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BORROWING COST

BORROWING COST. FRS 123. Definition. Interest and other costs that are incurred when funds are borrowed . FRS 123 SCOPE : Borrowing cost incurred on fund borrowed to construct or develop an asset. (Qualifying assets). Issue. Capitalize? the borrowing cost as part of the

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BORROWING COST

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  1. BORROWING COST FRS 123

  2. Definition • Interest and other costs that are incurred when funds are borrowed. • FRS 123 SCOPE: Borrowing cost incurred on fund borrowed to construct or develop an asset. (Qualifying assets)

  3. Issue Capitalize? the borrowing cost as part of the cost of assets (qualifying assets); or Write off? the borrowing cost in income statement when incurred because: • Borrowing costs are period costs • Borrowing costs may not be specifically for the construction but for the overall • operation of the enterprise IMPLICATIONS?

  4. Qualifying assets • An assets that necessarily takes a substantial period of time to get ready for its intended use or sale. This include: • the construction of building, • long term construction contract • R&D; and • the production of inventories that take a considerable period of time to bring to saleable condition and others.

  5. Accounting Treatments • Write off (Benchmarks Treatment) – Charge to P&L • Capitalise(Allowed Alternative Treatment) • Conditions: • It is probable that they will result in future economic benefit to the enterprise; and • The cost can be measured reliably • Amount to be capitalised : • borrowing cost on the fund borrowed less any income from temporary investment of the borrowing.

  6. Amendments to IAS 123 : Effective 1/1/2009 March 2007 – IASB issued amendments to IAS 123 These amendments eliminate option to existing std to recogd borrowing costs as an expense To the extent borrowing costs relate to acq, construct., prod. of ‘Qualf Assets’, - Capitalised All other borrowing costs should be expensed as incurred

  7. Example: 1 • ABC Bhd. borrows RM40m for the construction of a building. The loan carries and interest rate of 10% per annum. However, only RM10m was used and the balance RM30m was invested temporarily. The investment income received was RM1.5m. Calculate the amount of borrowing cost to be capitalised? • Borrowing costs = 10% x RM40m = RM4m • Amount to be capitalised= RM4m – RM1.5m = RM2.5m

  8. Identifying the borrowing cost • If the fund was borrowed generally, without specification of amount for the project: • The borrowing cost applicable to obtaining a qualifying asset is measured applying a WEIGHTED AVERAGE INTEREST RATE. • EXAMPLE 2 (Text book page 351)

  9. Commencement of Capitalisation • When: • Expenditure for the asset is being incurred • Borrowing costs are being incurred; and • Activities that are necessary to prepare the assets for its intended use or sale are in progress • If the fund is raised before the construction starts, borrowings cost to be capitalised is from the date when the construction starts.

  10. Suspension of Capitalisation • Capitalisation stops when active development is interrupted. Borrowing costs incurred during the interruption period will not be capitalised. • If the physical activities were not carry out, but technical works still carried on, this is not considered interruption of construction. • Temporary delay is not considered as interruption. Cessation of capitalisation • When all the construction activity is completed. (when substantially all activities necessary to prepare the assets for its intended use or sale are complete

  11. Example 3(Text book page 353)

  12. Disclosure The followings shall be disclosed in finl stat.: • Actg Policy Adopted for borrowing costs • Amt of borrowing capitalised for the period • Capitalisation rate used to determine amt of borrowing costs eligible for capitalisatn.

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