462065496 Module 11 Borrowing Costs PDF

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MODULE 11: Borrowing Costs RELATED STANDARDS: IAS 23 – Borrowing CostsINTRODUCTIONThis chapter addresses how an entity shall capitalize borrowing costs (interest and other costs) that are directly attributable to the acquisition, construction or production of a qualifying asset (an asset that necess...

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MODULE 11: Borrowing Costs RELATED STANDARDS: IAS 23 – Borrowing Costs INTRODUCTION This chapter addresses how an entity shall capitalize borrowing costs (interest and other costs) that are directly attributable to the acquisition, construction or production of a qualifying asset (an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) as part of the cost of that asset. An entity shall recognize other borrowing costs as an expense in the period in which it incurs them. Learning Objectives: 1. State the core principle of IAS 23. 2. Compute for capitalizable borrowing cost.

 Definition of Terms  Borrowing costs – Interest andothercoststhatanentityincursinconnection withtheborrowingoffunds.  Capitalization – Recognizingacostaspartofthecostofanasset.  Qualifying asset – Anassetthatnecessarilytakesasubstantialperiodoftime togetreadyforitsintendeduseorsale.  Scope  Borrowing cost may include:  Interest expense calculated by the effective interest method under IAS 39  Finance charges in respect of finance leases recognized in accordance with IAS 17 Leases; and  Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.  This standard does not deal with the actual or imputed cost of equity, including any preferred capital not classified as a liability pursuant to IAS 32.  A qualifying asset could be  Property, plant, and equipment and investment property during the construction period  Intangible assets during the development period  "made-to-order" inventories.  Assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:  Qualifying assets measured at fair value, such as biological assets accounted for under IAS 41 Agriculture.  Inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis and that take a substantial period to get ready for sale (for example, maturing whisky)  Assets that are ready for their intended use or sale when acquired.  Recognition  Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset and, therefore, should be capitalized. Other borrowing costs are recognized as an expense.  Measurement  Where funds are borrowed specifically (specificborrowing)  Borrowing costs eligible for capitalization are the actual costs incurred less

any income earned on the temporary investment of such borrowings. Module 11

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Borrowing Costs

 Where funds are part of a general pool (generalborrowing)  Borrowing cost eligible for capitalization is determined by applying a capitalization rate to the expenditure on that asset.  The capitalization rate will be the weighted average of the borrowing costs applicable to the general pool.  The amount of borrowing costs that an entity capitalizes during a period shall not exceed the amount of borrowing costs it incurred during that period.  Income earned on the temporary investment of such borrowings is not deducted from borrowing cost.  Capitalization  Commencement of capitalization  Capitalization should commence when expenditures are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress.  Suspension of capitalization  Capitalization should be suspended during periods in which active development is interrupted.  Cessation of capitalization  Capitalization should cease when substantially all of the activities necessary to prepare the asset for its intended use or sale are complete.  If only minor modifications are outstanding, this indicates that substantially all of the activities are complete.  Where construction is completed in stages, which can be used while construction of the other parts continues, capitalization of attributable borrowing costs should cease when substantially all of the activities necessary to prepare that part for its intended use or sale are complete.  Disclosure  Amount of borrowing cost capitalized during the period  Capitalization rate used to determine the amount of borrowing cost eligible for capitalization

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************************************************* Illustrative Problems 1. Defined by IAS 23 as Interest and other costs that an entity incurs in connection with the borrowing of funds. A. Finance cost C. Interest cost B. Borrowing cost D. Costs of debt 2. Defined by IAS 23 as an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. A. Capital asset C. Qualifying asset B. Long-term asset D. Capital expenditure 3. For purposes of capitalization of borrowing costs, which of the following is least likely to be considered as qualifying asset? A. Biological asset C. Manufacturing plant B. Intangible asset D. Power generation facility 4. IAS 23 does not require capitalization of borrowing cost relating to the following assets, except A. Assets measured at fair value B. Inventories manufactured in large quantities on repetitive basis even if they take substantial period of time to get ready for sale. C. Noncurrent assets that are ready for their intended use or sale when acquired. D. Real properties classified as investment properties 5. Under IAS 23, borrowing costs incurred in acquiring, producing or constructing a qualifying asset are A. Expensed in the period incurred. B. Capitalized as part of the cost of the qualifying asset. C. Expensed as benchmark treatment; capitalized as allowed alternative treatment. D. Capitalized as benchmark treatment; expensed as allowed alternative treatment. 6. Investment income from the temporary investment of borrowing attributable to the acquisition, construction or production of a qualifying asset is A. Deducted from the borrowing cost related to both specific and general borrowing. B. Deducted from the borrowing cost related to specific borrowing. C. Deducted from the borrowing cost related to general borrowing. D. Recognized as investment income for both specific and general borrowing. 7. If a qualifying asset is financed by general borrowing, the borrowing cost capitalized is equal to A. Actual borrowing costs incurred during the construction period. B. Total expenditure on the qualifying asset multiplied by a capitalization rate. C. Average expenditures on the qualifying asset multiplied by a capitalization rate or actual borrowing costs, whichever is higher. D. Average expenditures on the qualifying asset multiplied by a capitalization rate or actual borrowing costs, whichever is lower. 8. Which of the following is not part of the disclosure requirement under IAS 23? A. Borrowing cost capitalized during the period. B. Capitalization rate used to determine the borrowing cost to be capitalized. C. Amount of specific and general borrowings used to finance the acquisition, construction or production of a qualifying asset.

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