IAS 23 Assignment

LONG TERM LOANS AND RELATED ISSUES:
A. A loan is obtained from MCB on 1-1-2012 against a sanctioned limit of 120 M. It carries markup @ 12% p.a.
This loan is repayable in semi-annual installments of Rs 5 M starting from 1-7-2012; along with interest.
Required:
i.) Calculate the amount of interest expense for the year ended 30-6-2013
ii.) Prepare relevant extracts from statements of financial position as on 30-6-2013
Note
i) Sanctioned limit means maximum amount of loan agreed with the bank.
ii) Instalment of loan comprises of principal amount only unless there is any indication.
B. A loan is obtained from Citibank Limited on 1-1-2013 for Rs 5,000,000. It carries interest @ Rs 0.23 per
thousand per day (means 8.395% p.a)
It is repayable in monthly instalments of Rs 100,000 starting from 1-4-2013, along with interest.
Required:
C. A loan is obtained on 1-8-2012 for Rs 25 M. It carries markup @ 15% p.a. It is repayable in quarterly
instalments of Rs 5 M starting from 1-11-2012; along with interest.
Required:
Page 1 of 38
Prepared by: Dawood Shahid CA(f), CPA, MPhil, MBA, OCE
Example A
If we want to calculate interest expense; then identify the following figures:
Outstanding Balances of loan x Rate x Time period
(It means balance which remained constant for a given period of time)
i) Calculation of interest expense:

Figures in millions
115 M x 12% x 6/12 (July to Dec) = 6.9

110M x 12% x 6/12 (Jan to June) = 6.6
13.5
Workings
1-1-2012 Loan Obtained Rs 120
30-6-2012 Closing Balance 120

1-7-2012 Repayment of Loan (5)
115
1-1-2013 Repayment of Loan (5)
110

1-7-2013 Repayment of Loan 5
1-1-2014 Repayment of Loan 5
Current Portion 10
Non-current Portion 100
ii)
Extracts from statement of Financial Positions

As on 30-6-2013
2013
Equity & Liabilities
Non-current liabilities
Long term Loan 100
Current Liabilities
Current Portion of Loan 10
Accrued Interest 6.6
Note:
In a question in which we are preparing an extract of statement of financial position or statement of
comprehensive income then there is no need of any total.
Page 2 of 38
Example B
i) Calculation of interest Expense

5,000,000 x 8.395% x 3/12 = 104,938
4,900,000 x 8.395% x 1/12 = 34,280
4,800,000 x 8.935% x 1/12 = 33,580
4,700,000 x 8.935% x 1/12 = 32,880
205,678
Workings
1-1-2013 Loan Obtained 5,000,000
1-4-2013 Loan repaid (100,000)
4,900,000
1-5-2013 Loan repaid (100,000)

4,800,000
1-6-2013 Loan repaid (100,000)

4,700,000
30-6-2013 Closing Balance 4,700,000
Current portion of loan 1,200,000

(100,000 x 12)
Non-current Portion 3,500,000
ii)
Extracts from statement of Financial Position as on 30-6-2013
2013
Non-current Liabilities
Long term loan 3,500,000
Current Liabilities
Current Portion of Loan 1,200,000
Accrued Interest 32,880
Example C
i) Calculation of Interest expense for the period
Figures in millions
25M x 15% x 3/12 Aug to Oct = 0.9375

20M x 15% x 3/12 Nov to Jan = 0.75
15M x 15% x 3/12 Feb to April = 0.5625
10M x 15% x 2/12 May & June = 0.25
2.5
Page 3 of 38
Workings
1-8-2012 Loan Obtained Rs 25
1-11-2012 Repayment made (5)
20

15

10
Current portion (5M x 2) 10
Non-current Portion Nil
ii) Extracts from statement of Financial Position as on 30-6-2013

2013
Long term loan --
Current Liabilities
Current Portion of Loan 10
Accrued Interest 0.25
Page 4 of 38
Chapter A - Borrowing Cost (IAS-23) - Theory
Borrowing cost
Borrowing Costs [Para 5]
Interest and other related costs that an entity incurs in connection with borrowing of funds.
Other related costs include bank charges deducted by bank at the time of disbursement of loan.
 Different names used for bank charges in exam questions.
 Arrangement fee
 Loan processing charges
 Commitment fee
 Different types of Loans/Borrowings:
 Long term Loans
 Short term Loans
 Short term running finance/Bank overdraft.
 Some important accounting entries
Issue of Shares against Cash
Cash XX
*Share Capital XX
*Share capital is presented in equity; it is not a borrowing.
Dividend to Shareholders:
It is distribution of profits to shareholders.
a)
*Dividend XX
Dividend Payable XX
(When the dividend is declared)
*Dividend is not an expense instead it is deducted from retained earnings just like drawings (which are
deducted from capital).
b)
Dividend Payable XX
Cash/Bank XX
(When the dividend is paid)
 As the share capital is not borrowing therefore dividend to shareholders is not a borrowing cost.
Treatment of borrowing cost: [Para 8]
Borrowing cost is recognized as an expense, when incurred;
Interest Expense XX
Interest expense payable XX
Other common words used for interest is finance cost or finance charge.
Unless; borrowing cost related to a qualifying asset. In that case borrowing cost is Capitalized (added) to the
cost of a qualifying asset.
Page 5 of 38
Qualifying Asset: [Para 5]
An asset which takes substantial time period to get ready for its intended use or sale.
 Asset for use
 Tangible Assets (IAS-16)
 Intangible Asset (IAS-38)
 Assets for sale
 Inventories (IAS-2)
Examples of qualifying assets: [Para 7]
Depending upon the circumstances, any of the following may be a qualifying asset:
a) Construction of factory building/Head office building
b) Purchase and installation of plant & machinery especially if imported.
c) Power generation facilities.
 Assets that are ready for their intended use or sale when acquired are not qualifying assets e.g furniture,
computers, vehicles etc)
General Rule of Capitalization:
All amounts incurred to bring an asset into working condition as intended by management are Capitalized
(added to cost of an asset).
Conclusion:
Borrowing cost is recognized as an expense when incurred unless it relates to a qualifying asset. In that case,
it is capitalized.
Types of Borrowings with respect to Capitalization of borrowing cost:
Specific Borrowings General Borrowings
Specific Borrowings
Borrowings which are taken for the sole purpose of construction, acquisition or production of qualifying
asset.
Amount of borrowing cost to be Capitalized:
In case of specific borrowings, the amount to be capitalized is calculated as follows:
Amount of interest incurred on outstanding balance of loan xxxx

Less: investment income (if any) on temporary investment of surplus funds (xxx)
Amount of interest to be capitalized xxx
Page 6 of 38
Commencement of Capitalization [Para 17]
As per IS-23, entity shall commence capitalization of borrowing cost; when
(i) Entity incurs borrowing cost; and
(ii) Entity incurs expenditures on qualifying asset.
For example
a) A loan obtained on 1-8-2014
Construction started on 1-9-2014
 Commencement date should be 1-9-2014
b) Construction started on 1-7-2014 with owned funds.

