The annual assessment to determine whether there may have been some
impairment should be applied to all assets, including assets that have already been impaired in the past.
4: Accounting for tangible non-current assets
In some cases, the recoverable amount of an asset that has previously been impaired might turn out to be higher than the asset's current carrying value. In other words, there might have been a reversal of some of the previous impairment loss.
(a) The reversal of the impairment loss should be recognised immediately as income in profit or loss.
(b) The carrying amount of the asset should be increased to its new recoverable amount.
The asset cannot be revalued to a carrying amount that is higher than its value would have been if the asset had not been impaired originally, ie its depreciated carrying value had the impairment not taken place. Depreciation of the asset should now be based on its new revalued amount, its estimated residual value (if any) and its estimated remaining useful life.
An exception to this rule is for goodwill. An impairment loss for goodwill should not be reversed in a subsequent period.
Disclosure
IAS 36 calls for substantial disclosure about impairment of assets. The information to be disclosed includes the following.
(a) For each class of assets, the amount of impairment losses recognised and the amount of any impairment losses recovered (ie reversals of impairment losses)
(b) For each individual asset or cash generating unit that has suffered a
significant impairment loss, details of the nature of the asset, the amount of the loss, the events that led to recognition of the loss, whether the
recoverable amount is fair value less costs to sell or value in use, and if the recoverable amount is value in use, the basis on which this value was estimated (eg the discount rate applied)
An entity may receive monetary or non-monetary compensation from third parties for the impairment or loss of items of property, plant and equipment. The compensation may be used to restore the asset. Examples include:
Reimbursement by insurance companies after an impairment of items of plant and equipment
Physical replacement of an impaired or lost asset
An impairment loss recognised for an asset in prior years should be reversed if, and only if, there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. (IAS 36)
The accounting treatment is as follows.
(a) Impairments of items of property, plant and equipment should be recognised under IAS 36, disposals should be recognised under IAS 16.
(b) Monetary or non-monetary compensation from third parties for items of property etc that were impaired, lost or given up, should be included in profit or loss.
(c) The cost of assets restored, purchased, constructed as a replacement or received as compensation should be determined and presented under IAS 16.
5 IAS 23: Borrowing costs
IAS 23 Borrowing costs was revised in March 2007. Previously it gave a choice of methods in dealing with borrowing costs: capitalisation or expense. The revised standard requires capitalisation.
Only two definitions are given by the standard.
The standard lists what may be included in borrowing costs.
Interest expense calculated using the effective interest rate method as per IAS 39 (now per IFRS 9)
Finance charges in respect of finance leases recognised in accordance with IAS 17
Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs
Depending on the circumstances, any of the following may be qualifying assets.
Inventories
Manufacturing plants
Power generation facilities
Intangible assets
Investment properties
Financial assets and inventories that are manufactured or otherwise produced over a short period of time are not qualifying assets. Assets that are ready for their
intended use or sale when purchased are not qualifying assets.
Borrowing costs. Interest and other costs incurred by an entity in connection with the borrowing of funds.
Qualifying asset. An asset that necessarily takes a substantial period of time to get
ready for its intended use or sale. (IAS 23)
4: Accounting for tangible non-current assets
Recognition
Borrowing costs should be capitalised if they are directly attributable to the
acquisition, construction or production of a qualifying asset as part of its cost. Other borrowing costs are expensed as incurred.
Those borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are costs that would have been avoided had the expenditure on the qualifying asset not been made. This is obviously straightforward where funds have been borrowed for the financing of one particular asset.
Difficulties arise, however, where the entity uses a range of debt instruments to finance a wide range of assets, so that there is no direct relationship between particular borrowings and a specific asset. For example, all borrowings may be made centrally and then lent to different parts of the group or entity. Judgement is
therefore required, particularly where further complications can arise (eg foreign currency loans).
Once the relevant borrowings are identified, which relate to a specific asset, then the amount of borrowing costs eligible for capitalisation will be the actual borrowing costs incurred on those borrowings during the period, less any investment income on the temporary investment of those borrowings. It would not be unusual for some or all of the funds to be invested before they are actually used on the qualifying asset.
Example
On 1 January 20X9 a company borrowed $1.5m to finance the production of two assets, both of which were expected to take a year to build. Production started during 20X9. The loan facility was drawn down on 1 January 20X9, and was utilised as follows, with the remaining funds invested temporarily.
Asset A Asset B
$'000 $'000
1 January 20X9 250 500
1 July 20X9 250 500
The loan rate was 9% and the company can invest surplus funds at 7%.
Ignoring compound interest, what are the borrowing costs which may be capitalised for each of the assets and consequently the cost of each asset as at 31 December 20X9?
Asset A Asset B
To 30 June 20X9 $250,000/$500,000 ×
7% × 6/12 (8,750) (17,500)
36,250 72,500
Cost of assets
Expenditure incurred 500,000 1,000,000
Borrowing costs 36,250 72,500
536,250 1,072,500
In a situation where borrowings are obtained generally, but are applied in part to obtaining a qualifying asset, then the amount of borrowing costs eligible for capitalisation is found by applying the 'capitalisation rate' to the expenditure on the asset.
The capitalisation rate is the weighted average of the borrowing costs applicable to the entity's borrowings that are outstanding during the period, excluding borrowings made specifically to obtain a qualifying asset. However, there is a cap on the amount of borrowing costs calculated in this way: it must not exceed actual borrowing costs incurred.
Sometimes one overall weighted average can be calculated for a group or entity, but in some situations it may be more appropriate to use a weighted average for
borrowing costs for individual parts of the group or entity.
Example
A company had the following loans in place at the beginning and end of 20X6.
1 January
8.9% debenture repayable 20X7 – 150
The 8.9% debenture was issued to fund the construction of a qualifying asset (a piece of mining equipment), construction of which began on 1 July 20X6.
On 1 January 20X6, the company began construction of a qualifying asset, a piece of machinery for a hydro-electric plant, using existing borrowings. Expenditure drawn down for the construction was: $30m on 1 January 20X6, $20m on 1 October 20X6.
What are the borrowing costs to be capitalised for the hydro-electric plant machine?
4: Accounting for tangible non-current assets
Capitalisation rate = weighted average rate
= (10% ×
An entity can start to capitalise borrowing costs on the commencement date. This is the date when the following conditions are met:
(a) Expenditure on the asset is being incurred (b) Borrowing costs are being incurred
(c) Activities are undertaken that are necessary to prepare the asset for its intended use or sale
Expenditure must result in the payment of cash, transfer of other assets or
assumption of interest-bearing liabilities. Deductions from expenditure will be made for any progress payments or grants received in connection with the asset. IAS 23 allows the average carrying amount of the asset during a period (including
borrowing costs previously capitalised) to be used as a reasonable approximation of the expenditure to which the capitalisation rate is applied in the period. Presumably more exact calculations can be used.
Activities necessary to prepare the asset for its intended sale or use extend further than physical construction work. They encompass technical and administrative work prior to construction, eg obtaining permits. They do not include holding an asset when no production or development that changes the asset's condition is taking place, eg where land is held without any associated development activity.
Cessation of capitalisation
Once substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete, then capitalisation of borrowing costs should cease. This will normally be when physical construction of the asset is completed, although minor modifications may still be outstanding.
The asset may be completed in parts or stages, where each part can be used while construction is still taking place on the other parts. Capitalisation of borrowing costs should cease for each part as it is completed. The example given by the standard is a business park consisting of several buildings.