IAS 23 Borrowing Costs 02

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DEFINITIONS
Borrowing Borrowing costs are interest and other costs that an entity incurs in
costs connection with the borrowing of funds.
A qualifying asset is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale.
Qualifying
asset 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 acquired are not qualifying assets.
QUESTION 01
Identify whether or not the following are qualifying assets.
(a) a construction company constructing a bridge for government which will take 6 years
to complete.
(b) a very sophisticated integrated circuits being made by an entity who manufactures
and sales 10,000 to 12,000 units every month.
(c) a power plant under construction, it may take 10 months to complete this.
(d) an equipment purchased by X Limited, the equipment may be used immediately after
it is delivered.
(e) special order from a customer to manufacture a machine for him which will take 11
months at the least.
(f) An entity is constructing office building which will take 8 months to complete.

RECOGNITION AND CALCULATION

Borrowing costs

directly attributable (that would have been

avoided if the expenditure on the Other
qualifying asset had not been made.) to
the acquisition, construction or production
of a qualifying asset
Recognise as an expense in the period in
which it is incurred (P&L)
Capitalise as part of the cost of that asset

IN CASE OF “SPECIFIC BORROWINGS” Rs.

Actual borrowing costs incurred [Outstanding borrowing x interest rate x months/12] XXX
Less: Temporary investment income [Amount invested x interest rate x months/12] (XX)
Amount to be capitalized XXX

IN CASE OF “GENERAL BORROWINGS” Rs.

[Expenditure on QA x Capitalisation rate x months/12] XXX
[Expenditure on QA x Capitalisation rate x months/12] XXX
Amount to be capitalized XXX
The capitalisation rate shall be the weighted average of the borrowing costs applicable to
the borrowings of the entity that are outstanding during the period, other than borrowings
made specifically for the purpose of obtaining a qualifying asset.
Total borrowing costs incurred
Capitalisation rate = X 100
Weighted borrowings outstanding
 ICMAP M4 Financial Accounting

Note: In periods when finance costs are not being capitalised, temporary investment income
is not deducted from finance costs capitalised rather it is charged as income in profit or loss.

QUESTION 02
Up Limited borrowed a loan of Rs. 10 million from Down Bank on 15% per annum for
2| constructing its power generation facilities. The loan was received on February 01, 2011. Rs.
3 million were spent immediately but remaining Rs. 7 million were paid to the contractor on
March 1, 2011. Rs. 7 million were temporarily invested in a saving account at 9% per
annum. Up Limited has year-end of 31 December. As on December 31, 2011 the
construction is still in process and the loan is also outstanding.

Required:
Calculate the amount of borrowing cost to be capitalised for the year ended December 31,
2011?

QUESTION 03
SIKA Sports Limited is currently constructing a stadium. Up to 31 December 2011, it has
incurred the following expenditures.
April 30, 2011 Rs. 2,500,000
July 31, 2011 Rs. 2,300,000

No specific loan was borrowed for the construction; rather general pool of funds was used.
The following loans are outstanding:
Loan from FBL @12% Outstanding since 01-10-2010 Rs. 5,000,000
Loan from BAH @14% Outstanding since 01-08-2010 Rs. 10,000,000
Loan from BAF @16% Outstanding since 01-09-2011 Rs. 750,000

Required:
Calculate total borrowing costs eligible for capitalisation.

CAPITALISATION PERIOD
The commencement date for capitalisation is the date when the entity
first meets all of the following conditions:
(a) it incurs expenditures for the asset;
Commencement
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for
its intended use or sale.
during extended periods in which it suspends active
SUSPEND
development of a qualifying asset.
 during a period when it carries out substantial
technical and administrative work.
 when a temporary delay is a necessary part of the
Suspension process of getting an asset ready for its intended use
DO NOT
or sale. For example, capitalisation continues during
SUSPEND
the extended period that high water levels delay
construction of a bridge, if such high water levels are
common during the construction period in the
geographical region involved.

when substantially all the activities necessary to prepare the qualifying

Cessation
asset for its intended use or sale are complete.

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 Class Notes

QUESTION 04
Cord Limited is engaged in the manufacturing of automobiles. Currently the company is
manufacturing its power generation plant. The project was started on January 15, 2011 with
company’s own funds. Subsequently, Cord Limited borrowed a loan from ZBL Bank to
finance the project on February 22, 2011. The first payment out of the loan was made on
March 04, 2011. Due to some law and order situation, the project remained closed from April
25, 2011 to May 9, 2011. The work was also suspended for a week from May 23, 2011 to |3
May 30, 2011 so that necessary plan and layout can be finalized after testing of project
completed so far. The plant was completed on July 31, 2011 except that some sign board
could not be installed until August 10, 2011. Loan was repaid on August 31, 2011. Cord
Limited started using the plant on September 1, 2011.

Required:
From when Cord Limited should start capitalising borrowing costs?
Should Cord Limited suspend capitalisation from April 25, 2011 to May 9, 2011?
Should Cord Limited suspend capitalisation from May 23, 2011 to May 30, 2011?
When Cord Limited should cease to capitalise borrowing costs?

QUESTION 05 PE November 2013 Q5 (c)

Ahad Limited has been constructing a property for the last 10 months. At December 31,
2012 (year-end) the property was nearing completion and the costs incurred to date were as
under:
Rs. in million
Materials 500
Labour 250
Other directly attributable overheads 200
Interest on borrowings 70

It is the company’s policy to capitalize interest on specific borrowings raised for the purpose
of financing a construction. The amount of borrowings outstanding at December 31, 2012 in
respect of this project is Rs. 800 million and the interest rate is 10.50% per annum.

During the six months to June 30, 2013 the project was completed, with the following
additional costs incurred:
Rs. in million
Materials 150
Labour 100
Other directly attributable overheads 50

Required:
You are required to calculate the following as per IAS 23:
(i) Borrowing cost incurred for the year ended December 31, 2013 on the project.(02)
(ii) Cost of property as at December 31, 2013. (05)

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 ICMAP M4 Financial Accounting

QUESTION 06 Model Paper Q5 (c)

Solar Power Inc., borrowed Rs. 2 million to finance two (2) power plants, Plant-1, Plant-2 to
be manufactured which were expected to take a year to build. The finance was arranged on
January 01, 2012 and loan facility was drawn down. The loan facility carried a 10% interest
per annum. Funds were utilized as follows with remaining funds invested temporarily @ 6%
per annum:
4| Rs. “000”
Plant-1 Plant-
2
January 01, 2012 fund used 200 300
April 01, 2012 fund used 100 200
July 01, 2012 fund used 500 700
800 1,200
Required:
(i) Calculate the borrowing cost to be capitalized for each plant. (04)
(ii) Calculate the cost of each plant asset as at December 31, 2012. (02)

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