On 15-12-2014 entity obtained a loan for further expenditures on qualifying asset.
 Commencement date should be 15-12-2014
Cessation of Capitalization [Para 22]
Entity shall cease capitalizing borrowing costs when asset is available for its intended use or sale.
Important points to remember

a) If an asset is under process of construction or installation, then it is called as Capital Work in
Progress (CWIP). If that CWIP is being prepared by borrowings, then it is also called as qualifying
asset.
b) While calculating investment income to be deducted from interest incurred, we will consider only
that time period for which interest incurred is capitalized.
Q1. Money Limited began the construction of a new building on the 1 February 20X5. Construction costs incurred
in 20X5 were paid for as follows:
Rupees
On 1 February 500,000
On 1 July 600,000
On 1 November 800,000
The construction of the building ended on the 1 December 20X5 when the building was complete and ready
for its intended use. This building is to be depreciated over 10 years to a nil residual value using the straight-
line method.
The construction was financed by a loan of Rs. 1,900,000 from Citi Bank Limited. The loan was raised on 1
January 20X5 specifically to facilitate the construction of the building. The interest rate is 25% per annum.
There were no capital repayments during the year. Surplus funds were invested at 20% per annum.
The building is a qualifying asset for the purposes of IAS-23.
Required:
a) Calculate the amount of borrowing costs that are eligible for capitalization during the year ended 31
December 20X5.
b) Calculate the depreciation for the year ended 31 December 20X5.
c) Calculate the carrying amount of the buildings as at 31 December 20X5.
d) Calculate the amount of interest income to be recognized in income statement.
Q2. Loans raised specifically to fund the construction of a building (a qualifying asset} :
Loan % Raised on Rs
A 10% 1 January 2005 500,000
B 15% 1 June 2005 400,000
Rs 100,000 of the loan B capital was repaid on 31 July 20X5. No other loan capital was repaid.
The only interest income earned during the year was interest income earned on the investment of surplus
funds from the specific loans in a 6% interest account.
Construction costs paid for as follows:
Page 7 of 38
Date Rs
1st March 2005 300,000
30th April 2005 100,000
31st July 2005 220,000
Commencement date: 1 March 20X5
Cessation date: 31 August 2005.
Required:
a) Calculate the amount of borrowing costs that must be capitalized in terms of IAS-23.
b) Calculate carrying amount of asset as on 31-12-2005, assuming that useful life is 5 years.
General Borrowings:
If a loan is for more than one purpose including a qualifying asset; then loan is called as General Purpose
Borrowing. These funds may be utilized for buying inventories, paying off expenses and multitude of other
purposes in addition to acquisition, construction or production of a qualifying asset.
E.g A loan from MCB for Rs 20M @ 12%.
Suppose:
(i) 5M used for factory expenses.
(ii) 2M used for vehicles; and
(iii) 10M used for construction of H.O building (a qualifying asset).
 In such a case all interest incurred on the loan is not related to this qualifying asset.
 In case of General Borrowings, amount of borrowing cost to be capitalized is calculated as follows;
Expenditure on qualifying asset x capitalization rate x time period
Capitalization Rate:
(i) If there is only one general loan, then its rate is called as Capitalization Rate.
(ii) If there is more than one general loan having different interest rates, then we calculate an average
rate of interest called as capitalization rate as follows:
borrowing cost incurred

Capitalization rate = × 100
weighted Borrowing outstanding
Q3. MCQ (Private) Limited has the following general loans outstanding as at December 31 20x5.
Rs.
Loan -1 @ 6% 300,000
Loan -2 @8% 200,000
Loan -3 @9% 150,000
All the three loans were brought forward from previous year. Neither loan is taken during the year nor is
repaid.
The company spent following amounts on construction of an asset.
January 31,20x5 70,000
April,01,20x5 80,000
December,01,20x5 10,000
The asset is not yet available for use as on 31-12-2005
Required:
a) Calculate Capitalization rate
b) Calculate Borrowing cost eligible for capitalization.
c) Calculate the carrying amount of asset as at 31-12-2005
d) Calculate the amount of borrowing cost to be charged to statement of comprehensive income as an
expense during the year ended 31-12-2005
Page 8 of 38
Q4. Sublime Sports Limited is currently manufacturing its power plants. Up to December 31, 20x3, the company
has incurred costs totaling Rs. 500,000 on construction of one of its plants.
The following general loans are outstanding:
Rs.
Loan from MCB @ 9% 500,000
Loan from HBL @ 10% 625,000
Loan from UBL @11% 375,000
Loan from HBL was taken on July 1, 20X3 while other loans were brought forward from previous year.
Expenditures on plant were incurred as follows:
May 31, 2003 Rs. 300,000
July 31,2003 Rs. 200,000
Plant is not yet available for use as on Dec 31, 2003
Required:
You are required to calculate:
a) Capitalization rate of the company;
b) Total borrowing cost to be capitalized for the year 20X3.
c) Calculate the carrying amount as on 31 Dec, 2003.
d) Calculate the borrowing cost to be charged to statement of comprehensive income.
Q5. Soccer Limited began the construction of a new stadium on the 1 January 20X5. Details of the progress
payments made during 20X5 are as follows:
Rupees
On 1 January 300,000
On 1 April 200,000
On 1 July 250,000
On 1 September 150,000
On 1 October 200,000
The stadium was still under construction at 31 December 20X5.

