FINANCIAL ACCOUNTING 278

IAS 23 BORROWING COSTS

QUESTION 1

The following information on Alma Limited is available:

Year 1 Year 2 Year 3 Total

R R R R
Table 1:
Interest paid on:

Average bank overdraft

R1 800 000 @ 26% p.a. 468 000 - - 468 000
R1 200 000 @ 18% p.a. - 216 000 216 000 432 000

Loans incurred
R800 000 @ 24% p.a. 192 000 192 000 - 384 000
R1 200 000 @ 16% p.a. - - 192 000 192 000
660 000 408 000 408 000 1 476 000

Table 2:
Interest received on surplus funds of loan 165 000 108 000 - 273 000

Table 3:
Expenditures incurred during the year
(Evenly) 100 000 400 000 1 500 000 2 000 000

Assumptions

1. Interest is paid at the end of each year from own funds.

2. Loans are redeemed at the end of a year and incurred at the beginning of a year.

3. All interest is compounded annually.

REQUIRED

(a) Assume that the loans were incurred specifically for the construction of the asset. Any
shortages are funded from the bank overdraft. Calculate the borrowing costs that should be
capitalised.

(b) Calculate the borrowing costs that must be capitalised if you assume that the financing was
not specifically incurred for the construction of the asset.
FINANCIAL ACCOUNTING 278
IAS 23 BORROWING COSTS

QUESTION 1 (Suggested solution)

(a) Loan incurred specifically Capitalise

#Determine annually if specific loan is sufficient to cover average expenditure

Year 1: 100 000/2 < 800 000

Specific sufficient

Interest paid – Interest received

(192 000 - 165 000) 27 000

Year 2: 100 000 + 400 000/2 = 300 000 < 800 000
Specific sufficient

Interest paid – Interest received

(192 000 - 108 000) 84 000

Year 3: 100 000 + 400 000 + 1 500 000/2

= 1 250 000 > 1 200 000

Specific not sufficient anymore

Interest paid – Interest received 192 000

(192 000 - 0)

As well as:

Expenditure x Capitalisation rate

(1 250 000 - 1 200 000) x 18% 9 000
201 000
Note: Yr 3, R9000 limited to R216 000

Total capitalised over 3 years = R312 000

(b) General finance

Year 1:

Borrowing cost capitalised = Average expenditure x capitalisation rate x period

= (100 000/2) x 25.38% (a) x 1
= 12 690

Year 2:

Borrowing cost capitalised = Average expenditure x capitalisation rate x period

= (100 000 + (400 000/2)) x 20.40% (b) x 1
= 61 200

Year 3:

Borrowing cost capitalised = Average expenditure x capitalisation rate x period

= (500 000 + (1 500 000/2)) x 17.0% (c) x 1
= 212 500

(a): 660 000/(1 800 000 + 800 000) x 100 = 25.38%

(b): 408 000/(1 200 000 + 800 000) x 100 = 20.40%
(c): 408 000/(1 200 000 + 1 200 000) x 100 = 17.00%

Note: Control each year: borrowing costs capitalised may not exceed actual general
interest