Emerging Issues in the

Implementation of IFRS-based

Standards in Indonesia

Rosita Uli Sinaga & Danil S. Handaya Indonesian Accounting Standards Board

1

Why is it important ?

• Consistency and quality of the application

of IFRSs and IFRSs-based standards

• Public’s/stakeholders’ perception of

standard setters’ response to practical implementation issues

2

Implementation Issues

1. Accounting for land (right)

2. Accounting for telecommunication tower

3

Accounting for Land Right

4

Land (Right) Arrangement in Indonesia

• Do not permit entities, other than individuals (exception

applies) to own freehold title to land. Instead, can purchase a

right (to build, to cultivate, to use) over the land

• The rights can be extended and renewed indefinitely given no

violation towards the agreed arrangement on the land usage

• Nominal amount (administration fee and related tax) paid to

the State on extension and renewal. The amount paid is not a

reflection of the value of the land (right)

• The State acts as the administrator in administering the (legal)

relation between the land and its right holder

• The State can revoke the rights based on public interest, with

compensation given to the right holders. Compensation

based on agreed amount, normally based on market value of the land

5

(continued)

• The rights can be used as collateral of debts, and can

be transferred through sale or other means

• In substance, there is no difference between freehold

title to land (ownership) and the rights over the land (risk

and reward)

• The rights can be extended and renewed indefinitely

• The value of the land generally appreciates over time,

and not affected by the remaining “useful life” in a

particular extension or renewal period

6

(continued)

7

Should the purchase of a right over the land be accounted for as a:

a) purchase of property, plant and equipment (IAS 16);

b) purchase of an intangible asset (IAS 38); or

c) lease of land (IAS 17) ?

Should the right over the land be depreciated ?

Indonesian Interpretation (ISAK 25)

• Cost related to acquisition of right over the land is recognised

as an asset in accordance with IAS 16, unless the asset meets

the definition on investment property or inventory

• Useful life of the asset is assumed to be indefinite therefore it is

not depreciated unless it could be proven otherwise which

indicate that the probability of the failure to extent or renew the right is high

• Legal cost related to the acquisition of the land should be

recognised as part of the acquisition cost of the land in

accordance with IAS 16

• Legal cost related to the extensions or renewals of the land

should be recognised as an intangible asset and should be

depreciated over the over the extension/renewals period or

useful life of the land whichever is shorter

8

(continued)

Why PPE (IAS 16)?

• Freehold title to land (ownership) = PPE

Rights over the land = freehold title to land (ownership)

Rights over the land = PPE

• Ultimate ownership

– the rights can be used as collateral of debts, and can be

transferred through sale or other means (agreed price based on market value)

– The rights can be extended and renewed indefinitely (no

precedence of rejection)

9

(continued)

Why not depreciated?

• The rights can be extended and renewed indefinitely (no

depreciation basis)

• The value of the land generally appreciates over time,

and not affected by the remaining “useful life” in a

particular extension or renewal period

10

Timeline

11

2011

Revocation of local standard and observation

of multi interpretation issue

19-20 December 2011

2nd EEG Meeting (New Delhi)

1 November 2011

Submit clarification request to IFRS

Interpretations Committee 2012 (13-14 March 2012, 15-16 May 2012, 18-19

September 2012)

IFRS Interpretation Committee Meeting

Discussions with

stakeholders and regulators

(continued)

1. 2011 DSAK IAI revoked a local standard specifically

govern accounting for land, soon after followed by

multi interpretation issue on the accounting for land

(right)

2. 1 November 2011 DSAK IAI submitted clarification

request to IFRS Interpretations Committee

3. 19-20 December 2011 the issue was discussed at the

2nd EEG Meeting (New Delhi)

4. 2012 the issue was discussed at the IFRS

Interpretations Committee Meeting on 13-14 March

2012, 15-16 May, 18-19 September 2012

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Discussion Highlights

• 2nd EEG Meeting

– Different opinions from participants

– Acknowledge the potential issue on how local jurisdiction regulation on land (right) might affect the accounting treatment

– Issue proposed to be discussed at the IFRS Interpretations Committee Meeting

• IFRS Interpretations Committee Meeting

– Issue continually discussed at the last three meetings – Committee tentative agenda decisions

– Identified characteristics of lease, in accordance with definition of lease in IAS 17. The existence of an indefinite period does not prevent the “right to use” from qualifying as a lease

– Judgment on the appropriate length of depreciation period must include renewals

– IFRS Interpretations Committee noted that the particular fact pattern is specific to

one jurisdiction, and decided not to take the issue onto its agenda

13

ED Leases • Refer to IFRIC’s statement (September 2012 Meeting)

‘The Interpretations Committee noted that a lease could be

indefinite via extensions or renewals and, therefore, the existence of

an indefinite period does not prevent the ‘right to use’ from qualifying

as a lease in accordance with IAS 17’

CONSIDERATION

1. To clearly define ‘long term lease’ and how to differentiate (in

substance) with fixed asset – does the definition of long term lease

include indefinite lease?

