ORR OWING COSTS

HM UMAR FAROOQ RANA

Certified Chartered Accountant (UK), CA-ICAP (FINAL),
MCOM.

TO VIEW THE SLIDES

ONLINE:

1
 A Building(a qualifying asset)
Con.struction period March1st to December 31,
20x1.
Cost 180,000
A 12% bank loan of Rs. 180,000 acquired specifically for the
construction on 1st January 20x1.

 Rbueiqdl uiinreg.d: Borrowing cost to be capitalized as a part of

cost of

2
 A Building(a qualifying asset)
Con.struction period January 1st to December 31,
20x1.
Cost 180,000
A 12% bank loan of Rs. 180,000 acquired specifically for the
construction on March1st 20x1.

 Rbueiqdl uiinreg.d: Borrowing cost to be capitalized as a part of

cost of

3
 A Building(a qualifying asset)
Con.struction period January 1st to December 31,
20x1.
Cost 180,000
A 12% bank loan of Rs. 200,000 acquired specifically for the
construction on March1st 20x1.
Loan arrangement fee paid Rs.20,000
Required: Borrowing cost to be capitalized as a part of cost
of
 building.

4
 A Building(a qualifying asset)
Con.struction period January 1st to December 31,
20x1.
CA o1s2t%81 b0a,n0k0 0loan of Rs. 200,000 acquired
specifically for the construction on January1st 20x1.
Loan arrangement fee paid Rs.20,000
payment to contractor
March 1st Rs.
 July 1st 30,000
Rs.
September 1 st
November 60,000
1Required:
st
Borrowing cost to be capitalized as a part of cost
Rs.
of 60,000
 building. Rs.
5 20,000
 A Building(a qualifying
Con
asset).struction period January 1st to December 31,
20x1. Cost 180,000
A 12% bank loan of Rs. 200,000 acquired specifically for
the construction on January1st 20x1.
Loan arrangement fee paid Rs.20,000
payment to contractor
 January 1st Rs. 30,000
March 1st Rs.
 July 1st 30,000
November 1st Rs. 60,000
Surplus funds are invested in saving accountRs.
at 8%.
20,000 as a part of cost
Required: Borrowing cost to be capitalized
of
 building
6
.
 A Building(a qualifying
Con
asset).struction period January 1st to December 31,
20x1. Cost 180,000
A 12% bank loan of Rs. 200,000 acquired specifically for
the construction on January1st 20x1.
Loan arrangement fee paid Rs.20,000
payment to contractor
 January 1st Rs. 30,000
March 1st Rs.
 July 1st 30,000
December 1st Rs. 60,000
Surplus funds are invested in saving accountRs.
at 8%.
20,000 as a part of cost
Required: Borrowing cost to be capitalized
of
 building
7
.
 A Building(a qualifying
asset)
Construction period January 1st, 2015 to December 31,
2015. Cost. 80 million
In the year the company had the following sources of finance
 Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The
available.
company usually pays a dividend of 10% each year.
 Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March
1, 2015.


Ohetnr Aoeung,u isst p1a,2ya0b1el5 a, tR tsh.e 1 r0a tme iol fi o1n1 %were borrowed

from the1bank.
 January st Interest. Rs. 30
March 1 st
payment to contractor million Rs. 3
 July 1st million
December Rs. 6 million
1st
Surplus funds are invested in saving accountRs.
at 20
8%.
Required: Borrowing cost to be capitalizedmillion
as a part of cost of building
During
8
2015, Assuming that the loans were taken specifically for the project.
 A Building(a qualifying
asset)
Construction period January 1st, 2015 to December 31,
2015. Cost. 80 million
In the year the company had the following sources of finance
 Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The
available.
company usually pays a dividend of 10% each year.
 Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March
1, 2015.