The construction was financed by general borrowings within the company. General loans outstanding at any
one time during 20X5 averaged Rs. 20,000,000. The interest expense incurred on these loans during 20X5
was Rs 2,600,000.
The stadium is a qualifying asset as defined by IAS-23.
Required:
a) Calculate the amount of borrowing costs that are eligible for capitalization to the stadium during the
year ended 31 December 20X5.
b) Calculate the depreciation for the year ended 31 December 20X5.
c) Calculate the carrying amount of the stadium as at 31 December 20X5.
 Progress Payments means payments made to contractor by customers as the work is being completed.
Note: In case of general borrowings, interest income is not to be considered while calculating the borrowing
cost to be capitalized.
Page 9 of 38
Important Journal Entries
Company Investors
Company issued Shares:
Bank XX Investment in Shares XX

Share Capital XX Bank XX
Company issued Debentures (It is simply a loan)
Bank XX Investment in Debentures XX

Debentures XX Bank XX
(Normally it is a non-current loan) (Normally it is a Non-current investment

in assets)
Q6. An entity constructs a factory building which is a qualifying asset. Funds are provided from entity's general
borrowings. Capitalization of borrowing cost commences on 1-7-2009 and continues throughout the year
until the expected completion on 31-12-2010.
The detail of expenditures on the qualifying asset is as follows:
1 July 2009 2,050,000
15th September 2009 1,000,000
15th April 2010 500,000
30 June 2010 400,000
The entity's general borrowings in the period from 1st July 2009 to 30th June 2010 consist of the followings:
1) Rs. 5 million Debentures issued on 1-1-2009 with a fixed interest rate of 10%. The full amount of
debentures is payable in 2015.
2) Bank loan of 2 million taken on 1-7-2009 with a floating interest rate that is adjusted semi- annually
by changes in KIBOR. At 1-7-2009 interest rate was set at 8.75% which increased to 9.00% at 1
January 2010. The loan is paid off in half-yearly installments of Rs. 200,000.
3) Bank overdraft with a floating interest rate that is adjusted by changes in KIBOR. Interest rate at 1-7-
2009 is 14% which was adjusted to 14.25% at 1 Jan 2010. The overdraft at 1 July 2009 was 300,000
which increased to 700,000 at 1 Jan 2010, which remained constant till the year end.
Required:
Calculate the carrying amount of the factory building as on 30-06-2010 in accordance with relevant IFRS.
KIBOR: Karachi Inter Bank offered rate (It is an interest rate market).
Suspension of Capitalization [Para 21 & 22]
Sometimes after commencement of capitalization and before cessation of capitalization, there may be a
temporary stoppage of active development. In that case according to IAS-23:
An entity shall suspend capitalization of borrowing costs during periods in which it suspends active
development of a qualifying asset unless temporary delay is a necessary part of the process of getting the
asset ready for its intended use or sale.
Page 10 of 38
Example: Delays in Construction (Suspension Period)
A hotel was under construction in 2005. Borrowing cost of Rs. 300,000 is incurred on a loan during 2005. The
loan was specifically raised in January 1, 2005 for the sole purpose of construction of hotel.
Required:
Discuss how much of borrowing cost may be capitalized in the following two independent scenarios assuming
that:
a) Workers went on a strike for a period of two months during which no progress was made.
b) The builder of the hotel had to wait for five days for cement in the foundation to dry.
Solution:
a) During these two months, the interest incurred may not be capitalized to the asset as it is an
unnecessary interruption to the construction process.
b) The borrowing costs must still be capitalized as it is merely a temporary delay and is a normal part of
the construction process.
Q7. Hockey Limited borrowed 2,000,000 (at an interest rate of 14%) from the Bank on 1 January 20X5. These
funds have been borrowed in order to build a hockey stadium.
Progress payments made in 20X5 are as follows:
Rupees
On 1 January 600,000
On 1 July 1,200,000
On 1 September 200,000
The surplus funds were invested in a fixed deposit earning interest at 10% per annum.
Construction began on 1 January 20X5 and was still incomplete on 31 December 20X5. Between 1 June and
20 June, construction suspended while concrete cured (a necessary part of the construction process).
The stadium is a qualifying asset as defined by IAS-23.
Required:
a) Calculate the amount of borrowing costs that may be capitalized to the hockey stadium cost account
in the year ended 31 December 20X5.
b) Calculate the amount of borrowing costs that may be capitalized to the hockey stadium cost account
in the year ended 31 December 20X5 assuming that construction could not begin due to building
plans not meeting municipal standards. The plans have been resubmitted and it is expected that the
municipality will give the go-ahead to begin construction in early 20X6.
Expenditure on Qualifying Asset:

If an entity has funds available from its owned resources, specific borrowings and general borrowings at any
given date then assume that:
 First; own funds are utilized
 Second; funds from specific borrowing; and
 Then funds from general borrowings
Repayment of Principal and Interest of Specific Borrowing:
If an entity has funds available from:
a) Owned resources
b) Specific borrowings; and
c) General Borrowings
At the date of repayment of principal and interest then assume that funds were utilized in above order.
Page 11 of 38
Q8. On 1-3-2010, granite corporation (GC) started the construction of a new plant to meet the growing demand
for its products. The new plant was completed on 31 may 2011.
GC financed the cost of the project from the following sources:
i. On 1-3-2010, a 7 year loan of 70 million was obtained specifically for the construction of the plant.
The loan carried markup @ 13% p.a. payable semi-annually. An arrangement fee @ 1% of the loan
amount was paid to the bank. Two installments each comprising of repayment of principal of 5
million along with interest were paid on 31-08-2010 and 28-2-2011.
ii. GC also has a running finance facility of RS 100 million carrying markup @14% p.a. Any additional
amount required for the project was provided through this general purpose facility.
iii. Surplus fund were invested in saving accounts @ 8% P.a.
Payments made to contractor were as follows:
Payment date Rs in million

