BORROWING COST (IAS 23)

QUESTION 1

On 1 January 20X6 Stremans Co borrowed $1.5m 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.

Asset A                        Asset B

                                                                                                   $'000                           $'000

1 January 20X6                                                                       250                               500

1 July 20X6                                                                               250                               500

The loan rate was 9% and Stremans Co 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.

 

QUESTION 2

Acruni Co had the following loans in place at the beginning and end of 20X6.

1 January                                  31 December

    20X6                                         20X6

      $m                                           $m

10% Bank loan repayable 20X8                               120                                           120

9.5% Bank loan repayable 20X9                                80                                             80

8.9% debenture repayable 20X7                                 –                                           150

The 8.9% debenture was issued to fund the construction of a qualifying asset (a piece of mining equipment), construction of which began on 1 July 20X6.

On 1 January 20X6, Acruni Co began construction of a qualifying asset, a piece of machinery for a hydroelectric plant, using existing borrowings. Expenditure drawn down for the construction was: $30m on 1 January 20X6, $20m on 1 October 20X6.

Required

Calculate the borrowing costs that can be capitalised.

Answer

Question 3

An entity already has a number of general loan arrangements:

Loan 1 of $800,000, interest paid at 9%;

Loan 2 of $2 million, interest paid at 8%; and

Loan 3 of $400,000, interest paid at 7.5%.

The entity has commissioned a new printing press to be constructed on its behalf. The total cost will be $800,000 and the entity will be able to fund the purchase from its existing borrowings since it has arranged for stage payments to be made. The construction takes six months.

Required

Calculate the borrowing costs that can be capitalised and the total cost of the printing press.

Question 4

An entity borrowed $5 million to fund the construction of a new building. Interest is payable on the loan at 8%. Stage payments were due throughout the construction period and therefore excess funds were reinvested during that period. By the end of the project investment income of $150,000 had been earned and the construction took twelve months to complete.

Required

Calculate the borrowing costs that can be capitalised and the total cost of the building.

Question 5

The following events take place:

 An entity buys some land on 1 December.

 Planning permission is obtained on 31 January.

 Payment for the land is deferred until 1 February.

 The entity takes out a loan to cover the cost of the land and the construction of the building commenced on 1 February.

 Due to adverse weather conditions there is a delay in starting the building work for six weeks and work does not commence until 15 March.

Required

What date should capitalisation of borrowing cost commenced?

In the above scenario the key dates are:

 Expenditure on the acquisition is incurred on 1 February when construction commences.

 Borrowing costs start to be incurred from 1 February.

 Although work was being undertaken on planning permission etc. during December and January, no borrowing costs were incurred during this period.

 During the six-week inactive period borrowing costs should not be capitalised.

 Capitalisation of borrowing costs should commence from 15 March.

Question 6

Concorde Inc. obtained a term loan during the year ended December 31, 2008, amounting to $650 million for modernization and development of its factory. During the year, buildings costing $120 million were completed and plant and machinery amounting to $350 million were installed.

A sum of $70 million has been given as a capital commitments advance for assets, the installation of which is expected in the following year. The amount of $110 million has been utilized for working capital requirements.

Interest incurred on the loan of $650 million during the year ended December 31, 2008, amounted to $58.5 million.

Required

How should the interest amount of $58.5 million be treated in the financial statements of XYZ Inc.?

Interest incurred amounting to $58.5 million should be apportioned using the amounts of loan utilized for various purposes. Except for the portion of the loan that was used for working capital requirements ($110 million), the rest was utilized for the construction of qualifying assets, and therefore the borrowing costs eligible for capitalization will be

   

             $(650 – 110)/650 × 58.5 million = $48.6 million.

Question 7

Funto Construction has three sources of borrowings:

Average Loan                Interest Expenses

                                                                                 N                                               N

7 Years Loan                                                           8,000,000                       800,000

10 Years Loan                                                       10,000,000                       900,000

Bank Overdraft                                                      10,000,000                       900,000

The 7 year loan has been specifically raised to fund the building of a qualifying assets.

The company has incurred the following expenditure on a project funded from general borrowings for the year 31^st December 2014:

Date Incurred                                                    Amount

                                                                             N

31^st March                                                         1,000,000

31^st July                                                            1,200,000

30^th October                                                         800,000

                

Required

Determine the weighted average and the amount that will be capitalised.

Question 8

Lala Plc, a geared company has the following loan arrangements as at 1^st January 2011:

Average Loan               

                                                                                 N                                              

7%Loan notes                                                    55,000,000                          

8% Loan notes                                                  110,000,000                         

12% Debentures                                                85,000,000                         

10% Bank Loan                                                 150,000,000                        

On the 1^st of January 2011, the company commenced the construction of a new office factory. The construction of the factory will cost N100,000,000 and the company funded the construction with the existing borrowings. The factory was completed on 31^st August 2011 but was not available for use until 1^st December 2011 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.