- 20 Marks
Question
Ghana Highway Authority prepares its financial statements in accordance with International Public Sector Accounting Standards (IPSAS). The Government of Ghana has approved the sum of GH¢678,000 to the Ghana Highway Authority for the construction of a qualifying infrastructural asset.
The following costs were incurred during the construction of the Asset:
i) The sector minister in the process recommended his brother as a consultant to conduct feasibility analysis on the construction of the asset. The consultant charged the Authority the sum of GH¢350,000.
ii) An installation of platforms to enable the project to be undertaken were designed and built at a cost of GH¢225,900.
iii) Some foreign elements of the service required that Letter of Credit was processed to enable execution of the project, and the legal fees charged was GH¢275,000.
iv) Importation of specific components from Germany to execute the project in question cost the Authority €58,890.
v) Haulage and Freight charges cost €5,725.
vi) Cleaning and engine oil for first testing of equipment at the project site amounted to GH¢19,430.
vii) The cost of warranty on the asset was €3,400 should the Authority take advantage of the warranty agreement.
viii) Delivery, handling and other overhead amounted to GH¢156,800 out of which 60% were attributable.
ix) The Ghana Highway Authority consequently incurred cost of GH¢398,560 in modification of an adjoining infrastructure to facilitate the project.
The Government of Ghana was not able to provide all the amount hence the Minister for Finance gave approval to the Chief Executive Officer (CEO) of the Authority to borrow the excess amount from open market which a financial institution provided at a commercial rate of 35% per annum. Government of Ghana (GoG) accounting policy adopts the allowed alternative approach of borrowing costs under IPSAS 5: Borrowing Costs.
A check from the professional website of the Institute of Architects and Engineers in Ghana indicates that the professional fee that can be charged under the service rendered by the consultant would cost only GH¢195,000.
To the extent that the funds borrowed was not GoG funds, and the fact that the funds would be required after 100 days to pay for the cost of the asset, which was provided earlier than envisaged, the CEO took advantage of the 14 weeks’ grace period for payment and invested the funds in a 91-day investment which yielded a return of 24.09% per annum at first maturity when the funds were held in anticipation of payment.
The prevailing exchange rate on the date of the contract was GH¢13.50 to €1.00, however on the day of payment the exchange rate shot up to GH¢15.57 to €1.00.
Required:
a) Explain what is meant by a qualifying asset.
b) Determine the cost of the qualifying asset for capitalization.
c) Based on the information provided, indicate FIVE notes to the accounts in the books of the Ghana Highway Authority.
d) Explain another method or approach by which the borrowing cost could be recognized under IPSAS 5: Borrowing Costs.
Answer
(a) A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale. 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”.
(b) GHANA HIGHWAY AUTHORITY
COMPUTATION OF COST OF INFRASTRUCTURAL QUALIFYING ASSET
| GH¢ | GH¢ | |
|---|---|---|
| Consultant (Brother of Minister) | 350,000.00 | 195,000.00 |
| Construction of Platforms | 225,900.00 | 225,900.00 |
| Legal fees (letter of credit) | 275,000.00 | 275,000.00 |
| Components imported (58,890*15.57) | 916,917.30 | 916,917.30 |
| Haulage & freight (5,725*15.57) | 89,138.25 | 89,138.25 |
| Cleaning and testing at site | 19,430.00 | 19,430.00 |
| Delivery/handling/overheads | 94,080.00 | 94,080.00 |
| Modernizing adjoining infrastructure | 398,560.00 | 398,560.00 |
| Charge by consultant written to overheads | (155,000.00) | |
| Sub Total (A) | 2,214,025.55 | 2,214,025.55 |
| Less funds provided by GoG | (678,000.00) | |
| Funds borrowed | 1,536,025.55 | |
| Commercial rate of interest on borrowing (35% x 1,536,025.55) | 537,608.94 | 537,608.94 |
| Less return on investment of borrowed funds (24.09%/4 x 1,536,025.55) | (92,507.14) | (92,507.14) |
| Net attributable borrowing cost (B) | 445,101.80 | 445,101.80 |
| Total Project Cost (A+B) | 2,659,127.35 | 2,659,127.35 |
NB: Only one column is required.
(c) NOTES TO THE ACCOUNTS
i) The Accounting Policy adopted for Borrowing cost:
It is the policy of Ghana Highway Authority to treat borrowing cost using the Allowed alternative treatment, that is by capitalizing direct and attributable borrowing costs as part of the cost of the asset.
ii) The amount of the borrowing cost capitalized during the period:
During the year under review the Authority incurred net borrowing cost in the sum of GH¢445,101.80 and has accordingly capitalized the cost in line with its Allowed alternative treatment policy.
The Net results was determined as follows:
| GH¢ | |
|---|---|
| Amount of borrowing cost during the year | 537,608.94 |
| Return on investment of borrowed funds | (92,507.14) |
| Net Borrowing Cost | 445,101.80 |
iii) The capitalization rate used to determine the amount of borrowing cost eligible for capitalization:
During the year under review borrowing costs were capitalized based on the Authority’s (GoG) accounting policy, and the rate of the borrowing cost was at 35% commercial rate for the borrowed funds from a financial institution.
iv) foreign currency transaction:
The Authority was engaged in a foreign currency transaction. The cost involved in the transaction was accordingly translated into the ruling rate of the transaction in the reporting currency and have been accounted for as such. At the end of the financial year there has not been any foreign currency held, or obligation owed.
v) Related party disclosure:
During the year and construction of the infrastructural asset, a related party transaction arose when the Minister brought his brother as the Consultant for the project which led to the over charge of professional fees for the job done.
The charges in respect of the project which affected an arm’s length transaction is analyzed as below:
| GH¢ | |
|---|---|
| Fee charged by the Consultant (Minister’s brother) | 350,000.00 |
| Fees chargeable by the Professional body | 195,000.00 |
| Excess amount charged back to Overheads | 155,000.00 |
(d) The borrowing cost can also be alternatively treated using the benchmark approach.
Recognition:
Under the benchmark approach borrowing cost should be recognized as an expense in the period in which it is incurred. Borrowing costs that are incurred which are directly attributable to the acquisition, construction or production of an asset that qualifies as a qualifying asset, and that cost which would not have arisen but for the borrowing cost in respect of the qualifying asset is the type of borrowing cost that qualifies for capitalization under the allowed alternative approach.
- Level: Level 2
- Uploader: Salamat Hamid