1-3-2010 25
31-1-2011 65
30-09-2011 10
The construction work was suspended from 1-02-2011 to 28-02-2011. The suspension was caused due to
delay in shipment of essential component for the installation of plant.
Required:
Calculate the amount of borrowing cost that may be capitalized during the year ended 30-06-2010 and 30-06-
2011.
Q9. Amjad Ltd started construction of a factory building on 1st April 2011. Construction took seven months to
complete. A contractor was hired for this work and total contract price was agreed to be Rs 20 million.
Progress payment were made as follows:
1st April 10%
31st July 45%
th
30 September 15%
31st October 30%
Construction was financed partly by own savings and partly by loans. First payment to contractor was made
out of own funds. Afterwards all payments were made from borrowed funds.
A loan of Rs 8 million was obtained on 31st May 2011 specifically for this construction. This loan carried a
markup of 18%.Loan is to be repaid by the end of 2012.Unutilized portion of loan was kept in a deposit
account yielding an interest rate 4%.
Any shortage of funds was fulfilled from existing pool of loans:
Bank Loan Amount Interest
Rs
Aay 50,000,000 10%
Bee 25,000,000 14.5%
Cee 10,000,000 15%
All these loans remained outstanding throughout the year.
Factory building has useful life of 10 years. After completion of construction, due to a delay in purchase of
furniture, building was brought into use from 1st January 2012.
Required:
a) Calculate the amount of borrowing cost eligible for capitalization.
b) Calculate the carrying amount of building as on 31-12-2011.
c) Calculate the amount of borrowing cost to be recognized in income statement in the year ended
31-12-2011.
Note: while calculating the capitalization rate, only consider the outstanding balance of loans during the
period. It means commencement date, cease date and suspension period is not considered while calculating
the rate.
Page 12 of 38
Some important Terminologies used in exam questions:
Progress Billing: Bills given by contractor to customer as the work is performed and complete.
Retention Money: An amount deducted by the customer from progress billings as a security against
satisfactory completion of work. It is treated as a liability unless refunded/adjusted.
Right Shares: Shares issued to existing shareholders against consideration (which is normally cash). First
time issue of share is not called as right shares. Its accounting entry is exactly similar to entry of share capital.
Any funds from shareholders are treated as owned funds in a question of borrowing cost.
Q10. On July 1, 2009, Qureshi Steel Limited (QSL) signed an agreement with Pak Construction Limited for
construction of a factory building at a cost of Rs. 100 million. It was agreed that the factory would be ready for
use from January 1, 2011. The terms of payments were agreed as under:
1) 10% advance payment would be made on signing of the agreement. The advance paid would be
adjusted at 10% of the quarterly progress bills.
2) 5% retention money would also be deducted from the progress bills. Retention money will be
refunded one year after completion of the factory building.
3) Progress bills will be raised on last day of each quarter and settled on 15th of the next month.
The under mentioned progress bills were received and settled by QSL as per the agreement:
Invoice date Amount (Rs.)
September 30, 2009 30 million
December 31, 2009 20 million
March 31, 2010 10 million
June 30, 2010 15 million
On April 30, 2010 an invoice of Rs. 1.5 million was raised by the contractor for damages sustained at the site,
on account of rains. After negotiations, QSL finally agreed to make additional payment of Rs. 1.0 million to
compensate the contractor. The amount was paid on May 15, 2010. It is expected that 75% of the payment
would be recovered from the insurance company.
The cost of the project has been financed through the following sources:
1) Issue of right shares amounting to Rs. 15 million, on September 1, 2009. The company has been
following a policy of paying dividend of 20% for the past many years.
2) Bank loan of Rs. 25 million obtained on December 1, 2009. The loan carries a markup of 13% per
annum. The principal is repayable in 5 half yearly equal installments of Rs.5 million each along with
the interest, commencing from May 31, 2010. Loan processing charges of Rs.0.5 million were
deducted by the bank at the time of disbursement of loan. Surplus funds, when available, were
invested in short term deposits at 8% per annum.
3) Cash withdrawals from the existing running finance facility provided by a bank. Average running
finance balance for the year was Rs. 60 million. Markup charged by the bank for the year was Rs. 9
million.
Required:
a) Compute cost of capital work in progress for the factory building as of June 30, 2010 in accordance
with the requirements of relevant IFRSs.
(Borrowing costs calculations should be based on number of months)
b) Prepare extracts from statement of Financial Position as on 30-6-2010
Page 13 of 38
Q11. On January 1, 2015, Imran Limited started the construction of its new factory. The construction period is
approximately 15 months and the cost is estimated at Rs. 80 million. The work has been divided into 5 phases
and payment to contractor shall be made on completion of each phase.
In the year the company had the following sources of finance available.
(i) Rights i s s u e o f shares amounting to Rs. 15 million on January 1, 2015. The company usually pays a
dividend of 10% each year.
(ii) Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1, 2015. (This loan was
outstanding for 306 days in the year).
(iii) On August 1, 2015, Rs. 10 million were borrowed from the bank. Interest thereon, is payable at the rate
of 11%. (This loan was outstanding for 153 days in the year).
Investment income on temporary investment of the borrowings amounted to Rs. 0.5 million.
The details of bills submitted by the contractor, during the year are as follows:
Particulars Date of payment Rupees
On completion of 1st phase March 1, 2015 20,000,000

On completion of 2nd phase April 1,2015 18,000,000
On completion of 3rd phase October 1, 2015 16,000,000
On completion of 4th phase Payment not yet made 17,000,000
On June 1, 2015, the Building Control Authority issued instructions for stoppage of work on account of certain
discrepancies in the completion plan. The company filed a petition in the Court and the matter was decided in
the company’s favour on July 31, 2015. Work recommenced after a delay of 61 days.
The following periods may be relevant:
Period Days
March 1 to December 31 306
April 1 to December 31 275
August 1 to December 31 153
October 1 to December 31 92
Required
a) Assuming that the loans were taken specifically for the project, calculate the amount of borrowing costs
that s h o u l d be capitalised in the p e r i o d e n d i n g December 31, 2015 in accordance with the
requirements of IAS 23 Borrowing Costs.
b) Assuming that the loans constituted general finance, calculate the amount of borrowing costs that
s h o u l d be capitalised in the p e r i o d e n d i n g December 31, 2015 in accordance with the requirements
of IAS 23 Borrowing Costs.
(Borrowing cost calculations should be based on number of days)
Page 14 of 38
Self-Testing Questions
Q1. On September 1, 2008, Spin Industries Limited (SIL) started construction of its new office building and
completed it on May 31, 2009. The payments made to the contractor were as follows:
Date of Payment Rupees

