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BORROWING COSTS HM UMAR FAROOQ RANA Certified Chartered Accountant (UK), CA-ICAP (FINAL), MCOM. TO VIEW THE
BORROWING COSTS
HM UMAR FAROOQ RANA
Certified Chartered Accountant (UK), CA-ICAP (FINAL), MCOM.
TO VIEW THE SLIDES ONLINE:
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A Building(a qualifying asset)

Construction period March1st to December 31, 20x1. Cost 180,000

.

A 12% bank loan of Rs. 180,000 acquired specifically for the construction on 1 st January 20x1.

Required: Borrowing cost to be capitalized as a part of cost of building.

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A Building(a qualifying asset)

Construction period January 1st to December 31, 20x1. Cost 180,000

.

A 12% bank loan of Rs. 180,000 acquired specifically for the construction on March1 st 20x1.

Required: Borrowing cost to be capitalized as a part of cost of building.

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A Building(a qualifying asset)

Construction period January 1st to December 31, 20x1. Cost 180,000

.

A 12% bank loan of Rs. 200,000 acquired specifically for the construction on March1 st 20x1.

Loan arrangement fee paid

Rs.20,000

Required: Borrowing cost to be capitalized as a part of cost of

building.

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A Building(a qualifying asset)

Construction period January 1st to December 31, 20x1. Cost 180,000

.

A 12% bank loan of Rs. 200,000 acquired specifically for the construction on January1 st 20x1.

Loan arrangement fee paid payment to contractor March 1 st July 1 st September 1 st November 1 st

Rs.20,000

Rs. 30,000

Rs. 60,000 Rs. 60,000

Rs. 20,000

Required: Borrowing cost to be capitalized as a part of cost of building.

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A Building(a qualifying asset)

Construction period January 1st to December 31, 20x1. Cost 180,000

.

A 12% bank loan of Rs. 200,000 acquired specifically for the construction on January1 st 20x1.

Loan arrangement fee paid

payment to contractor January 1 st March 1 st July 1 st November 1 st

Rs.20,000

Rs. 30,000 Rs. 30,000 Rs. 60,000 Rs. 20,000

Surplus funds are invested in saving account at 8%.

Required: Borrowing cost to be capitalized as a part of cost of building.

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A Building(a qualifying asset)

Construction period January 1st to December 31, 20x1. Cost 180,000

.

A 12% bank loan of Rs. 200,000 acquired specifically for the construction on January1 st 20x1.

Loan arrangement fee paid

payment to contractor January 1 st March 1 st July 1 st December 1 st

Rs.20,000

Rs. 30,000 Rs. 30,000 Rs. 60,000 Rs. 20,000

Surplus funds are invested in saving account at 8%.

Required: Borrowing cost to be capitalized as a part of cost of building.

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A Building(a qualifying asset)

Construction period January 1 st , 2015 to December 31, 2015. Cost 80 million In the year the company had the following sources of finance available.

.

  • Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The company usually pays a dividend of 10% each year.

  • Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1,
    2015.

  • On August 1, 2015, Rs. 10 million were borrowed from the bank. Interest thereon, is payable at the rate of 11%.

payment to contractor January 1 st March 1 st July 1 st December 1 st

Rs. 30 million Rs. 3 million Rs. 6 million Rs. 20 million

Surplus funds are invested in saving account at 8%. Required: Borrowing cost to be capitalized as a part of cost of building During

2015, Assuming that the loans were taken specifically for the project.

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A Building(a qualifying asset)

Construction period January 1 st , 2015 to December 31, 2015. Cost 80 million In the year the company had the following sources of finance available.

.

  • Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The company usually pays a dividend of 10% each year.

  • Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1,
    2015.

  • On August 1, 2015, Rs. 10 million were borrowed from the bank. Interest thereon, is payable at the rate of 11%.

payment to contractor January 1 st March 1 st July 1 st December 1 st

Rs. 30 million Rs. 3 million Rs. 6 million Rs. 20 million

Surplus funds are invested in saving account at 8%. Required: Borrowing cost to be capitalized as a part of cost of building During

2015, Assuming that the loans constituted general finance.

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A Building(a qualifying asset)

Construction period January 1 st , 2015 to December 31, 2015. Cost 80 million

.

