Reporting
(ACC3206)
IAS 23
Borrowing Costs
Introduction
Borrowing costs are interests and other costs incurred on
funds borrowed.
An entity may borrow for other reasons and if they are not in
relation to construction or developing an asset, then those costs are
to be expensed as period costs.
Recognition
Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset
are to be capitalised as part of cost of the asset provided it is
probable that they will result in future economic benefits to
the entity and the costs can be measured reliably.
Required:
31/12/x5
RM
12% Loan stock 100,000
10% Term loan 220,000
8% Redeemable preference shares 80,000
Borrowing Costs Eligible for Capitalisation
Central Borrowings
Answer:
Capitalisation rate:
Principal (a) (b) (a) x (b)
At 31/12/x5 Weighted Interest %
RM Average Rate
12% Loan stock 100,000 25% 12% 3.0
10% Term loan 220,000 55% 10% 5.5
8% Redeemable 80,000 20% 8% 1.6
preference shares
400,000 100% 10.1%
Borrowing Costs Eligible for Capitalisation
Central Borrowings
Total interest:
Principal Interest Total
At 31/12/x5 Rate Interest
RM RM
12% Loan stock 100,000 12% 12,000
10% Term loan 220,000 10% 22,000
8% Redeemable preference 80,000 8% 6,400
shares
Total 400,000 40,400
RM
Interest that can be capitalised RM300,000 x 10.1% 30,300
Interest that can be charged as expense 10,100
40,400
Borrowing Costs Eligible for Capitalisation
Limitation to Capitalisation
If the carrying amount of an asset or the total cost of the
asset (including borrowing cost) exceeds its recoverable
amount or net realisable value, the asset has to be written
down or written off accordingly.
Beano Bhd secured a loan of RM1 million from Giant Finance Bhd in x1
to finance the construction costs. Interest on the loan was charged at
10% per annum. Repayment period of the loan was five years. Since
Beano Bhd did not need the full amount of the loan in the first year of
construction, it deposited RM600,000 in a fixed deposit which yielded
an interest of 8% per annum. The deposit matured on 31 December x1.
Required:
(a) Calculate the cost of the building.
(b) Show the statements of comprehensive income (extract) for the
years ended 31 December x1 until x4.
Answer:
(a)
Arguments for:
1) Borrowing costs form part of acquisition
cost
2) Costs included in assets is matched
against revenue of future periods.
3) Results is better comparability between
assets purchased and constructed.
Capitalization of borrowing costs
Arguments against:
1) Attempts to link borrowing costs to a
specific asset is arbitrary.
2) Different financing methods may result in
different amounts capitalized for the same
asset.
3) Expensing borrowing costs causes better
comparable results.
The End
Thank you