Ohetnr Aoeung,u isst p1a,2ya0b1el5 a, tR tsh.e 1 r0a tme iol fi o1n1 %were borrowed

from the1bank.
 January st Interest. Rs. 30
March 1 st
payment to contractor million Rs. 3
 July 1st million
December Rs. 6 million
1st
Surplus funds are invested in saving accountRs.
at 20
8%.
Required: Borrowing cost to be capitalizedmillion
as a part of cost of building
During
9
2015, Assuming that the loans constituted general finance.
 A Building(a qualifying
asset)
Construction period January 1st, 2015 to December 31,
2015. Cost. 80 million

In the year the company had the following sources of finance

available.
 Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The
company usually pays a dividend of 10% each year.
 Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1,
2015.
 On August 1, 2015, Rs. 10 million were borrowed
 January from the bank. Interest thereon,
Rs. 30
isst payable at the rate of 11%.
1 March million Rs. 3
payment to contractor
1st million Rs. 6
 July 1st million Rs.
December
Surplus funds are invested in saving account at 20 8%.million
Required:
1st Borrowing cost to be capitalized as a part of cost of building During
2015,
Assuming that the loans constituted general finance.

10
 Borrowing costs are part of CV of
 PPE.structure – debt vs. equity
Capital
 Debt can be attractive
 Borrowing costs – an expense or a necessary cost in bringing a non- current
asset to its present location and condition?
Different types of Loans/Borrowings:
 Long term Loans

 Short term Loans

 Short term running finance/Bank overdraft.

share capsihtarl eish nolodte brosrisr onwotin ag b

tohrerroewfoirneg d ciovsitd.end to Fund from debt are

11
 .
Borrowing costs are interest and other costs incurred by an entity in connection
with the borrowing of funds include the following
 Arrangement fee
 Loan processing charges
 Commitment fee
deducted by bank at the time of disbursement of loan.

tQou gaeltif ryeiandgy a fsosre tit is iannet ansdsedt tuhsaeto nrescaelses amrailyitnackul esd
ae substantial period of time
Asset for use
 Tangible Assets (IAS-16)
Assets


for
Intangible
Inventories Asset (IAS-38)
(IAS-2)
sale
Assets that are ready for their intended use or sale when acquired are not qualifying
assets
e.g furniture, computers, vehicles etc

12
 Accounting
Treatment
 IAS 23 requires the capitalisation of borrowing costs that
are directly attributable to the acquisition, construction
or production of a qualifying asset when:
 it is probable that the costs will result in
future economic benefits and the costs can be
reliably
measured


 btheee nc oasvtosiadreed d iifr tehcetl ysa aset tr iwbuast

anbolet banodu gthte,y c wonosurtlduchtaevde or

13
produced
 When should capitalisation begin and
end?
Capitalisation shall commence when
expenditures for assets are being incurred and
 borrowing costs are being incurred and
activities are necessary to prepare the asset for its
intended use or sale are in progress
Capitalisation should cease when
 the asset is substantially complete,
 or no work is being carried out for an extended
when
period

14
  Borrowing costs capitalised = actual costs less any
investment
inc.ome received from the temporary reinvestment of
 borrowing
 When
sunutilised
funds borrowed generally and used to obtain a qualifying
asset, amount to be capitalised is:
 Asset cost x capitalisation rate (weighted average)
 Total cost of a qualifying asset to be recognised cannot exceed its recoverable
amount
Borrowing costs capitalised in a period cannot exceed the amount


incurred in that period

 If an asset is under process of construction or installation then it
is

cparleeldpar aesd C bayp btioarlrWowoirnkg isn t Pheogr n itr eis as

(sloCW caP
I le.)d aI f st hqauta ClifWyinPI g iass bseeti.ng

1 5 While calculating investment income to be deducted from interest incurred,

 On 1 January 2012, X began to construct a supermarket.
It
.purchased a leasehold interest in the site for Rs.25
The construction of the building cost Rs.9 million and
million.
fixtures and fittings cost Rs.6 million. The construction
the
of the supermarket was completed on 30 September
2012 and it was available for use from 1 January 2013.
X borrowed Rs.40 million on 1 January 2012 in order
to finance this project. The loan carried interest at
10% per
annum. It was repaid on 30 June 2013.
Requirement
Calculate the total amount to be included in property,
plant and equipment in respect of the development at
31 December 2012.
16
The total amount to be included in property, plant and equipment
31
at December 2012
is: . Rs
LBeuailsdei ng .
Fixtures and Fittings
Interest (Rs.40m x 10% x 9/12) 295
Carrying value
Only 9 months’ interest can be capitalised. IAS
m 23 states that
capitalisation must cease when substantially all the activities
necessary to prepare the assets for its intended6 use or sale are
complete. No depreciation is charged, because m the supermarket was
not available for 3m
43

u seA umnotiul n1t Joafn buoarryo 2w0i1n3gm

. costs capitalised during
the period
 Capitalisation rate used to determine the amount of borrowing costs eligible for
capitalisation
17
 If borrowing is specific to a qualifying asset,
avoidable costs are easy to calculate

