STATEMENT OF
FINANCIAL ACCOUNTING STANDARD
SFAS No.
26
(1997 Revision)
INDONESIAN INSTITUTE OF ACCOUNTANTS
BORROWING COSTS
BORROWING COSTS_______________________________________
SFAS No. 26
Statement of Financial Accounting Standard (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 Executive Committee of the Indonesian
Institute of Accountants on January 14, 1997.
As of the effective date of this Statement, the previous SFAS No. 26, Accounting for
Interest During the Construction Period, has been superseded.
Jakarta, January 14, 1997
Indonesian Accounting Principles Committee
Drs. Jusuf Halim
Dra. Istini T. Siddharta
Drs. Mirza Mochtar, MBA
Dr. Wahjudi Prakarsa
Dr. Katjep K. Abdoelkadir
Drs. Jan Hoesada, MM
Drs. Hein G. Surjaatmadja
Drs. Sobo Sitorus
Drs. Timoty E. Marnandus, MBA
Dra. Mirawati Sudjono, MSc
Dr. Nur Indriantoro
Drs. Rusdy Daryono
Dra. Siti Ch. Fadjriah
Drs. Osman Sitorus
Drs. Jusuf Wibisana, MSc
Dra. Yosefa Sayekti, MCom
Drs. Heri Wahyu Setiyarso, MBA
Chairman
Vice Chairman
Secretary
Member
Member
Member
Member
Member
Member
Member
Member
Member
Member
Member
Member
Member
Member
BORROWING COSTS_______________________________________
SFAS No. 26
CONTENTS
paragraphs
INTRODUCTION................................................................................................
Objective.................................................................................................
Scope.......................................................................................................
Definitions...............................................................................................
01-05
01
02-04
05
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....................................................................
06-25
09-10
11-15
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 26
(1997 REVISION), BORROWING COSTS....................................................
Disclosure...........................................................................................
Transition............................................................................................
Effective Date.....................................................................................
16
17-19
20-21
22-25
26-37
35
36
37
BORROWING COSTS
SFAS No. 26
INTRODUCTION
Objective
01
The objective of this Statement is to prescribe the accounting treatment for
borrowing costs. This Statement generally requires the immediate expensing of interest
costs as 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
05
The following 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.
Qualifying assets are assets that necessarily take a substantial period of
time to get them ready for their intended use or sale.
EXPLANATION
06
Borrowing costs includes the following:
(a)
Interest on borrowed funds, either short-term or long-term.
(b)
Amortization of discounts or premiums related to the borrowings.
(c)
Amortization of costs incurred in connection with obtaining the borrowing
such as consultants’ fees, legal fees, commitment fees and the like.
(d)
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.
1
BORROWING COSTS
SFAS No. 26
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.
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
Borrowings 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, it
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 a qualifying asset did not occur. For instance: if there is centralization of
the financing function for all business activities. It can also be difficult if the Company
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 judgment is required.
13
If the borrowing is specifically 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 investment income earned on the
unused proceeds from the borrowings.
14
The financing arrangements for the acquisition of a qualifying asset may
require a company to receive the borrowed funds and pay borrowing costs before all or
part of the borrowed funds are used for the acquisition of the qualifying asset. In
2
BORROWING COSTS
SFAS No. 26
determining the amount of borrowing costs that are eligible for capitalization during the
period, the 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
16
When the carrying amount or the expected ultimate cost of the qualifying
asset exceeds 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 commences when:
(a)
Expenditures for the asset have been incurred;
(b)
Borrowing costs have been incurred; and
(c)
Activities that are necessary to get the asset ready for development or production
are in progress.
18
Expenditures on qualifying assets consist of payments of cash, transfers of
other assets, or the assumption of 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 asset for its intended use or
sale encompass more than physical construction of the asset. They include technical and
administrative work prior to the commencement of physical construction, such as the
activities associated with obtaining permits prior to the commencement of the physical
construction. It is considered that no activities have taken place if the company does not
engage in development or production efforts to change the condition of the asset. For
3
BORROWING COSTS
SFAS No. 26
instance, borrowing costs incurred during the period in which land is being developed
should be capitalized. However, if the company purchases land and does not conduct any
activities, the borrowing costs should not capitalized.
Suspension of Capitalization
20
Capitalization of borrowing costs should be suspended during extended
periods in which acquisition, construction, or production activities are interrupted.
21
Borrowing costs may continue to be incurred during a period in which
acquisition, construction or production activities are interrupted; however, the borrowing
costs during this period should not be capitalized. Under certain circumstances, physical
construction activities are interrupted when technical and administrative tasks are being
carried out. Under these circumstances, capitalization of borrowing costs should not be
suspended. Capitalization of borrowing costs is also not suspended when a temporary
delay/interruption is 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 should not be suspended if such high water levels are common in
that geographic location.
Cessation of Capitalization
22
Capitalization of borrowing costs should cease when activities to acquire,
construct or produce the qualifying asset are substantially complete.
23
An asset is normally ready for its intended use or sale when physical
construction is complete, even though routine administrative activities may still be
required. Under such circumstances, borrowing costs should not 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 should apply only to the uncompleted parts.
25
In a business park comprising several buildings, each building can be
considered individually as qualifying assets because the first completed building could be
used, sold or rented in accordance with the 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 not considered complete until the
whole plant is complete. This is because the plant has to be completed before any part
can be used.
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NUMBER 26
(1997 REVISION)
4
BORROWING COSTS
SFAS No. 26
BORROWING COSTS
Statement of Financial Accounting Standard No. 26 consists of paragraphs 26-37.
This Statement should be read in the context of paragraphs 1-25.
26
The following 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.
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 28.
28
Borrowings 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 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 investment income earned on the
unused proceeds from the borrowings.
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
commences when:
(a)
Expenditures for the asset have been incurred;
(b)
Borrowing costs have been incurred; and
(c)
Activities that are necessary to get the asset ready for development or production
are in progress.
5
BORROWING COSTS
SFAS No. 26
32
Capitalization of borrowing costs should be suspended during extended
periods in which acquisition, construction, or production activities are interrupted.
33
Capitalization of borrowing costs should cease when activities to acquire,
construct or produce the qualifying asset 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 should apply only to the uncompleted parts.
Disclosure
35
The financial statements should disclose:
(a)
The accounting policy for borrowing costs;
(b)
The amount of borrowing costs capitalized during the period; and
(c)
The capitalization rate used.
Transition
36
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
37
This Statement becomes effective for financial statements covering
periods beginning on or after January 1, 1997. Earlier application is encouraged.
6