BORROWING COSTS

HM UMAR FAROOQ RANA

Certified Chartered Accountant (UK), CA-ICAP (FINAL), MCOM.

TO VIEW THE SLIDES ONLINE:

1
 A Building(a qualifying asset)
.
Construction period March1st to December 31, 20x1.
Cost 180,000
A 12% bank loan of Rs. 180,000 acquired specifically for the
construction on 1st January 20x1.
Required: Borrowing cost to be capitalized as a part of cost of
building.

2
 A Building(a qualifying asset)
.
Construction period January 1st to December 31, 20x1.
Cost 180,000
A 12% bank loan of Rs. 180,000 acquired specifically for the
construction on March1st 20x1.
Required: Borrowing cost to be capitalized as a part of cost of
building.

3
 A Building(a qualifying asset)
.
Construction period January 1st to December 31, 20x1.
Cost 180,000
A 12% bank loan of Rs. 200,000 acquired specifically for the
construction on March1st 20x1.
Loan arrangement fee paid Rs.20,000
Required: Borrowing cost to be capitalized as a part of cost of
building.

4
 A Building(a qualifying asset)
Construction period January 1st to December 31, 20x1.
.
Cost 180,000
A 12% bank loan of Rs. 200,000 acquired specifically for the
construction on January1st 20x1.
Loan arrangement fee paid Rs.20,000
payment to contractor
March 1st Rs. 30,000
July 1st Rs. 60,000
September 1st Rs. 60,000
November 1st Rs. 20,000
Required: Borrowing cost to be capitalized as a part of cost of
building.
5
 A Building(a qualifying asset)
Construction period January 1st to December 31, 20x1.
.
Cost 180,000
A 12% bank loan of Rs. 200,000 acquired specifically for the
construction on January1st 20x1.
Loan arrangement fee paid Rs.20,000
payment to contractor
January 1st Rs. 30,000
March 1st Rs. 30,000
July 1st Rs. 60,000
November 1st Rs. 20,000
Surplus funds are invested in saving account at 8%.
Required: Borrowing cost to be capitalized as a part of cost of
building.
6
 A Building(a qualifying asset)
Construction period January 1st to December 31, 20x1.
.
Cost 180,000
A 12% bank loan of Rs. 200,000 acquired specifically for the
construction on January1st 20x1.
Loan arrangement fee paid Rs.20,000
payment to contractor
January 1st Rs. 30,000
March 1st Rs. 30,000
July 1st Rs. 60,000
December 1st Rs. 20,000
Surplus funds are invested in saving account at 8%.
Required: Borrowing cost to be capitalized as a part of cost of
building.
7
 A Building(a qualifying asset)
Construction period January 1st, 2015 to December 31, 2015.
.
Cost 80 million
In the year the company had the following sources of finance available.
 Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The
company usually pays a dividend of 10% each year.
 Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1,
2015.
 On August 1, 2015, Rs. 10 million were borrowed from the bank. Interest
thereon, is payable at the rate of 11%.
payment to contractor
January 1st Rs. 30 million
March 1st Rs. 3 million
July 1st Rs. 6 million
December 1st Rs. 20 million
Surplus funds are invested in saving account at 8%.
Required: Borrowing cost to be capitalized as a part of cost of building During
2015, Assuming that the loans were taken specifically for the project.
8
 A Building(a qualifying asset)
Construction period January 1st, 2015 to December 31, 2015.
.
Cost 80 million
In the year the company had the following sources of finance available.
 Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The
company usually pays a dividend of 10% each year.
 Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1,
2015.
 On August 1, 2015, Rs. 10 million were borrowed from the bank. Interest
thereon, is payable at the rate of 11%.
payment to contractor
January 1st Rs. 30 million
March 1st Rs. 3 million
July 1st Rs. 6 million
December 1st Rs. 20 million
Surplus funds are invested in saving account at 8%.
Required: Borrowing cost to be capitalized as a part of cost of building During
2015, Assuming that the loans constituted general finance.
9
 A Building(a qualifying asset)
Construction period January 1st, 2015 to December 31, 2015.
.
Cost 80 million

In the year the company had the following sources of finance available.
 Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The company
usually pays a dividend of 10% each year.
 Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1, 2015.
 On August 1, 2015, Rs. 10 million were borrowed from the bank. Interest thereon, is
payable at the rate of 11%.
payment to contractor
January 1st Rs. 30 million
March 1st Rs. 3 million
July 1st Rs. 6 million
December 1st Rs. 20 million
Surplus funds are invested in saving account at 8%.
Required: Borrowing cost to be capitalized as a part of cost of building During 2015,
Assuming that the loans constituted general finance.

