IAS-23 Borrowing Cost | Practical Question Solved | How to accounting for borrowing cost in Bangla ?
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IAS-23 Borrowing Cost | Practical
IAS-23 Borrowing Cost | Practical Question Solved | How to accounting for borrowing cost in Bangla:
Accounting for Borrowing Cost :
Learning Outcomes At the end of this article you should be able to:
Identify borrowing costs;
Identify qualifying assets;
Distinguish between the borrowing cost to be capitalized and expensed;
Account for borrowing cost to be capitalized.
Borrowing Costs Eligible for Capitalization There are two circumstances under which borrowing costs will be eligible for capitalization as indicated below.
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a) Where funds are borrowed specifically for the purpose of obtaining a qualifying asset. Borrowing costs eligible for capitalization are the actual costs incurred less any income earned on the temporary investment of such borrowings
b) Where funds are borrowed generally and use them for the purpose of obtaining a qualifying asset. The eligible amount of borrowing cost for capitalization is determined by applying a capitalization rate to the expenditure on that asset. The capitalization rate is the weighted average of the borrowing costs applicable to the general pool of funds that are outstanding during the period
Commencement of capitalization
Capitalization of borrowing costs should commence when all of the following conditions are satisfied. a) it incurs expenditures for the asset; b) it incurs borrowing costs; and c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the asset’s condition is taking place. For example, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalization.
Suspension of capitalization
Capitalization should be suspended during periods in which active development is interrupted.
Cessation of capitalization
Capitalization should cease when substantially all of the activities necessary to prepare the asset for its intended use or sale are complete.
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An asset is normally ready for its intended use or sale when the physical construction of the asset is complete even though routine administrative work might still continue. If minor modifications, such as the decoration of a property to the purchaser’s or user’s specification, are outstanding, this indicates that substantially all the activities are complete.
Where construction is completed in stages, parts which can be used while construction of the other parts continues, capitalization 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.
Example 01 Apollo PLC borrowed Rs.1,000,000 loan from bank with an interest rate of 10% which was equal to its effective interest rate on 1 April 2015 for the construction of power generation facilities of the company.
The loan was received on April 01 and utilized Rs. 300,000 on qualifying asset. On April 01, the company deposited the remaining amount in a bank yielding interest at 6% per annum. Whole of the amount is withdrawn and paid to contractor on 31 December 2015 when the construction was completed and ready for use. The company returned the loan to bank on 31 March 2016.Power generation facility was available for use in the business from 1 April 2016.
Accounting for Borrowing Cost :
Learning Outcomes At the end of this article you should be able to:
Identify borrowing costs;
Identify qualifying assets;
Distinguish between the borrowing cost to be capitalized and expensed;
Account for borrowing cost to be capitalized.
Borrowing Costs Eligible for Capitalization There are two circumstances under which borrowing costs will be eligible for capitalization as indicated below.
2
a) Where funds are borrowed specifically for the purpose of obtaining a qualifying asset. Borrowing costs eligible for capitalization are the actual costs incurred less any income earned on the temporary investment of such borrowings
b) Where funds are borrowed generally and use them for the purpose of obtaining a qualifying asset. The eligible amount of borrowing cost for capitalization is determined by applying a capitalization rate to the expenditure on that asset. The capitalization rate is the weighted average of the borrowing costs applicable to the general pool of funds that are outstanding during the period
Commencement of capitalization
Capitalization of borrowing costs should commence when all of the following conditions are satisfied. a) it incurs expenditures for the asset; b) it incurs borrowing costs; and c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the asset’s condition is taking place. For example, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalization.
Suspension of capitalization
Capitalization should be suspended during periods in which active development is interrupted.
Cessation of capitalization
Capitalization should cease when substantially all of the activities necessary to prepare the asset for its intended use or sale are complete.
3
An asset is normally ready for its intended use or sale when the physical construction of the asset is complete even though routine administrative work might still continue. If minor modifications, such as the decoration of a property to the purchaser’s or user’s specification, are outstanding, this indicates that substantially all the activities are complete.
Where construction is completed in stages, parts which can be used while construction of the other parts continues, capitalization 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.
Example 01 Apollo PLC borrowed Rs.1,000,000 loan from bank with an interest rate of 10% which was equal to its effective interest rate on 1 April 2015 for the construction of power generation facilities of the company.
The loan was received on April 01 and utilized Rs. 300,000 on qualifying asset. On April 01, the company deposited the remaining amount in a bank yielding interest at 6% per annum. Whole of the amount is withdrawn and paid to contractor on 31 December 2015 when the construction was completed and ready for use. The company returned the loan to bank on 31 March 2016.Power generation facility was available for use in the business from 1 April 2016.
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