IAS 23 : Borrowing cost

Question 1:

Specific Limited started constructing a factory on 1 January 2017. Cost of the

construction was estimated to be Rs. 60million. Funds will be borrowed specifically
from U bank @ 12% p.a.

Expenditure was undertaken as follows:

Dates Amount (Rs. million)

1 Jan 17 15
1Apr 17 15
1 Oct 17 15
31 Dec 17 15

Surplus funds are to be invested @ 6% p.a. Rs. 60 million loan was disbursed by U
bank on 1 Jan 2017.

Required:
 Borrowing cost to be capitalized in 2017.
 Cost of CWIP on 31 Dec 2017.
Note: Payment is to be made on the date of bill.

Question 2:

General Limited started constructing a factory on 1 January 2017. Cost of the

construction was estimated to be Rs. 60million. P limited will make payment out of
existing running finance accounts.

Expenditure was undertaken as follows:

Date Amount (Rs. Million)

1 Jan 17 15
1Apr 17 15
1 Oct 17 15
31 Dec 17 15

Average balances outstanding on the running finances accounts during 2017 were.
U bank Rs. 75m 12% p.a.
A bank Rs.45m 15% p.a.

Required:
 Borrowing cost to be capitalized in 2017
 Cost of CWIP on 31 Dec 2017
Note: Payment is to be made on the date of bills.
Question 3
On November 01, 2001 Jamal Nasir & Company contracted Wardah Construction Company to have a
building constructed for Rs. 3 millions. Jamal Nasir & Company made the following payments to the
construction company during 2002.

January 1 March 1 May 1 December 31 Total

Rs. 420,000 Rs. 600,000 Rs. 1,080,000 Rs. 900,000 Rs. 3,000,000

Construction was completed and the building was ready for occupancy on December 31, 2002. Jamal Nasir
& Company had the following debt outstanding at December 31, 2002:

Specific Construction Debt

i) 15%, 3-year loan to finance purchase of land and construction of the building, dated December 31,
2001, with interest payable annually on December 31 – Rs. 1.5 million.

Other Debts
ii) 10%, 5-year loan payable, dated December 31, 199, with interest payable annually on December 31 –
Rs. 1.1 million.
iii) 12%, 10-year bonds issued on December 31, 1997, with interest payable annually on December 31 –
Rs. 1.2 million.

Surplus funds were planned to be invested @ 5% in a saving account.

Required:
Keeping in view the requirement of IAS 23, calculate the following:
a) Total actual interest cost for the year.
b) Capitalization rate of borrowing cost.
c) Interest cost to be capitalized.
d) Cost of the building.

Definitions:
Borrowing cost:
Are interest and other cost that an entity incurs in connection with it borrowings.

Qualifying Assets
Is an asset that necessarily take substantial time to construct, manufacture or develop.

Accounting treatment of Borrowing cost

Borrowings that are obtained to acquire a qualifying asset Capitalize in cost of the qualifying asset

Borrowing that is obtained for other purposes Expensed out in profit and loss A/C
Borrowing by Companies

Specific borrowing An entity borrows funds specially to acquire a qualifying asset.

General borrowing An entity uses its existing financing facilities to acquire a qualifying asset.

Accounting treatment for capitalizing borrowing cost

Accounting for capitalzing borrowing cost incurred on specific borrowings: Rs.

Actual borrowing cost incurred X 4
Less: Income from temporary investment of surplus funds (X) (1)
Net amount to be capitalized X 3

Cost of constructing the building 40

Borrowing cost to be capitalized 3
Total cost of the building 43

Question 1:
Borrowing cost to be capitalized Rs.m
Actual borrowing cost incurred (Rs.60m X 12%)-payable to U Bank 7.2
Less: Income from temporary investment for investing the unutilized amount 1.8
Net 5.4

Loan amount received was invested at 6% in a saving A/c 60

Payment on 1 Jan 17 15
Balance in saving from 1 Jan till 31 Mar 45
Payment on 1 Apr 15
Balance in saving A/C from 1 Apr till 30 Sep 30
Payment on 1 Oct 15
Balance in saving A/C from 1 Oct to 31 Dec 15
Payment on 31 Dec 15
Balance on 31 December 2017 Nil

Interest income
45 X 6% X 3/12 0.675
30 X 6% X 6/12 0.9
15 X 6% X 3/12 0.225
Total 1.8

Cost of constructing the building 60

Borrowing cost to be capitalized 5.4
Total cost of the building 65.4