Accounting for Borrowing Costs in Financial Management

undefined
 
Accounting for Borrowing Costs
LKAS 23
 
Rangajeewa Herath
B.Sc. Accountancy and Financial Management (Sp.) (USJ),
MBA- PIM(USJ)
 
Borrowing costs
2
 
 
Borrowing costs are interest and other costs
that an entity incurs in  connection with
borrowing of funds.
-
e.g:
-
Interest expense on financial instrument
-
Finance charges of a lease
 
 
Rangajeewa Herath
3
 
 
An entity shall 
capitalized
 the borrowing
costs that are directly attributable to the
acquisition, construction or production of an
qualifying asset
 
as a cost of such asset. An
entity shall recognized 
other borrowing
costs as an expense
 in the period in which
it incurs them.
 
 
 
 
 
Recognition
 
Rangajeewa Herath
4
 
 
Qualifying asset is an asset which necessarily takes a
substantial period of time to get ready for its
intended use or sale.
 
    Depending on the circumstances any of the following may
be a qualifying asset.
 
Inventories
Manufacturing plant
Power generation facilities
Intangible assets
Investment properties
 
 
 
Qualifying Asset
 
Rangajeewa Herath
 
Capitalization of borrowing cost
5
 
-
To the extent that an entity’s borrows fund
specifically for the purpose of obtaining a
qualifying asset, the entity shall determine the
amount of borrowing costs eligible for
capitalization as the actual borrowing cost
incurred on that borrowing during the period
less
 any investment income on temporary
investment of  those borrowings.
 
Rangajeewa Herath
 
Exercise 1
6
 
Kandy PLC started a construction of a building on 01.04.2015.
For this purpose, on 01.04.2015, they obtained a bank loan
amounting to Rs. 8 million. The construction was in the progress
as at 31.03.2016 and Rs.6 million had been incurred for the
building by that date. The interest cost of the loan for the year
ending 31.03.2016 was Rs. 780,000.  By temporary investing
these borrowing the company has received interest income of
Rs.190,000 during the year ending 31.03.2016.
Identify
 the borrowing costs to be capitalized for the year ending
31.03.2016.
Calculate
 the carrying amount of the building as at 31.03.2016
 
Rangajeewa Herath
7
 
To the extent that entity borrows funds generally and uses them
for the purpose of obtaining a qualifying asset, the entity shall
determine the amount of borrowing costs eligible for
capitalization by applying the 
capitalization rate 
to the
expenditure on such asset.
The capitalization rate shall be the 
weighted average of the
borrowing costs
 applicable to borrowings of the entity that are
outstanding during the period, other than borrowing made
specifically for the purpose of obtaining qualifying assets.
 
Capitalization of borrowing cost
 
Rangajeewa Herath
 
Commencement of capitalization
8
 
When the entity first meets all of the following
conditions:
It incurs expenditure for assets
It incurs the borrowing cost
It undertakes activities that are necessary to prepare
the asset for its intended use or sale
 
 
Rangajeewa Herath
Slide Note
Embed
Share

Borrowing costs in financial management refer to interest and other expenses incurred when borrowing funds. These costs are crucial to account for correctly to ensure accurate financial reporting. Borrowing costs directly attributable to acquiring, constructing, or producing a qualifying asset are capitalized, while other borrowing costs are expensed. Qualifying assets include assets that take a substantial time to be ready for use, such as inventories, manufacturing plants, and intangible assets. The capitalization of borrowing costs involves determining the eligible amount based on actual borrowing costs incurred less any investment income earned. An example scenario illustrates how borrowing costs are determined and the carrying amount of an asset is calculated.


Uploaded on Oct 01, 2024 | 1 Views


Download Presentation

Please find below an Image/Link to download the presentation.

The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. Download presentation by click this link. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.

E N D

Presentation Transcript


  1. Accounting for Borrowing Costs Accounting for Borrowing Costs LKAS 23 LKAS 23 Rangajeewa Herath B.Sc. Accountancy and Financial Management (Sp.) (USJ), MBA- PIM(USJ)

  2. Borrowing costs Borrowing costs Borrowing costs are interest and other costs that an entity incurs in connection with borrowing of funds. - e.g: - Interest expense on financial instrument - Finance charges of a lease Rangajeewa Herath 2 2

  3. Recognition Recognition An entity shall capitalized the borrowing costs that are directly attributable to the acquisition, construction or production of an qualifying asset as a cost of such asset. An entity shall recognized other borrowing costs as an expense in the period in which it incurs them. Rangajeewa Herath 3 3

  4. Qualifying Asset Qualifying Asset Qualifying asset is an asset which necessarily takes a substantial period of time to get ready for its intended use or sale. Depending on the circumstances any of the following may be a qualifying asset. Inventories Manufacturing plant Power generation facilities Intangible assets Investment properties Rangajeewa Herath 4 4

  5. Capitalization of borrowing cost Capitalization of borrowing cost - To the extent that an entity s borrows fund specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalization as the actual borrowing cost incurred on that borrowing during the period less any investment income on temporary investment of those borrowings. Rangajeewa Herath 5 5

  6. Exercise 1 Kandy PLC started a construction of a building on 01.04.2015. For this purpose, on 01.04.2015, they obtained a bank loan amounting to Rs. 8 million. The construction was in the progress as at 31.03.2016 and Rs.6 million had been incurred for the building by that date. The interest cost of the loan for the year ending 31.03.2016 was Rs. 780,000. By temporary investing these borrowing the company has received interest income of Rs.190,000 during the year ending 31.03.2016. Identify the borrowing costs to be capitalized for the year ending 31.03.2016. Calculate the carrying amount of the building as at 31.03.2016 Rangajeewa Herath 6 6

  7. Capitalization of borrowing cost Capitalization of borrowing cost To the extent that entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalization by applying the capitalization rate to the expenditure on such asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to borrowings of the entity that are outstanding during the period, other than borrowing made specifically for the purpose of obtaining qualifying assets. Rangajeewa Herath 7 7

  8. Commencement of capitalization Commencement of capitalization When the entity first meets all of the following conditions: It incurs expenditure for assets It incurs the borrowing cost It undertakes activities that are necessary to prepare the asset for its intended use or sale Rangajeewa Herath 8 8

More Related Content

giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#