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 Borrowing costs are part of CV of PPE.
 Capital structure – debt vs. equity
 Debt can be attractive
 Borrowing costs – an expense or a necessary cost in bringing a non-
current asset to its present location and condition?
Different types of Loans/Borrowings:
 Long term Loans
 Short term Loans
 Short term running finance/Bank overdraft.
share capital is not borrowing therefore dividend to
shareholders is not a borrowing cost.
Fund from debt are used after using the from equity.

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 .
Borrowing costs are interest and other costs incurred by an entity in connection
with the borrowing of funds include the following
 Arrangement fee
 Loan processing charges
 Commitment fee
deducted by bank at the time of disbursement of loan.

Qualifying asset is an asset that necessarily takes a substantial period of time

to get ready for its intended use or sale may include
Asset for use
 Tangible Assets (IAS-16)
 Intangible Asset (IAS-38)
Assets for sale
 Inventories (IAS-2)
Assets that are ready for their intended use or sale when acquired are not qualifying assets
e.g furniture, computers, vehicles etc

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 Accounting Treatment:

 IAS 23 requires the capitalisation of borrowing costs that

are directly attributable to the acquisition, construction or
production of a qualifying asset when:
 it is probable that the costs will result in future
economic benefits and the costs can be reliably
measured
 the costs are directly attributable and they would have
been avoided if the asset was not bought, constructed
or produced

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 When should capitalisation begin and end?

Capitalisation shall commence when

 expenditures for assets are being incurred and
 borrowing costs are being incurred and
 activities are necessary to prepare the asset for its
intended use or sale are in progress
Capitalisation should cease when
 the asset is substantially complete, or
 when no work is being carried out for an extended
period

14
  Borrowing costs capitalised = actual costs less any investment
.
income received from the temporary reinvestment of unutilised
borrowings
 When funds borrowed generally and used to obtain a qualifying
asset, amount to be capitalised is:
Asset cost x capitalisation rate (weighted average)
 Total cost of a qualifying asset to be recognised cannot exceed its
recoverable amount
 Borrowing costs capitalised in a period cannot exceed the amount
incurred in that period
 If an asset is under process of construction or installation then it is
called as Capital Work in Progress (CWIP). If that CWIP is being
prepared by borrowings then it is also called as qualifying asset.
 While calculating investment income to be deducted from interest
incurred, we will consider only that time period for which interest
incurred is capitalized.
15
 On 1 January 2012, X began to construct a supermarket. It
.
purchased a leasehold interest in the site for Rs.25 million.
The construction of the building cost Rs.9 million and the
fixtures and fittings cost Rs.6 million. The construction of
the supermarket was completed on 30 September 2012
and it was available for use from 1 January 2013.
X borrowed Rs.40 million on 1 January 2012 in order to
finance this project. The loan carried interest at 10% per
annum. It was repaid on 30 June 2013.
Requirement
Calculate the total amount to be included in property,
plant and equipment in respect of the development at 31
December 2012.

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The total amount to be included in property, plant and equipment at
31 December 2012 is:
. Rs.
Lease 25m
Building 9m
Fixtures and Fittings 6m
Interest (Rs.40m x 10% x 9/12) 3m
Carrying value 43m
Only 9 months’ interest can be capitalised. IAS 23 states that
capitalisation must cease when substantially all the activities necessary
to prepare the assets for its intended use or sale are complete. No
depreciation is charged, because the supermarket was not available for
use until 1 January 2013.
 Amount of borrowing costs capitalised during the period
 Capitalisation rate used to determine the amount of borrowing costs
eligible for capitalisation

17
 If borrowing is specific to a qualifying asset,
avoidable costs are easy to calculate

18
 Required: Capitalization rate
If accounting year is July 1st to June 30.

19
  Running finance facility of Rs. 32 million from bank C carrying a
markup of 16% payable annually obtained on July 1st, 2014.
Required: Capitalization rate
If accounting year is July 1st to June 30.
20
 .

