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# Financial Accounting II (MGT401) Graded Discussion Board Topic: Borrowing costs – IAS 23

Topic: Borrowing costs – IAS 23

Learning Objectives: Students will be able to learn the basic principles of IAS 23 regarding Borrowing costs.

Scenario:

On 1st July 2014 Alex Corporation borrowed Rs. 10,00,000 for the construction of its manufacturing plant, approximately it will take one year to construct. Loan of Rs. 10,00,000 was taken from the bank on 1st July 2014; Rs. 600,000 were utilized on 1st July 2014 and remaining Rs. 400,000 utilized on 1st January 2015. Interest rate on borrowed amount was 8%. The amount of Rs. 400,000 was temporarily invested by the company at 5% on 1st July 2014 till its utilization.

Required: Determine the borrowing costs for the financial year 2014-15 which may be capitalized and also justify your answer as per provisions of IAS23.

Important Instructions:

1. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

2. Obnoxious or ignoble answer should be strictly avoided.

3. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

For Detailed Instructions please see the GDB Announcement

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### Replies to This Discussion

Specific Loan 10,00,000 to 8%

For General Purpose 400,000 to 5%

Our main purpose here discussion not just Solution

We are here with you hands in hands to facilitate your learning and do not appreciate the idea of copying or replicating solutions.

Borrowing Cost : IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the acquisition, construction or production of a 'qualifying asset' (one that necessarily takes a substantial period of time to get ready for its intended use or sale) are included in the cost of the asset. Other borrowing costs are recognised as an expense.

Where funds are borrowed specifically, costs eligible for capitalisation are the actual costs incurred less any income earned on the temporary investment of such borrowings. [IAS 23.12] Where funds are part of a general pool, the eligible amount is determined by applying a capitalisation rate to the expenditure on that asset. The capitalisation rate will be the weighted average of the borrowing costs applicable to the general pool. [IAS 23.14]

Capitalisation 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 (may include some activities prior to commencement of physical production). [IAS 23.17-18] Capitalisation should be suspended during periods in which active development is interrupted. [IAS 23.20] Capitalisation should cease when substantially all of the activities necessary to prepare the asset for its intended use or sale are complete. [IAS 23.22] If only minor modifications are outstanding, this indicates that substantially all of the activities are complete. [IAS 23.23]

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. [IAS 23.24]

Disclosure [IAS 23.26]

amount of borrowing cost capitalised during the period capitalisation rate used

just clear ur concepts n dont copy ,,,,,,,,,,,,

Plz explain the ans I cannot understand

loan 1000000 x 8% = 80000

less earnings 400000 x 5% x 6/12 = (10000)

capitalized amount = 70,000.

enjoy tc.

plz explain ...

Dear Students Don’t wait for solution post your problems here and discuss ... after discussion a perfect solution will come in a result. So, Start it now, replies here give your comments according to your knowledge and understandings....

Borrowing Cost : IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the acquisition, construction or production of a 'qualifying asset' (one that necessarily takes a substantial period of time to get ready for its intended use or sale) are included in the cost of the asset. Other borrowing costs are recognised as an expense.

Where funds are borrowed specifically, costs eligible for capitalisation are the actual costs incurred less any income earned on the temporary investment of such borrowings. [IAS 23.12] Where funds are part of a general pool, the eligible amount is determined by applying a capitalisation rate to the expenditure on that asset. The capitalisation rate will be the weighted average of the borrowing costs applicable to the general pool. [IAS 23.14]

Capitalisation 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 (may include some activities prior to commencement of physical production). [IAS 23.17-18] Capitalisation should be suspended during periods in which active development is interrupted. [IAS 23.20] Capitalisation should cease when substantially all of the activities necessary to prepare the asset for its intended use or sale are complete. [IAS 23.22] If only minor modifications are outstanding, this indicates that substantially all of the activities are complete. [IAS 23.23]

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. [IAS 23.24]

Disclosure [IAS 23.26]

amount of borrowing cost capitalised during the period capitalisation rate used

just clear ur concepts n dont copy ..

Borrowing Costs for Financial Year 014-15 which is Capitalized

Amount (Rs)

Interest Charges  (10,00,000 * 8/100 )                                                                         80,000/-

(Interest charge @ 8% for 12 months from 01/07/2014 to 30/06/2015)

Less:   Interest Income   (4,00,000 *5/100 * 6/12)                                                     (10,000/-)

(Temporary Investment @ 5% for 6 months form 01/07/2014 to 31/01/2014)

________________

Total               70,000/-

_________________

Therefore, the borrowing costs to be capitalized are Rs. 70,000/-

According to the IAS 23 Borrowing Cost

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as cost of the asset.

Once the relevant borrowings are identified, which relate to a specific asset, then the amount of borrowing costs available for capitalization will be the actual borrowing costs incurred on those borrowings during the period, lessany investment income on the temporary investment of those borrowings. It would not be unusual for some or all of the funds to be invested before they are actually used on the qualifying asset.

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