The IFRS Interpretation Committee (“IFRIC”) issued IFRIC Agenda Decision: Over time transfer of constructed good (IAS 23 Borrowing Costs) on 15 March 2019. It summarises IFRIC’s responses to a question on capitalisation of borrowing costs. The submitter sought clarification in relation to the capitalisation of borrowing costs for a construction of a multi-unit real estate development (building).
Although IFRIC chairperson and the vice-chair of the International Accounting Standards Board (“IASB”), Sue Lloyds had to a certain extent indicated IASB’s expectation that the IFRIC agenda decision should be applied in months after it is issued instead of years, in Malaysia, the agenda decision is only required to be applied to financial statements for the annual period beginning on or after 1 July 2020. This is based on the announcement made by the Malaysian Accounting Standards Board (“MASB”), the standard-setter which is responsible for the accounting standards in Malaysia on 20th March 2019. More details on IFRIC Agenda Decision are available in IFRIC Agenda Decision: How does it affect you?
For this round, we are interested to find out what is the financial impact arising from this agenda decision to the Malaysian listed companies. So, let’s now dive into the details.
About IFRIC Agenda Decision: Over time transfer of constructed good
Let us first brief you a little bit more on the question raised to IFRIC.
The fact pattern
In the submission to IFRIC, the submitter asked whether based on the fact pattern given, an entity has a qualifying asset. This is because entities are able to capitalise any directly attributable borrowing costs.
The fact pattern given are as follows:
- In this case, a real estate developer (entity) constructs the building and sells the individual units in the building to customers.
- the entity borrows funds specifically for the purpose of constructing the building and incurs borrowing costs in connection with that borrowing.
- before construction begins, the entity signs contracts with customers for the sale of some of the units in the building (sold units).
- the entity intends to enter contracts with customers for the remaining part-constructed units (unsold units) as soon as it finds suitable customers.
- the terms of, and relevant facts and circumstances relating to, the entity’s contracts with customers (for both the sold and unsold units) are such that, applying paragraph 35(c) of IFRS 15 Revenue from Contracts with Customers, the entity transfers control of each unit over time and, therefore, recognises revenue over time. The consideration promised by the customer in the contract is in the form of cash or another financial asset.
Following the fact pattern above, entities may have recognised a receivable, a contract asset and/or inventory (work-in-progress) in the financial statements. The question is then whether all these type of assets are considered as qualifying assets.
Recap of the principles in IAS 23 Borrowing Costs
As a quick recap, IAS 23 states that qualifying asset is an asset that necessarily takes a substantial period to get ready for its intended use or sale. Any directly attributable borrowing costs that relate to the acquisition, construction or production of a qualifying asset can be capitalised as part of the cost of that asset, provided that the asset meets the definition of a qualifying asset. If there is no qualifying asset, the borrowing costs will need to be expensed off to profit or loss when incurred.
IFRIC’s view on the issue
In that IFRIC Agenda Decision, IFRIC concludes that all the assets (receivable, contract asset or inventory) are not a qualifying asset on the following basis:
- Receivable – receivable is a financial asset and accordingly, it is a not a qualifying asset because IAS 23 has clearly stated that financial asset is not a qualifying asset.
- Contract asset – contract asset is not a qualifying asset because the intended use of a contract asset is to collect cash or other financial asset, instead of a use for which it necessarily takes a substantial period to get ready. This is based on the definition of contract asset as defined in IFRS 15.
- Inventory (work-in-progress) for unsold units under construction – inventory is not a qualifying asset based on the fact pattern because the asset is ready for its intended sale in its current condition. This is for the fact that the entity intends to sell the partly-constructed units as soon as it finds suitable customers, and on signing a contract with a customer, will transfer control of any work-in-progress relating to that unit to the customer.
The current practice in Malaysia
In Malaysia, the general practice is for entities to capitalise the borrowing costs for the partly-constructed unit as part of the cost of inventory although the asset is ready for sale in its current condition. AmInvestment Bank Bhd initial forecast states that the change in accounting policy will reduce the developers’ bottom line between 10% to 20% for financial year 2020 to 2021 when the agenda decision is implemented.