Required: Calculate Investment Income

If accounting year is July 1st to June 30.

21
 A Building(a qualifying asset)
Construction period January 1st, 20x1 to March 31, 20x2.
.
Cost 180,000
A 12% bank loan of Rs. 200,000 acquired specifically for the
construction on January1st 20x1.
Loan arrangement fee paid Rs.20,000
payment to contractor
March 1st Rs. 60,000
July 1st Rs. 60,000
December 1st Rs. 60,000
Surplus funds are invested in saving account at 8%.
Required: Borrowing cost to be capitalized as a part of cost of
building during 20x1.

22
 A Building(a qualifying asset)
Construction period January 1st, 2015 to December 31, 2015.
.
Cost 80 million
 In addition to the above payments, SIL paid a fee of Rs. 8 million on January 1st , for
obtaining a permit allowing the construction of the building.
In the year the company had the following sources of finance available.
 Rights issue of shares amounting to Rs. 15 million on January 1, 2015. The company
usually pays a dividend of 10% each year.
 Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1, 2015.
 On August 1, 2015, Rs. 10 million were borrowed from the bank B. Interest thereon, is
payable at the rate of 11%.
payment to contractor

March 1st Rs. 33 million

July 1st Rs. 6 million
December 1st Rs. 20 million
Surplus funds are invested in saving account at 8%.
Required: Borrowing cost to be capitalized as a part of cost of building During 2015,
Assuming that the loans constituted specific finance .
23
 A Building(a qualifying asset) Cost 80 million
Construction period January 1st, 2015 to December 31, 2015.

.
In addition to the above payments, SIL paid a fee of Rs. 8 million on January 1st , for obtaining a
permit allowing the construction of the building.
 The project was financed through the following sources:
 On 1 January, 2015 a medium term loan of Rs. 25 million was obtained specifically for the
construction of the building. The loan carried mark up of 12% per annum payable semi-
annually. A commitment fee @ 0.5% of the amount of loan was charged by the bank.
Existing running finance facilities of SIL
 Running finance facility of Rs. 28 million from Bank A carrying mark up of 13% payable annually. The
average outstanding balance during the period of construction was Rs. 25 million.
 Running finance facility of Rs. 25 million from Bank B. The mark up accrued during the period of
construction was Rs. 3 million and the average running finance balance during that period was Rs. 20
million.
payment to contractor
January 1st Rs. 20 million
March 1st Rs. 13 million
July 1st Rs. 6 million
December 1st Rs. 20 million
Surplus funds are invested in saving account at 8%.
Required: Borrowing cost to be capitalized as a part of cost of building During 2015.
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 A Building(a qualifying asset) Cost 80 million
Construction period January 1st, 2015 to December 31, 2015.

.
In addition to the above payments, SIL paid a fee of Rs. 8 million on January 1st , for obtaining a permit allowing
the construction of the building.
 The project was financed through the following sources:
 On 1 January, 2015 a medium term loan of Rs. 25 million was obtained specifically for the
construction of the building. The loan carried mark up of 12% per annum payable semi-annually. A
commitment fee @ 0.5% of the amount of loan was charged by the bank.
 Surplus funds were invested in savings account @ 8% per annum.
Existing running finance facilities of SIL
 Running finance facility of Rs. 28 million from Bank A carrying mark up of 13% payable annually
arranged on January 1st,2015.
 Running finance facility of Rs. 25 million from Bank B carrying mark up of 14% payable annually
arranged on july1st,2015.
payment to contractor
January 1st Rs. 30 million
March 1st Rs. 3 million
July 1st Rs. 6 million
December 1st Rs. 20 million
Surplus funds are invested in saving account at 8%.
Required: Borrowing cost to be capitalized as a part of cost of building During 2015.

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