02 IAS 23 Borrowing costs PDF

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© kashifadeelPage | 1IAS 23 Borrow ing Costs02DEFINITIONSBorrowing costs Qualifying assetDefinitionsBorrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.A qualifying asset is an asset that necessarily takes a substantial period of time to get r...

Description

CAF 5 – IAS 23

02

IAS 23 Borrow ing Costs DEFINITIONS Borrowing costs Borrowing costs are interest and other costs that an entity incurs in Definitions connection with the borrowing of funds. Interest Loan processing charges Commissions Commitment fee Documentation charges Legal charges

Examples

     

Exclusion from Scope

actual or imputed cost of equity, including preferred capital not classified as a liability

Qualifying asset A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Depending on the circumstances, any of the following may be qualifying assets: (a) inventories (b) manufacturing plants (c) power generation facilities (d) intangible assets (e) investment properties. Financial assets, and 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.

RECOGNITION Borrowing costs directly attributable (that would have been avoided if the expenditure on the qualifying asset had not been made) to the acquisition, construction or production of a qualifying asset Capitalise as part of the cost of that asset

Other

Recognise as an expense in the period in which it is incurred (P&L)

The amount of borrowing costs capitalised cannot exceed the amount of borrowing costs it incurred during a period.

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CAF 5 – IAS 23

CALCULATION

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IN CASE OF “SPECIFIC BORROWINGS” Actual borrowing costs incurred [Outstanding borrowing x interest rate x months/12] Less: Temporary investment income [Amount invested x interest rate x months/12] Amount to be capitalized

Rs. XXX (XX) XXX

IN CASE OF “GENERAL BORROWINGS” [Expenditure on QA x Capitalisation rate x months/12] [Expenditure on QA x Capitalisation rate x months/12] Amount to be capitalized

Rs. XXX XXX 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. Capitalisation rate =

Total borrowing costs incurred Weighted borrowings outstanding during construction

X 100

The capitalisation rate is applied from the time expenditure on the asset is incurred.

PERIOD OF CAPITALISATION

Commencement

Suspension

Cessation

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; (b) it incurs borrowing costs; and (c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. Capitalisation of borrowing costs should be suspended if development of asset is suspended for an extended period of time. However, capitalisation is not suspended during a period when it carries out substantial technical and administrative work or when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. For example, capitalisation continues during 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. Capitalisation of borrowing costs is ceased when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.

Latest update: March 2020

CAF 5 – IAS 23

OTHER IMPORTANT CONCEPTS As a result of capitalising borrowing costs, the cost of asset may exceed its recoverable amount or NRV, therefore, an entity may have to recognise impairment loss or write down of inventory to NRV. Expenditures on a qualifying asset include only those expenditures that Expenditures have resulted in payments of cash, transfers of other assets or the on a assumption of interest-bearing liabilities. Expenditures are reduced by any qualifying progress payments received and grants received in connection with the asset asset It is assumed when both general and specific borrowings are available to Mixture of the construction project that the specific borrowings would be used first. Any borrowings further borrowings required (where applicable) would therefore come from the general (and often more expensive) borrowings.

Impairment or write down

DISCLOSURE Disclosure requirement

An entity shall disclose: (a) borrowing costs capitalised; and (b) capitalisation rate. Borrowing costs capitalised The amount of borrowing costs capitalised during the year is Rs. 351,225

Example Capitalisation rate used The capitalisation rate used is 13.38%

SYLLABUS Content/Learning outcome

Reference

C4 IAS 23 Borrowing Costs LO3.4.1 Discuss and understand accounting treatment for borrowing cost LO3.4.2 Identify and account for borrowing costs in accordance with IAS 23 LO3.4.3 Disclose borrowing costs in financial statements Proficiency level: 2 Testing level: 1

Past Paper Analysis A14 S15 A15 S16 CAF 5 Obj ect ive Type CAF 7 12 16 1

-

A16

17

S17

-

A17

18

S18

-

A18

-

S19

17

A19

S20

03 1 01

01

Total Marks 17 (including IAS 16)

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CAF 5 – IAS 23

PRACTICE Q&A

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Sr.# Description BASIC CLASS ILLUSTRATIONS 1C Identify qualifying assets 2C Specific borrowing 3C General borrowing – weighted capitalisation rate 4C Period of capitalisation 5C Effect of grants and progress payments 6H Okara Engineering: Specific borrowings 7H Sahiwal Construction: Capitalisation rate 8H Sahiwal Construction: General borrowings 9H Company A: Specific borrowing with suspension PRACTICE QUESTIONS 10H Shayan Limited – Specific borrowing 11H Sara Limited – General borrowings 12H Looney – Theory + Specific 13C Googly industries – two qualifying assets - specific 14C Khan Limited – General borrowings 15C Spin Industries Limited – mixed borrowings (advanced) 16C Monday Limited: IAS 16 disclosures with IAS 23 workings

Marks

Reference

03 04 05 04 05 04 04 04 06

KA KA KA KA KA ST ST ST KA + ST

05 05 05 05 05 15 17

QB QB QB QB QB QB PE A19

Latest update: March 2020

CAF 5 – IAS 23

QUESTION Identify whether or not the following are qualifying assets. 1. A construction company constructing a bridge for government which will take 6 years to complete. 2. A very sophisticated integrated circuits being made by an entity who manufactures and sales 10,000 to 12,000 units every month. 3. A power plant under construction, it may take 10 months to complete this. 4. An equipment purchased by X Limited, the equipment may be used immediately after it is delivered. 5. Special order from a customer to manufacture a machine for him which will take 11 months at the least. 6. An entity is constructing office building which will take 8 months to complete.