Now, let’s see how this agenda decision affects Malaysian listed companies.
Analysis of the financial effects of the IFRIC Agenda Decision
As the agenda decision is only applied for financial period beginning on or after 1 July 2020, the resulting effects from the change in accounting policy by companies is available in their interim financial statements, for the time being.
Some companies have also decided to early adopt the agenda decision before the date required by MASB. For the purpose of this analysis, the companies are selected from the main market and under the property sector category.
Adoption impact reported in the financial statements
The table below shows the effects to the retained earnings/accumulated losses of the companies (excluding the portion that belongs to non-controlling interests) following the change in the accounting policy arising from the implementation of the agenda decision:
| Company name | Effects to retained earnings/ accumulated losses | At the date of transition (RM ‘000) | At the date of transition (%) | Transition year end (RM ‘000) | Transition year end (%) | Source of information | |
|---|---|---|---|---|---|---|---|
| 1. | South Malaysia Industries Berhad | Increased in accumulated losses | 524 | 0.55% | No information | – | Quarterly report for financial period ended 31 March 2021 |
| 2. | Malaysian Resources Corporation Berhad | Decreased in retained earnings | 26,152 | 5.68% | 27,382 | 11.36% | Quarterly report for financial period ended 31 March 2021 |
| 3. | Mah Sing Group Berhad | Decreased in retained earnings | 29,733 | 1.76% | 35,790 | 2.17% | Quarterly report for financial period ended 31 March 2021 |
| 4. | Thriven Global Berhad | Decreased in retained earnings | 1,765 | 4.35% | 4,530 | 9.36% | Quarterly report for financial period ended 31 March 2021 |
| 5. | Sime Darby Property Berhad | Decreased in retained earnings | 63,723 | 0.66% | 98,734 | 1.08% | Quarterly report for financial period ended 31 March 2021 |
| 6. | IOI Properties Group Berhad | Decreased in retained earnings | 258,974 | 2.88% | 209,972 | 2.26% | Quarterly report for financial period ended 31 March 2021 |
| 7. | Paramount Corporation Berhad | Decreased in retained earnings | 2,565 | 0.31% | 2,049 | 0.19% | Quarterly report for financial period ended 31 March 2021 |
| 8. | Tambun Indah Land Berhad | Increased in retained earnings | 207 | 0.06% | 538 | 0.15% | Quarterly report for financial period ended 31 March 2021 |
| 9. | OSK Holdings Berhad | Decreased in retained earnings | 1,511 | 0.06% | 3,214 | 0.11% | Quarterly report for financial period ended 31 March 2021 |
| 10. | SP Setia Berhad | Decreased in retained earnings | 34,108 | 0.24% | 34,045 | 0.77% | Quarterly report for financial period ended 31 March 2021 |
| 11. | LBS Bina Group Berhad | Decreased in retained earnings | 66,014 | 10.69% | No information | – | Quarterly report for financial period ended 31 March 2021 |
| 12. | PLB Engineering Berhad | Decreased in retained earnings | No information | – | 6,036 | 17.88% | Quarterly report for financial period ended 28 February 2021 |
| 13. | Eco World Development Group Berhad | Decreased in retained earnings | 50,765 | 6.81% | 25,786 | 2.93% | Quarterly report for financial period ended 31 January 2021 |
In addition to the above, it is also noted that 3 companies had also assessed the impact from the agenda decision, but concluded that the effects were not material to the companies. They are UEM Sunrise Berhad, Crescendo Corporation Berhad and Matrix Concepts Holdings Berhad. Two companies – Eupe Corporation Berhad and Global Oriental Berhad had also disclosed that they are still assessing the impact from the agenda decision.
Conclusion
The above sums up the findings on the effects arising from the adoption of the agenda decision to the property players listed in the main market in Malaysia.
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