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AmInvest Research Reports

Author: AmInvest   |   Latest post: Fri, 19 Jul 2019, 9:51 AM

 

Property Sector - IAS 23 Borrowing Costs: No Impact on Valuations

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  • Addressing the matter. The Securities Commission (SC) on 17 June organised a meeting to discuss the impact on the IAS 23 on Malaysian developers. The meeting was attended by representatives from the SC, Bursa Malaysia, the Malaysian Accounting Standards Board (MASB), corporates, bankers and analysts.
  • Consistency with IFRS. On 20 March 2019, the IFRS Interpretations Committee (IFRIC) issued an Agenda Decision — Over Time Transfer of Constructed Good (IAS 23 Borrowing Costs). Following the agenda decision, the MASB has decided that an entity shall apply the change in its accounting policy as a result of the Agenda Decision on IAS 23 Borrowing Costs to financial statements of annual periods beginning on or after 1 July 2020.
  • Changes in accounting treatment. IAS 23 states that borrowing costs 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. Other borrowing costs are recognised as an expense.

When a project is ready for sale, borrowing costs which have been previously capitalised subsequent to the launch will need to be unwound and recognised as expenses in the income statement including the borrowing costs previously capitalised unsold units classified under inventories.

  • Impact on developers. Developers are still assessing the effect on the change in accounting policy, therefore it is still early to determine the real impact to earnings. Although initial rough estimates suggested the new approach will reduce the FY20– FY21 bottom line by between 10% and 20%, we are not making changes to our earnings forecasts at this juncture pending further information from the developers.

Note that the new implementation is only a timing difference in recognising the borrowing costs and shall have no impact on cash flows, hence we are keeping our valuations unchanged no matter how much revision to be made into our earnings forecasts in the future.

Source: AmInvest Research - 18 Jun 2019

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