September 1,2008 10,000,000
December 1,2008 15,000,000
February 1,2009 12,000,000
June 1,2009 9,000,000
In addition to the above payments, SIL paid a fee of Rs. 8 million on September 1, 2008 for obtaining a permit
allowing the construction of the building.
The project was financed through the following sources:
i. On August 1, 2008 a medium term loan of Rs. 25 million was obtained specifically for the
construction of the building. The loan carried mark up of 12% per annum payable semi-annually. A
commitment fee @ 0.5% of the amount of loan was charged by the bank.
Surplus funds were invested in savings account @ 8% per annum. On February 1, 2009 SIL paid the
six monthly Interest plus Rs. 5 million towards the principal.
ii. Existing running finance facilities of SIL
a. Running finance facility of Rs. 28 million from Bank A carrying mark up of 13% payable
annually. The average outstanding balance during the period of construction was Rs. 25
million.
b. Running finance facility of Rs. 25 million from Bank B. The mark up accrued during the
period of construction was Rs. 3 million and the average running finance balance during that
period was Rs. 20 million.
Required:
Calculate the amount of borrowing costs to be capitalized on June 30, 2009 in accordance with the
requirements of International Accounting Standards. (Borrowing cost calculations should be based on
number of months).
Q2. In the board meeting held on 15 December 2006, management of Power limited decided to construct a
qualifying asset amounting to Rs, 1,000,000. The management of Power limited approached to a bank to
finance the project but the bank agreed to finance only the 50% of the estimated cost I.e. Rs. 500,000 @ 15%
p.a. The loan was sanctioned on 28th December 2006 and was immediately put into the bank account of
company. Management of the company decided to utilize other general purpose loans to finance the
remaining balance of Rs, 500,000.
The construction of qualifying asset started on 1 January 2007. Following is the schedule of payments made
by Power limited In connection with the construction of qualifying asset.
Amount of Payment
Date of Installment
(Rs.)
January 1,2007 200,000
April 1, 2007 200,000
July 1, 2007 200,000
October 1,2007 200,000
Management decided to invest the unutilized portion of specific loan in the government securities fetching an
income @ 6% p.a. There was an unnecessary stoppage in the work from 1 June 2007 to 31 July 2007.
Page 15 of 38
The following is the information regarding all the loans available to Power limited:
Description Amount Rate Loan taken On
Specific loan 500,000 15% 28-12-2006
General purpose loan 1 600,000 12% 01-02-2007
The general purpose loan 2 was repaid in full on-30-11-2007 and general purpose loan 3 was repaid in full on
31-10-2007. Remaining loans were outstanding till 31 December 2007.
The construction of qualifying asset was not completed, up to 31 December 2007.
Required:
a) Calculate the amount of borrowing cost and portion of borrowing cost eligible for capitalization for
the year ended December 2007.
b) Compute the amount of borrowing cost to be recognized as an expense during the year.
Note: repayment of general borrowings is not considered while preparing the detail of payments.
Q3. For the purpose of construction of qualifying asset during the year ending December 2008, Alpha limited
decided to utilize various funds available to them. The details of funds available to Alpha ltd. are as follows.
Type of loan Amount Rate/Return Loan taken on Loan repaid on
General purpose loan 1 500,000 15% 01-03-2007 31-12-2008
Shareholders’ equity 900,000 Dividend @ 20% 01-07-2000 Not repaid up to 31-12-2008
Down payments from 300,000 _ 01-02-2008 Not repaid up to 31-12-2008
customers (non-interest
bearing)
You are required to calculate the capitalization rate to be used for calculating the amount of borrowing cost to
be capitalized. The financial year of Alpha Ltd. ends on 31-12-2008.
Q4. On, 01 January 2012, Marvelous Engineering Limited (MEL) started construction of its new factory. The
construction work was completed on 30 November 2012. The payment made to the contractor as follows:
Date of payment Rs. in million
01-Jan-12 100
01-Apr-12 310
15-Dec-12 90
The construction work was financed through the following sources:

Date Description Rs. in million
01-Jan-12 12% Redeemable preference shares 150
01-Apr-12 14% TFCs for four years 300
01-Jul-12 Issue of right shares (estimated return is 22%) 50
The following additional information is also available:

i. The preference shares would be redeemed on 31 December 2016.
ii. Surplus funds were invested in a savings scheme @ 9% per annum.
iii. Due to delay in supply of construction material, the construction work was suspended from, 01 June
2012 to 30 June 2012.
Required:
Calculate the amount of borrowing costs that may be capitalized during the year ended 31 December 2012 in
accordance with the requirements of International Financial Reporting Standards. (Assume that calculations
of borrowing costs are based on number of months)
Note: if nothing is mentioned then loans are assumed as specific.
Page 16 of 38
Q5. A socially responsible multinational corporation (MNC) decided to construct a tunnel that will link two sides
of the village that were separated by a natural disaster years ago. Realizing its role as a good corporate
citizen, the MNC has been in this village for a couple of years exploring oil and gas in the nearby offshore area.
The tunnel would take two years to build. It began construction on January 1, 2014. The following payments
were made during 2014:
Rs 000
January 31 200
March 31 450
June 30 100
October 31 200
November 30 250
The first payment on January 31 was funded from the entity's general borrowings. However, the entity
succeeded in raising a medium-term loan for an amount of Rs 800,000 on March 31, 2014, with simple
interest of 9% per year. These funds were specifically used for this construction. Excess funds were
temporarily invested at 6 percent per year. The general borrowings was again used for an Rs 200,000
payment on Nov 30, which could not be funded from the medium-term loan. The construction project was
temporarily halted for six weeks in May, June, when substantial technical and administrative work was
carried out which was necessary stoppage for the completion of construction work.. The following amounts of
debt were outstanding at the year end, December 31, 2014:
Rs
Medium-term loan (see description above) 800,000
Bank overdraft (The weighted average amount outstanding during the year was Rs 750,000, 1,200,000
and interest charged thereon by the bank amounted to Rs 33,800.)
A 10%, 7-year loan taken on October 1, 2007, repayable in full in December 2015 9,000,000
Required:
Calculate the amount of borrowing cost to be capitalized to the cost price of the Tunnel in 2014? (10 marks)
Page 17 of 38
Solutions
A1.
Money Limited
a) Borrowing costs to be capitalized

Interest incurred during construction:
1,900,000 x 25% x 10 / 12 395,833
Interest earned
(1 900,000 – 500,000) x 20% x 5/12 116,667
(1 900,000 – 500,000 – 600,000) x 20% x 4/12 53,333
170,000
Borrowing cost to be capitalized 225,833
b) Depreciation in 20X5
Construction costs 500,000 + 600,000 + 800,000 1,900,000

Borrowing costs capitalized Part (a) 225,833
2,125,833
Depreciation:
= 2,125,833 / 10 years x 1 / 12 months = 17,715
c) Carrying amount at 31 December 20X5

Cost 2,125,833
Accumulated depreciation Part (b) (17,715)
Carrying amount 2,108,118
d) Interest income to be recognized in income statement
1,900,000 x 20% x 1/12 31,667 (Related to Jan 2005)

=
 Ledgers not required in question. For Additional Information

Loan A/c Bank A/c
1-Jan Bank 1,900,000 1-Jan Loan 1,900,000 1-Feb CWIP 500,000
1-July CWIP 600,000
C/D 1,900,000 1-Nov 800,000
CWIP
1,900,000 1,900,000 1,900,000 1,900,000
A2.
a) Borrowing Cost to be Capitalized

Loan A
1-3 to 31-8 500,000 x 10% x 6/12 = 25,000
Loan B
1-June to 31-7 400,000 x 15% x 2/12 = 10,000
1-August to 31-8 300,000 x 15% x 1/12 = 3,750
38,750
Page 18 of 38
Less: Investment Income
Loan A Funds 1-1 500,000
Payment made 1-3 (300,000)
200,000 x6%x2/12 = 2,000
100,000 x6%x1/12 = 500
Loan B Funds 1-6 400,000
500,000 x6%x2/12 = 5,000
Repayment of Loan 31-7 (100,000)
180,000 X6%x1/12 = 900
(8,400)
Amount of borrowing cost to be capitalized 30,350
b) Carrying Amount of Building as on 31-12-2005:

