Understanding Borrowing Costs and Qualifying Assets in Financial Accounting
Learn about borrowing costs in financial accounting, including what they entail, how they are capitalized, and what qualifies as a qualifying asset. Explore examples and concepts related to these important accounting principles.
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2014/2015 Principles of Financial and Cost Accounting Thilanka Warnakulasooriya B.Com Special (Col), ACA, MBA Fin ( Col)
LKAS 23 BORROWING COSTS
Borrowing Costs prescribes the criteria for determining whether borrowing costs can be capitalized as part of the cost of acquiring, constructing, or producing a qualifying asset
Borrowing costs. Include interest and other costs incurred by an entity in relation to borrowing of funds. Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised. All other borrowing costs are recognised in the period in which they occurred
What are borrowing costs?? Interest and other costs incurred by an entity in connection with the borrowing of funds e.g. Interest expenses.( Interest on Short term borrowing such as OD, Interest on L.T Borrowings) Finance charges on finance leases Foreign Exchange differences on Foreign Exchange borrowings Amortisation of loan issue costs
What are Qualifying Asset ?? Assets that are ready for their intended use or sale when acquired are not qualifying assets as envisioned by this Standard. Ex for qualifying Assets A toll bridge that takes a couple of years to construct before it is ready for use and is opened to the public A power plant that takes a substantial period of time to get ready for its intended use
Ex. Costs to be capitalised An entity already has a number of general loan arrangements: Loan 1 of LKR 800, 000 interest paid at 9% Loan 2 of LKR 2Mn interest paid at 8% Loan 3 of LKR 400,000 , interest paid at 7.5% The entity has commissioned a new Production plant to be constructed on its behalf. The total cost will be LKR 1Mn and the entity will be able to fund the purchase from its existing borrowings since it has arranged for stage payments to be made. The construction takes six months. Consider the interest cost and whether this may be capitalised?
