Case Study Report

Borrowing Cost
31/03/2021
Prepared by:
Nandini Pramadhani
Feelya Monica
Dinny Firvidiani
I. Problems Identification

Prime View Properties ( holding) limited (PVL) is a company incorporated in Hongkong.

PVL holds a portfolio of commercial buildings for rental income . The accounting policy to use
the cost model to account property, plant, and equipment and valuation model to account for
investment properties.

One of the sources of rental income is atlantic centre. The atlantic centre is a commercial
building that consist of ground floor until second floor for shopping centre and third floor until
twenty ninth floor for office building. The purchasing cost of atlantic centre is $240 million in
1990.Because of new office tower near the atlantic centre, the major tenant of atlantic centre
moving out. And during that years, the atlantic centre was rent by small tenant for short term
period.

As response to the event, PVL as parent company decided to convert the atlantic centre
into atlantic hotel and the shopping centre convert into atlantic place. Ownership of the building
divided into 2, atlantic place would be 100% owned by atlantic centre limited and atlantic hotel
owned by atlantic hotel limited.

To realization this project, the renovation would be costs to be financed by bank loans
with interest 5% per annum. From this cases, there are two problem appear, first whether PVL
allow to capitalized the borrowing cost to finance the convertion project as cost of atlantic place
and atlantic hotel based on accounting standard?

II. Identification and Discussion of Related IFRS

 Standard that concerning the cases are the IAS 23 about Borrowing Costs and IAS 27
about Separate Financial Statements (as amended in 2011).

The IAS 23 (Borrowing Costs) requires that the borrowing costs will directly attributable
to the acquisition, construction or production of a 'qualifying asset' (one that necessarily takes a
substantial period of time to get ready for its intended use or sale) are included in the cost of the
asset. By focusing on the case, the Atlantic Centre Limited 100% owned subsidiary of PVL.
From the Atlantic Centre’s prime location, PVL wants to converting the use of the AC to be a
mid-range hotel, so they change the use of the building such the 3rd until 29th becoming a hotel
and the ground and 2nd floor becoming shopping mall named Atlantic Place. For this situation the
renovation cost will be occurs and it will be financed by bank loans borrowed of 5% rate of
interest per annum.

The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs.
Borrowing costs include interest on bank overdrafts and borrowings, finance charges on finance
leases and exchange differences on foreign currency borrowings where they are regarded as an
adjustment to interest costs. This is relatable with the cases which the company financed by the
bank loans.

III. Proposed Solutions of The Problem

Solution of the problem the problems are, first whether PVL (trough ACL or AHL) can
capitalize the borrowing cost to finance the renovation work as cost of Atlantic Place and the
Atlantic Hotel, second how to present the capitalized amount in consolidated financial statement.
Solution for the first and second problem, based on the IAS 23 borrowing costs that are directly
attributable to construction or acquisition of an asset should be capitalized, based on the cases
7.1 borrowing cost from renovation of atlantic place and atlantic hotel can be capitalized.
Cost that will be measure to capitalize is actual costs less any income earned from temporary
investment of such borrowing. The borrowing costs should be stop to capitalized if the
renovation is interrupted and if the renovation was completed.
All of cost that are directly attributable to renovation process should be capitalized and
other borrowing cost recognized as expense. Actually in IASPLUS we can not find the specific
way to presented the capitalization, and in what account they should be presented. But we
already present the way to measure capitalization amount and what account the borrowing costs
should be recognized.
IV. Relation of the Solutions to the Conceptual Framework

The relation to the conceptual framework from this case are, first reliability because the
cost that will spend by PVL (trough ACL or AHL) to capitalize the renovation through
borrowing cost is really material, so the information must be free of material error and bias, and
not misleading. Thus, the information should faithfully represent transactions and prudently
represent estimates and uncertainties through proper disclosure.
Then, PVL must prepare relevant financial statement, information must be relevant to the
needs of the users, which is the case when the information influences their economic decisions.
This may involve reporting particularly relevant information, or information whose omission or
misstatement could influence the economic decisions of users. With this PVL can attract the
attention of potential investors to invest in their latest plans.