Construction Cost = 620,000
(300,000 + 100,000 + 220,000)
Borrowing Cost Capitalized = 30,350
Total Cost of Building = 650,350
Depreciation
650,350 x 4/12 = 43,357
5
Carrying Amount as on 31 Dec,2005 is 650,350 – 43,357=606,993
A3. a) Calculation of Capitalization Rate

Rupees
Loan 1 300,000 X 6% 18,000
Loan 2 200,000 X 8% 16,000
Loan 3 150,000 x 9% 13,500
650,000 47,500
47,500 x 100 = 7.31%

650,000
b) Borrowing cost to be capitalized;
Loan Capitalization rate Months Rupees
January 31, 20X5 70,000 7.31% 11/12 4,691
April,01,20X5 80,000 7.31% 9/12 4,386
December,01, 20X5 10,000 7.31% 1/12 61
9,138
c) Carrying amount: Amount at which asset or liability is presented in statement of financial position.
Construction Cost = 160,000
Borrowing Cost = 9,138
= 169,138
Less Acc Dep = ( -- )
Carrying Amount = 169,138
Page 19 of 38
d) Borrowing cost to be expensed out during the year:
Total Borrowing cost = 47,500
(18,000 + 16,000 + 13,500)
Less Capitalized = (9,138)
To be expensed out = 38,362
A4.
a) Calculation of Capitalization Rate

Rupees
Loan MCB 500,000 X 9% 45,000
Loan HBL 615,000 X 10% 6/12 31,250
Loan UBL 375,000 x 11% 41,250
1,490,000 A 117,500
Weighted average Rupees
Loan MCB 500,000
Loan HBL (625000X 6/12) 312,500
Loan UBL 375,000
B 1,187,500
Capitalization rate B/A 9.89%
b) Borrowing cost to be capitalised

Loan Capitalization rate Months Rupees
May 31, 20X3 300,000 9.89% 7/12 17,308
July 31, 20X3 200,000 9.89% 5/12 8,242
25,550
c) Carrying Amount
Total Construction cost = 500,000
(300,000 + 200,000)
Borrowing cost capitalized = 25,550
Total Cost 525,550
Less Acc Dep = (--)
Carrying Amount = 525,550
d) Borrowing cost recognized as an expense:
Total borrowing cost incurred = 117,500
Less: Capitalized borrowing cost = (25,550)
Borrowing cots recognized as an expense = 91,950
A5.

Capitalization rate (weighted average rate of interest):
2 600,000 / 20,000,000
=13 %
300,000 X 13% X 12/12 39,000
200,000 X 13% X 9/12 19,500
250,000 X 13% X 6/12 16,250
150,000 X 13% X 4/12 6,500
250,000 X 13% X 3/12 6,500
87,750
b) Depreciation
Since the asset is not available for use (Still under construction) so there is no depreciation for the year.
c) Carrying amount at 31 December 2005
Total Cost incurred = 1,100,000
Page 20 of 38
Borrowing Cost capitalized = 87,750
Total Cost = 1,187,750

Less: Acc Dep = ( -- )
Carrying Amount = 1,187,750
A6.
Capitalization Rate:
Weighted
Borrowing Interest Period
borrowing
Debenture at 10% 5,000,000 500,000 12/12 5.000,000
Bank loan:
8.75% for six months 2,000,000 87,500 6/12 1,000,000
9% for six months 1,800,000 81,000 6/12 900,000
Bank overdraft
14% for six months 300,000 21,000 6/12 150.000
14.25% for six months 7006-,000 49,875 6/12 350,000
739,375 7,400,000
Capital rate = 739,375 x 100

7,400,000
= 9.992% p.a
Borrowing Cost to be Capitalized

1-7-2009 2,050,000 x 9.992% x 12/12 = 204,836
15-9-2009 1,000,000 x 9.992% x 9.5/12= 79,103
15-4-2010 500,000 x 9.992% x 2.5/12= 10,408
30-6-2010 400,000 x 9.992% x 0/12= -
3,950,000 294,347
Carrying Amount :
Total Cost (3950,000 + 294, 355) 4,244,347
Less *Acc Dep (--)
Carrying Amount 4,244,347
*As asset is not yet available for use, therefore no depreciation.
Page 21 of 38
A7.

Interest incurred:
2,000,000 x 14% x 1 year = 280,000
Interest earned:
(1 400,000 x 10% x 6 / 1 2 ) + (200,000 x 10% x 2/12) = 73,333
You may find it easier to understand the calculation of the interest earned by looking at the following tabular
calculation:
Total Available for Interest on

From Used working
borrowings investment investment
1-Jan 2,000,000 600,000 1,400,000 70,000 1,400,000 x 10% x 6/12
1-Jul 1,200,000 200,000 3,333 200,000 x 10% x 2/12
1-Sep 200,000 - -
73,333
Interest to be capitalised
Interest incurred during construction 280,000
Less investment income during construction (73,333)
206,667
Please note: capitalization of borrowing costs does not cease during a temporary delay in construction.
b) Since construction has not yet started (the activities have not yet begun), none of the interest incurred is
eligible for capitalization during the year ended 31 Dec, 2005 (i.e. the interest incurred should be expensed).
A8.
Borrowing cost to be capitalized
2011 2010
Commitment fee - 700,000
Specific Borrowing (W 2) 6,987,500 3,033,333
Investment income (W 3) (1,749,000) (1,181,333)
General Borrowing(W 4) 1,381,625 -
6,620,125 2,552,000
Workings:
(1) Borrowing cost to be capitalized
Detail of expenditure
Used from Used from
Date Payments amount
specific general
1-3-2010 1st payment 25,000,000 25,000,000 -
31-8-2010 1st repayment 5,000,000+4,550,000(70m x 13% x6/12) 9,550,000 -
31-01-2011 2nd payment 65,000,000 34,750,000 30,250,000
28-02-2011 2nd repayment 5,000,000+4,225,000(65m x 13% x6/12) - 9,225,000
69,300,000
(2) Specific borrowing

Interest incurred :
up to 31 June 2010 70,000,000 13% 4/12 3,033,333
For upto 30 June 2010 3,033,333
July and august 70,000,000 13% 2/12 1,516,667

September to January 65,000,000 13% 5/12 3,520,833
March April May 65,000,000 13% 3/12 1,950,000
For Upto 30 June 2011 6,987,500
Page 22 of 38
(3) Investment income:
up to 31 June 2010 44,300,000 8% 4/12 1,181,333

