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An intangible asset that takes a substantial period of time to get ready for its
Intended use or sale is a ‘qualifying asset’. This would be the case for an internally
Generated intangible asset in the development phase when it takes a ‘substantial period
Of time’ to complete, such as software.
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MGT401 GDB Solution
MGT401 Financial Accounting II
Question # 1 · Telefix; A famous telecom company, has recently acquired the license of 4G network technology. Furthermore, the company has an option to sell this license or licensed it to a third party. However, the management of the Telefix has decided to use it to operate a wireless network. Development process of the network started when the license is acquired. Should the borrowing costs on the acquisition of this 4G license be capitalized by the Telefix or should it wait until the network is ready for its intended use?
Answer: According to IAS-23 borrowing costs on the acquisition of this 4G license be capitalized by the Telefix. In IAS-23 Where construction is completed in stages, which can be used while construction of the other parts continues, capitalisation 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.
Question # 2 · Jawad Constructors Private Ltd., a real estate company, has recently incurred expenses for the acquisition of a legal permit. This permit is especially obtained, which will allow them, to construct of a building. It has also acquired some other construction equipment that will be used in the construction process of various buildings. You have to guide the company that whether they can capitalize the borrowing costs incurred on the acquisition of the permit and other constructive equipment or they should wait until the construction of the building is complete?
Answer: In this case the construction is not complete therefore this is a qualify asset. A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale. [IAS 23.5] That could be property, plant, and equipment and investment property during the construction period, intangible assets during the development period, or "made-to-order" inventories. [IAS 23.6]