01 ANSWER

(03)

QUESTION

02

Up Limited borrowed a loan of Rs. 10 million from Down Bank on 15% per annum for constructing its power generation facilities. The loan was received on February 01, 2011. Up Limited paid Rs. 3 million to contractor immediately but remaining Rs. 7 million were paid to the contractor on March 1, 2011. The remaining 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? (04)

QUESTION

03

SIKA Sports Limited is constructing a stadium for last some years. During the year ended 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 during the year ended 31 December 2011. (05)

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 stopped for a week from May 23, 2011 to May © kashifadeel.com

CAF 5 – IAS 23 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.

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Required: (a) From when Cord Limited should start capitalising borrowing costs? (b) Should Cord Limited suspend capitalisation from April 25, 2011 to May 9, 2011? (c) Should Cord Limited suspend capitalisation from May 23, 2011 to May 30, 2011? (d) When Cord Limited should cease to capitalise borrowing costs? (04)

QUESTION

05

Zeal Limited is building a dam for Federal Government. The project will take 10 years to complete. On February 01, 2011 it took a loan @ 12% of Rs. 100 million for the expenditures incurred on the same date. On July 01, 2011 the Federal Government made first progress payment of Rs. 30 million. Zeal Limited had offered employment opportunities to locals of the area, considering this fact; Provincial Government has given Zeal Limited a grant (award) of Rs. 10 million on October 31, 2011. Required: The borrowing costs to be capitalised for Zeal Limited for the year ended December 31, 2011 (05)

QUESTION

06

On 1 January 2016 Okara Engineering issued a bond to raise Rs. 25,000,000 to fund a capital project which will take three years to complete. Amounts not yet needed for the project are invested on a temporary basis. During the year to 31 December 2016, Okara Engineering spent Rs. 9,000,000 on the project. The cost of servicing the bond was Rs. 1,250,000 during this period and the company was able to earn Rs. 780,000 through the temporary reinvestment of the amount borrowed. Required: Calculate the additions to capital work in progress.

(04)

QUESTION Sahiwal Construction has three sources of borrowing: Average loan in the Interest expense year (Rs.) incurred in the year (Rs.) 7 year loan 8,000,000 800,000 10 year loan 10,000,000 900,000 Bank overdraft 5,000,000 900,000

07 Interest rate

10% 9% 18%

The 7 year loan has been specifically raised to fund the building of a qualifying asset. Required: Calculate capitalisation rate.

(04)

Latest update: March 2020

CAF 5 – IAS 23

QUESTION

08

Continuing the example above, Sahiwal Construction has incurred the following expenditure on a project funded from general borrowings for year ended 31 December 2016. Date incurred: Amount (Rs.) 31st March 1,000,000 31st July 1,200,000 30th October 800,000 Required: Calculate addition to capital work in progress.

(04)

QUESTION

09

Company A borrowed Rs. 9,000 @ 15% per annum to fund a project on 1st Jan 2016. The following expenditures were made on the project during the year ending 31 December 2016 Date: 1st March 2016: Rs. 2,500 Date: 1st October 2016: Rs. 4,200 Date: 1st December 2016: Rs. 2,300 Surplus funds were invested @10% whenever available. The project activities started on 1 March 2016. Work on the project was suspended during the month of August and resumed in early September. Construction was completed on 31 December 2016. Required: Calculate the borrowing costs to be capitalised and to be charged to PL.

(06)

QUESTION

10

Shayan Limited (SL) started the construction of its new factory on 1 January 2018 with a loan of 50,000,000 borrowed at an interest rate of 8% per annum. The loan was used on the factory as follows: Date of Payment Jan 1, 2018 May 1, 2018 Oct 1, 2018

Rs. in million 25 15 10

The construction of the asset was completed on 31 December 2018. However, during the accounting period SL invested the surplus funds at an interest rate of 3%. Required How much the amount of borrowing cost eligible for capitalization at 31.12.2018. (05)

QUESTION

11

On January 1, 2018 Sara Limited (SL) started the construction of an asset. To meet the financing requirements, borrowing was made from three different banks at the start of the year as follows: Banks Amount Interest Rate p.a A 70,000 10% B 60,000 8% C 50,000 12%

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CAF 5 – IAS 23 The funds were used on the assets as follows: Date of Payment Jan 1, 2018 May 1, 2018 Oct 1, 2018 Page | 8

