is generally recognized in profit or loss

45. IAS 40: Investment Property (cont.)
Disclosure Requirements
Whether the fair value measurement is applied:
If FVM, whether and when any operating leases are classified as investment property
Criteria used to distinguish between owner-occupied investment property and property held for sale where judgment is needed
Methods and assumptions underlying fair value measurements, including extent to which market-related evidence is used
Extent to which the fair values were determined by an experienced, professional, and independent appraiser
Existence of restrictions and contractual obligations related to the properties
Amounts and specific types of income and expense recognized in profit or loss