1. Advanced Financial Accounting Lecture-31 Borrowing Cost IAS-23

2. Borrowing Cost

3. Borrowing cost are interest and other cost incurred by an entity in connection with the borrowing of funds.

4. Qualifying Assets A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

5. Examples of Qualifying Assets 1.Power plant being un the process of manufacture. 2.Inventories routinely manufactured. 3.Assets ready to use. 4.Inventories requiring a substantial period for the manufacturing. 5.Special order for a special inventory that will be manufacturer that will be manufactured in five months. Qualifying Assets Not Qualifying Assets Qualifying Assets

6. Barrowing Costs (Recognition) Borrowing cost shall be recognized as an expense in the period in which they are incurred, except to the extent that borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized as part of the cost of that asset.

7. Borrowing Costs Eligible for Capitalization The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying assets are those borrowing costs that would have been avoided if the expenditure on the qualifying assets had not been made.

8. Example Mega limited is engaged in the production of power generation plants,which is to be used by the company. The company borrows funds for the construction of this plants Rs. 20,000,000 @ 10% The company wants to adopt the accounting treatment of interest expense on such asset. What option are available to the company under IAS-23, borrowing costs.

9. Interest Expense = Rs. 20,000,000 @ 10% = 2,000,000

10. Example Swan limited borrowed a loan from bank on 12 % per annum amounting to Rs 1,000,000 for the construction of power generation facilities of the company. The loan was received on January 01 and utilized Rs. 300,000 on Qualifying asset. On January 01, the company deposited the remaining amount in the bank yielding interest @ 6 %. Whole the amount is with draw and paid to contractor on March 01. The company returned the loan to bank after 9 months i.e. on October 01.You are required to calculate the amount of borrowing cost eligible capitalization.

11. Interest paid to bank Rs 1,000,000 x 12% x 9/12. 90,000 less interest income 700,000 x 6% x 2/12 7,000 Borrowing cost eligible for capitalization 83,000

12. Capital expenditure barrowed 1,000,000 Add Borrowing cost eligible for capitalization 83,000 1,083,000

13. Capitalization Rate = Total borrowing cost incurred Weighted borrowing outstanding during the year X 100

14. Question MCQ Pvt. Limited has the following loans outstanding as at December 31 st 2005 Rs. Loan – 1@ 6 % 300,000 Loan – 2 @ 8 % 200,000 Loan –3 @ 9 % 150,000 All the three loans were brought forward from previous year. Neither loan is acquired during the year nor is paid. The company spent following amounts on construction of an asset. January 31, 2005 70,000 April 01, 2005 80,000 December 01, 2005 10,000 Calculate (I ) capitalization rate (ii ) borrowing cost eligible for capitalization.

15. Solution Capitalization Rate = Total borrowing cost incurred Weighted borrowing outstanding during the year Rs. Interest Loan – 1@ 6 % 300,000 8,000 Loan – 2 @ 8 % 200,000 16,000 Loan –3 @ 9 % 150,000 13,500 47,500 Capitalization Rate = 47,500 / 600,000 x 100 = 7.31% x 100

16. Question MCQ Pvt. Limited has the following loans outstanding as at December 31 st 2005 Rs. Loan – 1@ 6 % Due on opening date 300,000 Loan – 2 @ 8 % Taken on 1 st April 2005 200,000 Loan –3 @ 9 % Taken on 1 st July 2005 150,000