Rs. 30,000 20,000 15,000

The construction of asset was completed on 31 December 2018. Required Calculate the general weighted average borrowing rate and eligible borrowing cost (05)

QUESTION

12

Looney has recently finished building a new item of plant for its own use. The item is a press for use in the manufacture of industrial diamonds. Looney commenced construction of the asset on 1st April 2013 and completed it on 1st April 2015. 1st January 2013, Looney took out a loan to finance the construction of the asset. Interest is charged on the loan at the rate of 5% per annum. The annual interest must be paid in four equal instalments at the end of each quarter. Looney capitalises interest on manufactured assets in accordance with the rules in IAS 23 Borrowing costs. The costs (excluding finance costs) of manufacturing the asset were Rs. 28 million. Required State the IAS 23 rules on the capitalisation of borrowing costs, calculate the cost of the asset on initial recognition and explain the amount of borrowing cost capitalised. (05)

QUESTION

13

On 1 January 20X6 Googly Industries Limited (GIL) borrowed Rs.15 million to finance the production of two assets, both of which were expected to take a year to build. Work started during 20X6. The loan facility was drawn down and incurred on 1 January 20X6, and was utilised as follows, with the remaining funds invested temporarily.

1 January 20X6 1 July 20X6

A ----------t A Rs. in million A --------tB 2.5 5 2.5 5

The loan rate was 9% and GIL can invest surplus funds at 7%. Required Ignoring compound interest, calculate the borrowing costs which may be capitalised for each of the assets and consequently the cost of each asset as at 31 December 20X6. (05)

QUESTION

14

Khan Limited (KL) has the following loan arrangements as at 1 January 2020: Rs. in million 7% Debentures 55 8% Loan notes 110 12% Line of credit 85 10% Running finance arrangement 150 On the 1 January 2020, KL commenced the construction of a new factory. The construction

of the factory will cost Rs.100 million and the company funded the construction with the existing borrowings. Latest update: March 2020

CAF 5 – IAS 23

The factory was completed on 31 August 2020 but was not available for use until 31 January 2021 as a result of minor modification. During the construction period, active work was interrupted, and the building construction was stopped for two months as a result of adverse weather conditions. Required Calculate the borrowing cost to be capitalised and the cost of the building to be recognised upon initial recognition. (05)

QUESTION

15

On September 1, 2014, Spin Industries Limited (SIL) started construction of its new office building and completed it on May 31, 2015. The payments made to the contractor were as follows: Date of Payment Rs. September 1, 2014 10,000,000 December 1, 2014 15,000,000 February 1, 2015 12,000,000 June 1, 2015 9,000,000 In addition to the above payments, SIL paid a fee of Rs.8 million on September 1, 2014 for obtaining a permit allowing the construction of the building. The project was financed through the following sources: (i) On August 1, 2014 a medium term loan of Rs.25 million was obtained specifically for the construction of the building. The loan carried mark up of 12% per annum payable semi-annually. A commitment fee @ 0.5% of the amount of loan was charged by the bank. Surplus funds were invested in savings account @ 8% per annum. On February 1, 2015 SIL paid the six monthly interest plus Rs.5 million towards the principal. (ii)

Existing running finance facilities of SIL  Running finance facility of Rs.28 million from Bank A carrying mark up of 13% payable annually. The average outstanding balance during the period of construction was Rs.25 million.  Running finance facility of Rs.25 million from Bank B. The mark up accrued during the period of construction was Rs.3 million and the average running finance balance during that period was Rs.20 million.

Required Calculate the amount of borrowing costs to be capitalised on June 30, 2015 in accordance with the requirements of International Accounting Standards. (15) (Borrowing cost calculations should be based on number of months).

QUESTION The following information pertains to Monday Limited (ML): (i) The balances of property, plant and equipment as on 1 January 2018: Cost/Revalued Accumulated amount depreciation Assets ----------- Rs. in million ----------Office building 240 36 Equipment 190 60

16

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CAF 5 – IAS 23 Revaluation surplus related to the office building as at 1 January 2018 amounted to Rs. 8.5 million. (ii)

On 1 September 2018, a new equipment was acquired by making payment of Rs. 70 million to the supplier. An old equipment was also given in exchange to the supplier. The fair values of the old and new equipment were assessed at Rs. 21 million and Rs. 93 million respectively. The old equipment had been acquired at a cost of Rs. 40 million on 1 July 2016. Cost incurred on installing the new equipment amounted to Rs. 5 million.

(iii)

On 1 January 2018, ML commenced construction of a manufacturing plant. The whole process of assembling and installation was completed on 31 October 2018. However, the work was stopped from 16 to 31 August 2018 due to unexpected rains.

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The total cost of Rs. 660 million incurred on the plant was paid as under: Description Payment date Rs. in million 1st payment 1 February 2018 140 2nd payment 1 April 2018 214 3rd payment 1 September 2018 146 4th payment 1 December 2018 160 The plant was financed through a bank loan of Rs. 500 million obtained on 1 March 2018. The loan carries a mark-up of 18% payable annually. The surplus funds available from the loan were i...