In the year the company had the following sources of finance available.

  • Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The company usually pays a dividend of 10% each year.

  • Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1, 2015.

  • On August 1, 2015, Rs. 10 million were borrowed from the bank. Interest thereon, is payable at the rate of 11%.

payment to contractor January 1 st March 1 st July 1 st December 1 st

Rs. 30 million

Rs. 3 million Rs. 6 million Rs. 20 million

Surplus funds are invested in saving account at 8%. Required: Borrowing cost to be capitalized as a part of cost of building During 2015,

Assuming that the loans constituted general finance.

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Borrowing costs are part of CV of PPE.

  • Capital structure debt vs. equity

  • Debt can be attractive

  • Borrowing costs an expense or a necessary cost in bringing a non- current asset to its present location and condition?

Different types of Loans/Borrowings:

  • Long term Loans

  • Short term Loans

  • Short term running finance/Bank overdraft.

share capital is not borrowing therefore dividend to shareholders is not a borrowing cost.

Fund from debt are used after using the from equity.

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.

Borrowing costs are interest and other costs incurred by an entity in connection with the borrowing of funds include the following

  • Arrangement fee

  • Loan processing charges

  • Commitment fee

deducted by bank at the time of disbursement of loan.

Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale may include

Asset for use

  • Tangible Assets (IAS-16)

  • Intangible Asset (IAS-38) Assets for sale

  • Inventories (IAS-2)

Assets that are ready for their intended use or sale when acquired are not qualifying assets

e.g furniture, computers, vehicles etc

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Accounting Treatment:

  • IAS 23 requires the capitalisation of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset when:

    • it is probable that the costs will result in future economic benefits and the costs can be reliably measured

    • the costs are directly attributable and they would have been avoided if the asset was not bought, constructed

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or produced

When should capitalisation begin and end?

Capitalisation shall commence when

  • expenditures for assets are being incurred and

  • borrowing costs are being incurred and

  • activities are necessary to prepare the asset for its intended use or sale are in progress

Capitalisation should cease when

  • the asset is substantially complete, or

  • when no work is being carried out for an extended

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period

 Borrowing costs capitalised = actual costs less any investment income received from the temporary reinvestment
Borrowing costs capitalised = actual costs less any investment
income received from the temporary reinvestment of unutilised
borrowings
.
When funds borrowed generally and used to obtain a qualifying
asset, amount to be capitalised is:
Asset cost x capitalisation rate (weighted average)
Total cost of a qualifying asset to be recognised cannot exceed its
recoverable amount
Borrowing costs capitalised in a period cannot exceed the amount
incurred in that period
If an asset is under process of construction or installation then it is
called as Capital Work in Progress (CWIP). If that CWIP is being
prepared by borrowings then it is also called as qualifying asset.
While calculating investment income to be deducted from interest
incurred, we will consider only that time period for which interest
incurred is capitalized.
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On 1 January 2012, X began to construct a supermarket. It purchased a leasehold interest in the site for Rs.25 million. The construction of the building cost Rs.9 million and the

.

fixtures and fittings cost Rs.6 million. The construction of

the supermarket was completed on 30 September 2012 and it was available for use from 1 January 2013.

X borrowed Rs.40 million on 1 January 2012 in order to

finance this project. The loan carried interest at 10% per

annum. It was repaid on 30 June 2013.

Requirement

Calculate the total amount to be included in property,

plant and equipment in respect of the development at 31

December 2012.

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The total amount to be included in property, plant and equipment at 31 December 2012 is:
The total amount to be included in property, plant and equipment at
31 December 2012 is:
.
Rs.
Lease
25m
Building
9m
Fixtures and Fittings
6m
Interest (Rs.40m x 10% x 9/12)
Carrying value
3m
43m
Only 9 months’ interest can be capitalised. IAS 23 states that
capitalisation must cease when substantially all the activities necessary
to prepare the assets for its intended use or sale are complete. No
depreciation is charged, because the supermarket was not available for
use until 1 January 2013.
Amount of borrowing costs capitalised during the period
Capitalisation rate used to determine the amount of borrowing costs
eligible for capitalisation
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If borrowing is specific to a qualifying asset, avoidable costs are easy to calculate 18
If borrowing is specific to a qualifying asset,
avoidable costs are easy to calculate
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Required: Capitalization rate If accounting year is July 1 st to June 30. 19
Required: Capitalization rate
If accounting year is July 1 st to June 30.
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 Running finance facility of Rs. 32 million from bank C carrying a markup of 16%
Running finance facility of Rs. 32 million from bank C carrying a
markup of 16% payable annually obtained on July 1 st, 2014.
Required: Capitalization rate
If accounting year is July 1 st to June 30.
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. Required: Calculate Investment Income If accounting year is July 1 st to June 30. 21
.
Required: Calculate Investment Income
If accounting year is July 1 st to June 30.
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A Building(a qualifying asset)

