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Lecture Notes On Borrowing Costs - 000

The document defines borrowing costs as interest and other costs incurred from borrowing funds. It notes borrowing costs can include interest expense, finance charges, and exchange differences from foreign currency borrowings treated as interest adjustments. Borrowing costs do not include equity capital costs. The document states borrowing costs directly attributed to a qualifying asset should be capitalized as part of the asset's cost, while other borrowing costs are recognized as an expense. A qualifying asset takes substantial time to prepare for intended use. The document provides guidelines for calculating capitalized amounts for specific and general borrowings, and notes capitalization should commence when expenditures, borrowing costs, and preparatory activities occur, and cease when substantially all activities to prepare the asset are complete. Disclosure of

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1K views3 pages

Lecture Notes On Borrowing Costs - 000

The document defines borrowing costs as interest and other costs incurred from borrowing funds. It notes borrowing costs can include interest expense, finance charges, and exchange differences from foreign currency borrowings treated as interest adjustments. Borrowing costs do not include equity capital costs. The document states borrowing costs directly attributed to a qualifying asset should be capitalized as part of the asset's cost, while other borrowing costs are recognized as an expense. A qualifying asset takes substantial time to prepare for intended use. The document provides guidelines for calculating capitalized amounts for specific and general borrowings, and notes capitalization should commence when expenditures, borrowing costs, and preparatory activities occur, and cease when substantially all activities to prepare the asset are complete. Disclosure of

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judel Ariel
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LECTURE NOTES ON BORROWING COST

Definition

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of
funds. 


Borrowing cost may include:


• interest expense calculated using the effective interest rate method as described in PAS 39;
• finance charges in respect of finance leases recognized in accordance with PAS 17; and
• exchange differences arising from foreign currency borrowings to the extent that they are regarded
as an adjustment to interest costs.

Borrowing cost does not include actual or imputed cost of equity capital, including any preferred capital
not classified as a liability pursuant to PAS 32.

Accounting Treatment
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying
asset form part of the cost of that asset and, therefore, should be capitalized. Other borrowing costs
are recognized as an expense.

A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use.
That could be property, plant, and equipment and investment property during the construction period,
intangible assets during the development period, or "made-to-order" inventories.

How much should be capitalized?


Specific borrowings - Actual borrowing costs incurred less any income on the temporary investment of
those borrowings.

General borrowings – Lower of:


• Average expenditures x capitalization rate; and
• Actual borrowing costs incurred.
The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings
of the entity that are outstanding during the period, other than borrowings made specifically for the
purpose of obtaining a qualifying asset.

Commencement of capitalization
The commencement date for capitalization is the date when the entity first meets all of the following
conditions:
(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.

Suspension and cessation of capitalization


Capitalization should be suspended during periods in which active development is interrupted.
Capitalization should cease when substantially all of the activities necessary to prepare the asset for its
intended use or sale are complete. If only minor modifications are outstanding, this indicates that
substantially all of the activities are complete.

Where construction is completed in stages, 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.

Disclosure
An entity shall disclose:
(a) the amount of borrowing costs capitalized during the period; and
the capitalization rate used to determine the amount of borrowing costs eligible for capitalization

PROBLEMS
1. On 1 January 2015 The Divine Company took out a 12% P10 million loan to finance the construction
of a building. The key dates are as follows:
1 January 2015 - Loan interest relating to the project starts to be incurred
1 February 2015 - Technical site planning commences
1 March 2015 - Expenditures on the project start to be incurred
1 April 2015 - Construction work commences
1 Nov. 2015 - Substantially all of the activities necessary to prepare the asset for its intended
use are complete
1 Dec. 2015 - Building brought into use
What amount of interest should Divine capitalize for the current year?
2. On 1 January 2015 Imp Company borrowed P6 million at an annual interest rate of 10% to finance the
costs of building an electricity generating plant. Construction commenced on 1 January 2015 and cost
P6 million. Not all the cash borrowed was used immediately, so interest income of P80,000 was
generated by temporarily investing some of the borrowed funds prior to use. The project was completed
on 30 November 2015. What is the carrying amount of the plant at 30 November 2015?

3. Maragondon Company had the following borrowings during 2015. The borrowings were made for
general purposes but the proceeds were used in part to finance the construction of a new building:
Principal Interest
12% bank loan P10,000,000 P1,200,000
15% long-term loan 20,000,000 3,000,000
P30,000,000 P4,200,000
The construction began on January 1, 2015 and was completed on December 31, 2015.
Expenditures on the building were made as follows:
January 1 P8,000,000
June 30 8,000,000
December 31 4,000,000
The capitalizable borrowing cost is

4. During 2015, Grant Industries, Inc. constructed a new manufacturing facility at a cost of
P12,000,000. The weighted average accumulated expenditures for 2015 were calculated to be
P5,400,000. The company had the following debt outstanding at December 31, 2015:
• 10 percent, five-year note to finance construction of the manufacturing facility, dated January
1, 2015, P3,600,000.
• 12 percent, 20-year bonds issued at par on April 30, 2011, P8,400,000.
• 8 percent, six-year note payable, dated March 1, 2014, P1,800,000.
Determine the amount of interest to be capitalized by Grant Industries for 2015.

Use the following information for the next two questions.


Lodi Department Stores, Inc., constructs its own stores. Management’s policy is to include interest as
part of the cost of new store just being completed. Additional information follows:
Total construction expenditures:
January 2, 2014 P 600,000
May 1, 2014 600,000
November 1, 2014 500,000
March 1, 2015 700,000
September 1, 2015 400,000
December 31, 2015 500,000
P3,300,000
Outstanding company debt:
Mortgage related directly to new store;
interest rate, 12%; term, 5 years
from beginning of construction P1,000,000
General liability:
Bonds issued just prior to construction
of store; interest rate, 10% for 10
years P 500,000
Bonds issued just prior to construction;
interest rate, 8%, mature in 5 years P1,000,000
Estimated cost of equity capital 14%

5. The capitalizable borrowing cost for 2014 is

6. The capitalizable borrowing cost for 2015 is

7. Oceanwide Enterprises, Inc., is involved in building and operating cruise ships. Each ship is identified
as a separate discrete job in the accounting records. At the end of 2014, Oceanwide correctly
reported P5,400,000 as Construction in Progress on the following jobs.
Accumulated Costs
(including 2014
Completion Date interest)
Ship (end of month) December 31, 2014
340 October 31, 2014* P2,300,000
341 June 30, 2015 1,150,000
342 September 30, 2015 1,200,000
343 January 31, 2016 750,000
*Ship 340 was completed and ready for use in October 2014 and will be placed in service May 1,
2015.
Construction costs for 2015, and the dates the expenditures were made, were as follows:
Ship Date Costs
341 April 1 P1,200,000
342 May 1 1,600,000
343 July 1 2,200,000
344 September 1 810,000
345 November 1 360,000

Oceanwide had the following general liabilities at December 31, 2015:


12%, 5-year note (maturity date-2017)P2,000,000
10%, 10-year bonds (maturity date-2020) 8,000,000

On January 1, 2015, Oceanwide borrowed P2,000,000 specifically for the construction of ship 343.
The loan was for 3 years with interest at 13%.
Capitalized interest on Ship No. 343

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