Borrowing costs

Question 1

IAS 23 - Borrowing costs

What are the two forms of borrowing costs that you may need to calculate?

Answer 1

Borrowing costs from funds borrowed specifically for construction and funds from general borrowings.

Question 2

IAS 23 - Borrowing Costs

What is the approach when capitalising funds borrowed specifically for construction

Funds borrowed specifically for construction

Answer 2

Capitalise the borrowing costs incurred on the specific finance

Question 3

IAS 23 - Borrowing costs

What are the requirements to qualify?

Answer 3

Entity constructs a substantial asset, for use itself or resale, and it is likely that additional funds will be required to finance the construction.

Question 4

IAS 23 - Borrowing costs

What should you do if some funds are invested?

Funds borrowed specifically for construction

Answer 4

The capitalised amount should be reduced by the investment income received.

Question 5

IAS 23 - Borrowing costs

What is the process?

Financed out of general borrowings

Answer 5

Borrowing costs to be calculated by finding the weighted average cost of the general borrowings.

Question 6

IAS 23 - Borrowing costs

When should capitalisation commence?

Three conditions

Answer 6

1. • It incurs expenditures for the asset
2. It incurs borrowing costs
3. It undertakes activities that are necessary to prepare the asset for its use/sale

Question 7

IAS 23 - Borrowing costs

When should an entity cease capitalising borrowing costs?

Answer 7

When all activities to get the asset ready for its intended use/sale are complete.

Question 8

IAS 23 - Borrowing costs

What is the formula to find the Weighted average of below:
£1m 6% loan finance
£2m 8% loan finance
Factory cost £600k

Calculating Weighted average

Answer 8

(1x0.06)+(2x0.08)/1+2
Then
(Answer of above*600k)