Construction period January 1 st , 20x1 to March 31, 20x2. Cost 180,000

.

A 12% bank loan of Rs. 200,000 acquired specifically for the construction on January1 st 20x1.

Loan arrangement fee paid

payment to contractor March 1 st July 1 st December 1 st

Rs.20,000

Rs. 60,000 Rs. 60,000 Rs. 60,000

Surplus funds are invested in saving account at 8%.

Required: Borrowing cost to be capitalized as a part of cost of

building during 20x1.

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A Building(a qualifying asset)

Construction period January 1 st , 2015 to December 31, 2015. Cost 80 million

.

  • In addition to the above payments, SIL paid a fee of Rs. 8 million on January 1 st , for obtaining a permit allowing the construction of the building.

In the year the company had the following sources of finance available.

  • Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The company usually pays a dividend of 10% each year.

  • Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1, 2015.

  • On August 1, 2015, Rs. 10 million were borrowed from the bank B. Interest thereon, is payable at the rate of 11%. payment to contractor

March 1 st July 1 st December 1 st

Rs. 33 million Rs. 6 million Rs. 20 million

Surplus funds are invested in saving account at 8%.

Required: Borrowing cost to be capitalized as a part of cost of building During 2015,

Assuming that the loans constituted specific finance.

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A Building(a qualifying asset) Cost 80 million Construction period January 1 st , 2015 to December 31, 2015.

  • In addition to the above payments, SIL paid a fee of Rs. 8 million on January 1 st , for obtaining a permit allowing the construction of the building.

.

  • The project was financed through the following sources:

  • On 1 January, 2015 a medium term loan of Rs. 25 million was obtained specifically for the construction of the building. The loan carried mark up of 12% per annum payable semi- annually. A commitment fee @ 0.5% of the amount of loan was charged by the bank.

Existing running finance facilities of SIL

  • Running finance facility of Rs. 28 million from Bank A carrying mark up of 13% payable annually. The average outstanding balance during the period of construction was Rs. 25 million.

  • Running finance facility of Rs. 25 million from Bank B. The mark up accrued during the period of construction was Rs. 3 million and the average running finance balance during that period was Rs. 20 million. payment to contractor January 1 st March 1 st July 1 st December 1 st

Rs. 20 million Rs. 13 million

Rs. 6 million

Rs. 20 million

Surplus funds are invested in saving account at 8%. Required: Borrowing cost to be capitalized as a part of cost of building During 2015.

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A Building(a qualifying asset) Cost 80 million Construction period January 1 st , 2015 to December 31, 2015.

  • In addition to the above payments, SIL paid a fee of Rs. 8 million on January 1 st , for obtaining a permit allowing the construction of the building.

.

  • The project was financed through the following sources:

  • On 1 January, 2015 a medium term loan of Rs. 25 million was obtained specifically for the construction of the building. The loan carried mark up of 12% per annum payable semi-annually. A commitment fee @ 0.5% of the amount of loan was charged by the bank.

  • Surplus funds were invested in savings account @ 8% per annum. Existing running finance facilities of SIL

  • Running finance facility of Rs. 28 million from Bank A carrying mark up of 13% payable annually arranged on January 1 st ,2015.

  • Running finance facility of Rs. 25 million from Bank B carrying mark up of 14% payable annually arranged on july1 st ,2015. payment to contractor January 1 st March 1 st July 1 st December 1 st

Rs. 30 million Rs. 3 million Rs. 6 million

Rs. 20 million

Surplus funds are invested in saving account at 8%. Required: Borrowing cost to be capitalized as a part of cost of building During 2015.

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