CPA P2 Advanced Corporate Reporting
TOPIC 3 - IAS 23 BORROWING COSTS Background An entity may incur significant interest costs if it has to raise a loan to finance the purchase of construction of an asset.
Property Construction Intangible Assets
IAS 23
Generally requires interest costs to [be] written off to profit or loss in the period incurred.
However
Core Principle of IAS 23: “Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, form part of the cost of that asset. Other borrowing costs are recognised as an expense” “Qualifying Asset”: an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. So, borrowing costs in relation to a qualifying asset such as a building should be capitalised and included in the cost of the asset, provided that the borrowing costs are directly attributable.
1 © Cenit Online 2015
CPA P2 Advanced Corporate Reporting
Why do we have IAS 23?? 1.
The cost of the asset will be more accurately stated by the inclusion of these costs.
2.
Good Point The borrowing costs will be more accurately matched to future revenues when they are depreciated as part of the cost of the asset. IAS 23 is a classic example of the accruals/matching concept.
Amount of Borrowing Costs Capitalised??
based on effective interest rate
The finance/interest cost of funds borrowed to finance the purchase/construction of a specific asset OR
A proportion of the funds borrowed by the entity for general use, using a weighted average cost of finance (this is used where it is not possible to link specific funds borrowed with a specific qualifying asset).
Borrowing costs include interest based on its effective rate on overdrafts, loans, financial instruments and finance charges on finance leased assets.
When do we start Capitalising Borrowing Costs?
1. Borrowing costs are being incurred (obviously!) and 2. Expenditures for the qualifying asset are being incurred and 3. Activities necessary to prepare the asset have started
Note: Points 1 & 2 above may not necessarily be the same date.
2 © Cenit Online 2015
CPA P2 Advanced Corporate Reporting
Capitalisation of borrowing costs should cease when the asset is substantially complete (even though the funds may still be attracting interest charges).
Any borrowing costs that are not eligible for capitalisation must be expensed (CR Loan; DR P+L)
Borrowing costs cannot be capitalised for assets measured at fair value (because such assets are carried at fair value and not their capitalised cost).
If active development/construction of the qualifying asset is interrupted for any extended periods, capitalisation of borrowing costs should be suspended for these periods (and expensed instead) Suspension of capitalisation of borrowing costs is not necessary for temporary delays or for periods when substantial technical or administrative work is taking place
NB:
Any income earned from the temporary investment of specifically borrowed funds would normally be deducted from the amount to be capitalised.
However, in order for this offsetting to take place, actual capitalisation of borrowing costs on the other part of the specifically borrowed funds must be occurring simultaneously
i.e. if we are not capitalising borrowing costs, then any interest earned from investing borrowed funds is credited to the Statement of Profit or Loss (and not offset against borrowing costs to be capitalised). - Disclosures o The Amount of Borrowing costs capitalised during the period o The Capitalisation rate Used
3 © Cenit Online 2015
CPA P2 Advanced Corporate Reporting
IAS 23 BORROWING COSTS Question Edijius has arranged a loan with Swedbank, to enable him to build a football stadium in Vilnius. He will be allowed to borrow up to $300,000,000 to be used in such amounts and at such times as he requires the funds. The bank charges interest at the rate of 7% per annum and Edijius is able to invest any surplus funds at the rate of 5% per annum.
He borrowed $100,000,000 on 1 January 2008 and immediately invested $50,000,000. On 28 Feb he withdrew $30,000,000 from the funds invested. On 1 April, he borrowed a further $120,000,000 of which he invested $70,000,000. On 31 May he spent $60,000,000 out of the funds invested. On 31 August he borrowed a further $80,000,000, spent $20,000,000 immediately and invested the remainder. On 1 November work was stopped because of a strike by the workforce. The work recommenced on 1 January 2009 and Edijius closed all investment accounts and spent the rest of the loan in completing the project which was ready for final inspection by 29 February. The Local authority finally gave their approval of the stadium on 1 April and paid Edijius the full contract price of $350,000,000 Required: Calculate the carrying amount of the Football Stadium in Edijius financial statements immediately before the sale transaction
4 © Cenit Online 2015
CPA P2 Advanced Corporate Reporting
Solution Date 1.1.08 – 28.2.08 1.3.08 – 31.3.08 1.4.0831.8.08
1.9.08 – 31.10.08 1.11.0831.12.08 1.1.09 – 29.2.09
Borrowed
Invested
‘000 ($) 100,000 *7%*2/12
Interest Cost ‘000 ($) 1,167
100,000 * 7%*1/12
583
(50,00083 20,000)*5%*1/12 1.4.08 – 31.5.08 750 –(70,000 +20,000) *5%*2/12
(100,000+120,000)*7%*5/12 6,417
(220,000+80,000) *7%*2/12
3,500
Work Stopped – No Construction – Borrowing Costs Expensed to Statement of Profit or Loss 300,000*7%*2/12
3,500
Total
15,167
Carrying Amount of Stadium Before Sale Cost Add: Borrowing Costs Less: Investment Income
Interest Earned ‘000 ($) ‘000 ($) 50,000 *5%*2/12 417
1.6.08 – 31.8.08 375 (90,00060,000)*5%*3/12 (30,000+60,000) 750 *5%*2/12 Interest Earned Credited to Statement of Profit or Loss
Total
2,375 € ‘000 300,000 15,167 (2,375) 312,792
5 © Cenit Online 2015
CPA P2 Advanced Corporate Reporting
Past Exam Questions – IAS 23 – CPA – P1
Past Exam Questions – IAS 23 – CPA – P2
Q 3 (4) April 2014 Q3 Apr 2012
Q (A) April 2014 Q1 Apr 09 – Note 8
Q3 Aug 2010
6 © Cenit Online 2015
