- 20 Marks
Question
In accordance with IAS 23, Borrowing Costs that are directly attributable to the acquisition, construction, or production of a qualifying asset form part of the cost of that asset, while other borrowing costs are recognized as an expense.
Required:
a. State the conditions wherein capitalisation of borrowing costs:
i. Commences
ii. Should not be suspended
iii. Should cease (6 Marks)
b. VITAMAX Plc. is constructing a factory that will take about 18 months to complete. The company commenced construction on 2 January 2013. The following payments were made during the year:
| Date | Amount (N’000) |
|---|---|
| 31 January | 40,000 |
| 31 March | 90,000 |
| 30 June | 20,000 |
| 31 October | 40,000 |
| 30 November | 50,000 |
The first payment on 31 January was funded from the company’s pool of debts. However, the company succeeded in raising Medium-Term Loan Notes for an amount of N160,000,000 on 31 March 2013 at a simple interest rate of 9 percent per year, calculated and payable monthly in arrears. These funds were specifically used for the construction. Excess funds were temporarily invested at 6 percent monthly in arrears and payable in cash. The pool of debts were again used for a N40,000,000 payment on 30 November 2013 which could not be funded from the Medium-Term Loan Notes.
The construction project was temporarily halted for three weeks in May 2013 when substantial technical and administrative work was carried out.
The following amounts of debts were outstanding at the reporting date of 31 December 2013:
| Description | Amount (N’000) |
|---|---|
| Medium-Term Loan Notes | 160,000 |
| Bank Overdraft | 240,000 |
| 10% 7-Year Notes | 1,800,000 |
For the bank overdraft, the weighted average amount outstanding during the year was N150,000,000 and the total interest charged by the bank amounted to N6,760,000 for the year.
Required:
Calculate the total amount of interest to be capitalized. (9 Marks)
Answer
(a) Conditions for Capitalization of Borrowing Costs
i. Commencement:
- Capitalization of borrowing costs begins when:
- Expenditures for the asset are being incurred.
- Borrowing costs are being incurred.
- Activities necessary to prepare the asset for its intended use or sale are in progress.
ii. Should Not Be Suspended:
- Capitalization should not be suspended during periods when active construction is ongoing unless:
- There are interruptions that are significant and not related to the asset’s construction (e.g., prolonged delay).
iii. Should Cease:
- Capitalization of borrowing costs should cease when:
- The asset is substantially complete and ready for its intended use or sale.
- Activities to prepare the asset for its intended use or sale are completed.
BORROWING COSTS TO BE CAPITALISED
GENERAL POOL OF FUND
Workings:
2. Note
Although no activities had been interrupted by technical
administrative work during May 2013, Capitalisation is not
suspended for this period according to IAS 23
- Tags: Borrowing Costs, Capitalization, Financial Reporting, IAS 23, VITAMAX Plc
- Level: Level 2
- Topic: Property, Plant, and Equipment (IAS 16)
- Series: NOV 2014
- Uploader: Kofi