18
 Required: Capitalization rate
If accounting year is July 1st to June 30.

19
  Running finance facility of Rs. 32 million from bank C carrying
a markup of 16% payable annually obtained on July 1st, 2014.
Required: Capitalization rate
st
If accounting year is July 1 to June 30.
20
 .

Required: Calculate Investment Income

If accounting year is July 1st to June 30.

21
 A Building(a
Con structionqualifying asset) 1st, 20x1 to March 31,
period January
.
20x2.
CA o1s2t%81 b0a,n0k00loan of Rs. 200,000 acquired
specifically for the construction on January1st 20x1.
Loan arrangement fee paid Rs.20,000
payment to contractor
March 1st Rs. 60,000
 July 1st Rs.
December 60,000
1st
Surplus Rs.
funds are invested in saving account at 8%.
Required: Borrowing cost to be capitalized
60,000 as a part of cost
of
 building during 20x1.
22
 A Building(a qualifying asset)
Construction period January 1st, 2015 to December 31,
2015.

Cost. 80 million s
t
,
onIb tadidnitnigo na tpoe rht mei ta balolovew pinagy mthen csto,n SsItLru pcatido for
 Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The
na company
oef fet hoefusually
bRusi.lpays
d8i anm
dividend of 10%1each
gi.lionon January year.
In the year the company had the
Bank loan
following
 of Rs.of32
sources million
finance carrying a mark-up of 13% was raised on March 1,
available.
2015.
 On August 1, 2015, Rs. 10 million were borrowed from the bank B. Interest thereon,
is payable at the rate of 11%.
payment to contractor
March 1st Rs. 33
 July 1st million Rs. 6
December million
1Surplus
st funds are invested in saving account at Rs.
8%.20
Required: Borrowing cost to be capitalized as million
a part of cost of building During
2015,
23
 A Building(a qualifying asset) Cost 80
million
Construction period January 1st, 2015 to December 31,
2015.
 permit .
In add allowing
ition to thetheabove payments,
construction ofSIL
thepaid a fee of Rs. 8 million on January 1st , for obtaining
building.
a The project was financed through the following


 On 1 January, 2015 a medium term loan of Rs. 25 million was obtained specifically for
sources:
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.
Existing running finance facilities of SIL


Rvauenrngaineg o fuinstatnacned ifnacgi lbitayal onfc eR ds.u 2r8ni mg tilhleio pne frroi md Bofacnokn Ats

rcuarcrityoing w msaa rRks .u p2p5 o mf 1i3il%

l on p.ayable annually. The
 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.
 January Rs. 20
1st Marchto contractor
payment million Rs.
1st 13 million
 July 1st Rs. 6 million
December
Surplus funds are invested in saving account at Rs.
8%.20
1Required:
st
Borrowing cost to be capitalized as million
a part of cost of building During
2 4 2015.
 A Building(a qualifying asset) Cost 80
million
Construction period January 1st, 2015 to December 31,
2015.


.
In addition to the above payments, SIL paid a fee of Rs. 8 million on January st1
the construction of the
allowing
, for obtaining a permit

building.
 The project was financed through the following sources:
 On 1 January, 2015 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.
Existing running finance facilities of
SILRunning finance facility of Rs. 28 million from Bank A carrying mark up of 13% payable


annually arranged on January 1st,2015.

 Running finance facility of Rs. 25 million from Bank B carrying mark up of 14% payable annually
arranged on july1st,2015.
payment to contractor
st

 MJanarucahr y1 1ts Rs.

 July 1st 30mmil liilooi nn

December Rs. 6 million
1st Rs. 20
Required: Borrowing cost to be capitalized as a part of cost of building During
Surplus million
2015. funds
25
are invested
26
27