– Ownership over ‘residual’

– Ultimate control over the (leased) asset – ability to transfer the asset to

other parties (and obtain benefit / reward from the lease)

2. To provide clear definition and guidance on what constitute as a

property 14

Accounting for

Telecommunication Tower

15

Telecommunication Tower

• Permanent structure – part of a building/land, not

part of a mobile facility

• Belong to entities which engage primarily in

telecommunication tower leasing, and with no

association in any form with telecommunication

operators entities

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• Emerging business model – telecommunication

tower sharing/leasing

• Domestic law – utilisation of telecommunication

towers should be shared, monopolisation is

prohibited

• Tower owners receive rent revenue in exchange for leasing spaces in the towers to

telecommunication operators, to which they

attach their own devices

• Owners provide some basic services to the telecommunication operator (e.g. maintenance

services)

Business Model

17

(continued)

18

Can telecommunication towers be considered as building or

property?

What is the object of sale/lease? Sale of network service

access, or lease of towers spaces?

Accounting Issues

• Telecommunication tower has some of the characteristics of

investment property – spaces on the tower are let to tenants to earn

rentals

• However, telecommunication tower lacks features associated with a

building – walls, floors, and roof.

– Relevant to other structures, such as oil/gas storage tanks, advertising

billboards, etc

• Potential effect to bottom line figure when different measurement

model is applied (IAS 16 – revaluation, IAS 40 – fair value) -

comparability

ISSUES

1. Definition of building – property (IAS 16 and IAS 40)

2. Object of sale/lease – business model and element of (ancillary)

service 19

Definition of Building - Property

Paragraph 6 of IAS 16

Property, plant and equipment are tangible items that:

a) are held for use in the production or supply of goods or services, for

rental to others, or for administrative purposes; and

b) are expected to be used during more than one period

Paragraph 5 of IAS 40

Investment property is property (land or a building—or part of a building—

or both) held (by the owner or by the lessee under a finance lease) to

earn rentals or for capital appreciation or both, rather than for:

a) use in the production or supply of goods or services or for

administrative purposes; or

b) sale in the ordinary course of business

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Ancillary Service Element

Paragraph 11 & 12 of IAS 40

In some cases, an entity provides ancillary services to the

occupants of a property it holds. An entity treats such a property

as investment property if the services are insignificant to the

arrangement as a whole. An example is when the owner of an

office building provides security and maintenance services to the

lessees who occupy the building

In other cases, the services provided are significant. For example, if

an entity owns and manages a hotel, services provided to guests

are significant to the arrangement as a whole. Therefore, an

owner-managed hotel is owner-occupied property, rather than

investment property

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FASB’s Investment Property Entities Exposure Draft

Investment Property

Real estate property, including any property improvements or integral

equipment, held by an investment property entity (within the scope of

Topic 973) for investing purposes rather than for either of the following

purposes:

a) The entity’s own use in the production or supply of goods or services

or for administrative purposes;

b) Development for sale in the ordinary course of business upon

completion

Property Improvements or Integral Equipment

Any physical structure or equipment attached to the real estate, or other

parts thereof, that cannot be removed and used separately without

incurring significant cost. Examples include an office building, a

manufacturing facility, a power plant, and a refinery 22

Timeline

23

December 2011

Clarification request from the Indonesian Capital

Market and Financial Institution Supervisory Agency

28-29 May 2012

3rd EEG Meeting (Argentina)

4 September 2012

Submit clarification request to IFRS Interpretations

Committee

18-19 September 2012

IFRS Interpretation Committee Meeting Discussions with

stakeholders and regulators

(continued)

1. December 2011 DSAK IAI received clarification

request from the Indonesian Capital Market and

Financial Institution Supervisory Agency

2. 28-29 May 2012 the issue was discussed at the 3rd

EEG Meeting (Argentina)

3. 4 September 2012 DSAK IAI submitted clarification

request to IFRS Interpretations Committee

4. 18-19 September 2012 the issue was discussed at

the latest IFRS Interpretations Committee Meeting

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Discussion Highlights

• 3rd EEG Meeting

– Acknowledge the emerging telecommunication tower sharing business

model

– Acknowledge the issue with the (lack of) definition of property – building in

the current standards (IAS 16 and IAS 40)

– Majority consider telecommunication tower as a PPE – equipment

• IFRS Interpretations Committee Meeting

– Acknowledge the issue with the term building in paragraph 5 of IAS 40,

and what constitute as the definitive features of a building

– Taking into consideration the role of the service elements in the business

model

– IFRS Interpretations Committee requested the staff to analyse this issue

further and to consider whether amendments to the scope of IAS 40 could

or should be made

25

ED Leases

• Different lease treatments for assets

classified as ‘property’

• No further definition, explanation, and

clarification on what is defined as ‘property’

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THANK YOU

- 2012 -

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