For upto 30 June 2010 1,181,333
44,300,000 8% 2/12 590,667

34,750,000 8% 5/12 1,158,333
For Upto 30 June 2011 1,749,010
(4) General Borrowing:
31-1-2011 30,250,000 14% 3/12 * 1,058,750
28-2-2011 9,225,000 14% 3/12 322,875
1,381,625
* one month suspended
A9.
a) Amount of borrowing cost to be Capitalized
Specific borrowings (W-1) 546,667
General borrowings (W-2) 59,550
606,217
1) Specific borrowing
Interest Incurred
8,000,000 x 18% x 5/12 = 600,000
Investment Income
8,000,000 x 4% x 2/12 = (53,333)
546,667
2) General Borrowings
1,000,000 x 11.91% x 3/12 = 29,775
3,000,000 x 11.91% x 1/12 = 29,775
6000,000 x 11.91% x 0/12 = -
59,550
Workings
Capitalization Rate = 5,000,000 + 3,625,000 + 1,500,000 x 100 = 1,0125,000 x 100 = 11.91%
50,000,000 + 25,000,000 + 10,000,000
Details of Expenditures
Particulars Amount Owned Specific General
1-4-2011 10% Payment 2,000,000 2,000,000 - -
31-7-2011 45% Payment 9,000,000 - 8,000,000 1,000,000
30-9-2011 15% Payment 3,000,000 - - 3,000,000
31-10-2011 30% Payments 6,000,000 - - 6,000,000
b) Carrying Amount
Construction Cost 20,000,000
Borrowing Cost 606,217
Total Cost 20,606,217
Less: Acc. depreciation (342437)
(20,606,217 ÷ 10 x 2/12)
Carrying Amount 20,262,780
Page 23 of 38
c) Interest Expense to be charged in income statement
Specific
8,000,000 x 18% x 2/12 240,000
Nov & Dec
General
Aay 50,000,000 x 10% = 5,000,000
Bee 25,000,000 x 14.5% = 3,625,000
Cee 10,000,000 x 15% = 1,500,000
10,125,000
Interest Capitalized (59,550)
To be expensed 10,065,450
Total Borrowing cost to be expensed out (240,000+10,065,450) 10,305,450
A10.
Capital work in progress - Factory building Rs. in ‘000'

Progress invoices received from the contractor 75,000.00
(30,000+20,000+10,000+15,000)
(Rain damages paid would be chargeable to profit and loss account / insurance
claim)
Borrowing costs to be capitalised:
Loan processing charges 500.00)
Interest on bank loan W-1 1,841.67)
Interest on running finance W-2 2,730.00)
Interest income from surplus loan amount W-4 (395.00)
Capital work in progress - June 30, 2010 79,676.67)
W-1: Interest on bank loan (Specific):

Rupees in ‘000
Interest amount Outstanding loan
Months Interest at 13%
From To amount
01-12-2009 31-05-2010 6 25,000 1625.00
01-06-2010 30-06 -2010 1 20,000 216.67
1,841.67
Page 24 of 38
W-2: Interest on running finance
Rupees in ‘000
Payments from Months Interest at
Payments
Payments Invoice outstanding 15% per
Description net of Right Bank Running
date amount up to 30-6- annum
deductions Issue Loan finance
10 (W-3)
01-07-09 Advanced 10,000 10,000 10,000 12.00 1,500
payment
15-10 - 1st progress 30,000 25.500 15,000 10,500 8.50 1,116
09 bill
15-01 - 2nti progress 20,000 17,000 17,000 - - -
10 bill
15-04 - 3rd progress 10,000 8.500 7,500 1,000 2.50 31
10 bill
31-05 - Loan interest 1,625 1,625 1.00 20
10
31-05 - Loan 5,000 5,000 1.00 63
10 instalment
15,000 *24,500 29,125 2,730
*Loan amount of Rs. 25,000,000 less processing charges of Rs. 500,000
W-3: Average rate of interest for running finance facility (9,000/60,000) 15%
W-4: Interest income from surplus loan amounts:

Rupees in ‘000'
Interest income Interest
From Months Surplus loan amounts
To income at 8%
01-12-09 15-01-10 1.5 24,500 (245)
16-01-10 15-04-10 3.0 7,500 (150)
(395)
W-5 Calculation of Net Payments: (used in W-2)

1st Bill 2nd Bill 3rd Bill 4th Bill
Amount of Bill 30,000 20,000 10,000 15,000
Less 10% Advance (3,000) (2,000) (1,000) (1,500)
5% Retention Money (1500) (1,000) (500) (750)
Net Payment 25,500 17,000 8,500 12,750
Accounting Entries for the year ended 30-6-2010

(Not required in question just for additional information)
1-7-09 Advance to Contractor 10,000

Bank 10,000
30-9-09 CWIP 30,000

Advance to contractor 3,000
Retention money 1,500
payable
Payable to contractor 25,500
15-10-09 Payable 25,500

Bank 25,500
Page 25 of 38
31-12-09 CWIP 20,000
payable
15-1-10 Payable 17,000

Bank 17,000
31-3-10 CWIP 10,000

Advance 1,000
payable
15-4-10 Payable 8,500

Bank 8,500
30-6-10 CWIP 15,000

Advance 1,500
Retention money 750
Payable
b)
Qureshi Steel Limited
Statement of Financial Position
As on 30-6-2010
2010
(000)
Non-Current Assets
CWIP-Factory Building 79,677
Current Assets
(10,000-3,000-2,000-1,000-1,500)
Insurance claim Receivable 750
Equity & Liabilities:

Equity
Share Capital 15,000
Bank Loan 10,000
Retention Money Payable (1500+1000+500+750) 3,750
Current Liabilities
Current Portion of loan (5M x 2) 10,000
Financial Charges payable (20M x 13% x 1/12) 217
Payable to contractor(related to June Quarter 12,750
Running Finance (Assumed as Closing as well) 60,000
Page 26 of 38
A11.
a) Assuming borrowings as Specific Borrowing:
Interest Incurred:
32,000,000 x 13% x (306-61)/365 = 2,792,329
10,000,000 x 11% x 153/365 = 461,096
Less: Investment Income: (Given) = (500,000)
Borrowing Cost to be capitalized = 2,753,425
b) Assuming borrowings as General Borrowings:

5,000,000 x 12.73% x (306-61)/365 = 427,240
18,000,000 x 12.73% x (275-61)/365 = 1,343,451
16,000,000 x 12.73% x 92/365 = 513,385
Borrowing cost to be Capitalized 2,284,076
W-1) Calculation of Capitalization Rate:

= 3,948,658 X 100 = 12.73%
31,019,178
 Interest incurred on loans:

32,000,000 x 13% x 306/365 = 3,487,562
10,000,000 x 11% x 153/365 = 461,096
3,948,658
 Weighted Avg outstanding balance:

32,000,000 x 306/365 = 26,827,397
10,000,000 x 153/365 = 4,191,781
31,019,178
W-2) Details of Payments:

Funds used From
Date Particulars Amount Right Shares Loans
1-3-2013 First Payments 20,000,000 15,000,000 5,000,000
1-4-2013 Second Payments 18,000,000 - 18,000,000
1-10-2013 Third Payments 16,000,000 - 16,000,000
Page 27 of 38
Solutions of Self-TEST Questions
A1.
Spin Limited
Amount of borrowing cost to be Capitalized as on June 30,2009
Commitment Fee 125,000
Specific Borrowings(W-1) 1,912,500
General Borrowings (W-2) 1,419,808
3,457,308
Workings:
1) Specific Borrowings:
Interest Incurred:
25,000,000 x 12% x 5/12 1,250,000
20,000,000 x 12% x 4/12 800,000
2050,000
Less Investment Income:
6,875,000 x 8% x 3/12 137,500
1,912,500
2) General Borrowings
8,125,000 x 13.88% x 6/12 563,875
12,,000,000 x 13.88% x 4/12 555,200
6,500,000 x 13.88% x 4/12 300,733
1,419,808
3) Detail Of Payments
Particulars Amount Specific General Months for General Borrowing

1-9-2008 Permit 8,000,000 8,000,000
1-9-2008 1st Payment 10,000,000 10,000,000
1-12-2008 2nd Payment 15,000,000 6,875,000 8,125,000 6 months
1-2-2009 3rd Payment 12,000,000 - 12,000,000 4 months
1-2-2009 Repayment 6,500,000 - `6,500,000 4 months
4)Capitalization Rate
6,250,000 x 100 = 13.88%
4,5000,000
2.1 25,000,000 x 13% = 3,250,000
20,000,000 3,000,000
45,000,000 6,250,000
Page 28 of 38
A2. a)
i)Total Borrowing Cost
500,000 x 15% = 75,000
600,000 x 12% x 11/12 = 66,000
400,000 x 14% x 9/12 = 42,000
300,000 x 14% x 10/12 35,000
218,000
ii)Borrowing Cost Eligible for Capitalization:

Specific Borrowings:
i) Interest Incurred:
500,000 x 15% x 10/12 (J – M & A – D ) 62,500
Less Investment Income
300,000 x 6% x 3/12 (J-M) 4,500
100,000 x 6% x 2/12 (A-M) 1,000
(5,500)
57,000
General Borrowings
100,000 x 13% x 5/12 5,417
200,000 x 13% x 3/12 6,500
11,917
Total amount to be capitalized 68,917
(57,000 + 11,917)
W-1 Capitalization Rate

143,000 (W-1.1) x 100 = 13%
1,100,000 (W-1.2)
W-1.1 Interest incurred on loans

600,000 x 12% x 11/12 = 66,000
400,000 x 14% x 9/12 = 42,000
300,000 x 14% x 10/12 = 35,000
143,000
W-1.2 Weighted Average borrowings

600,000 x 11/12 = 550,000
400,000 x 9/12 = 300,000
300,000 x 10/12 = 250,000
1,100,000
W-2) Details of Payments

Funds used From
Date Particulars Amounts Specific General
1-1-07 1st Payment 200,000 200,000
1-4-07 2nd Payment 200,000 200,000
1-7-07 3rd Payment 200,000 100,000 100,000
1-10-07 4th Payment 200,000 200,000
Page 29 of 38
b) Amount to be recognized in income statement
Specific Loan:
500,000 x 15% 75,000
Less Capitalized (62,500)
To be expensed out 12500
General Loans:
600,000 x 12% x 11/12 = 66,000
400,000 x 14% x 9/12 = 42,000
300,000 x 14% x 10/12 = 35,000
Less: Capitalized (11,917)
To be expensed out 131,083
Total interest expense to be recognized in income statement as an expense:

12,500 + 131,083 = 143,583
A3.
Capitalization Rate = 182,700 x 100 = 13.82%

1,321,667
W-1 Interest Rate
500,000 x 15% = 75,000
780,000 x 14% x 7/12 = 63,700
400,000 x 12% x 11/12 = 44,000
182,700
W-2 Weighted Average Borrowing
500,000 x 12/12 = 500,000
780,000 x 7/12 = 455,000
400,000 x 11/12 = 366,667
1,321,667
A4. Amount of borrowing cost to be capitalized:

Rs. in million
Interest on redeemable preference shares [150 x 12% x (11- 1)-12] 15.00
Interest on TFCs [300 x 14% x (8-1)-12] 24.50
39.50
Less: Interest income from surplus funds (W-1) (3.23)
Amount of borrowing cost to be capitalized: 36.27
Surplus funds available Surplus Amount Interest income @ 9%

From To Months RS. in million
01-01-2012 31-03-2012 3 50 1.13
01-04-2012 30-11-2012 7* 40 2.1
3.23
*One month suspension
Page 30 of 38
Details of Expenditures
Date Particulars Payments Specific Right Shares
Preference Shares TFCs
1-1-2012 1st Payment 100,000 100,000
1-4-2012 2nd Payment 310,000 50,000 260,000
15-12-2012 3rd Payment 90,000 40,000 50,000
150,000 300,000 50,000
A5. Amount of borrowing cost to be capitalized:
Rs
Specific Loan
Rs 800,000 x 9% x 9/12 54,000

Less: Interest earned on unutilized amount of loan:
April 1 to June 30 [(800,000 – 450,000) x 3/12 x 6%] (5,250)
July 1 to October 31 [(800,000 – 550,000) x 4/12 x 6%] (5,000)
November 1 to November 30 [(800,000 – 750,000) x 1/12 x (250)
6%]
A 43,500
General Pool of Funds
Capitalization rate is 9.58% (W-1)

Paid on January 31 (200,000 x 11/12 x 9.58%) 17,563
Paid on November 30 (200,000 x 1/12 x 9.58%) 1,597
B 19,160
Total Amount to be Capitalized 62,660
Note: Although the activities has been interrupted for administrative work during May and June 2014,
capitalization of borrowing cost is not suspended for this period according to IAS-23, because it is a
necessary stoppage for the completion of construction work.
W-1 Rs
Capitalization rate for pool of debt
Total interest paid on these borrowings:

Bank Overdraft 33,800
7-year note (9,000,000 x 10%) 900,000
933,800
Borrowings outstanding
Bank overdraft 750,000
7-year note 9,000,000
9,750,000
Capitalization rate = 933,800/9,750,000 9.58% (rounded)
W-2 Detail of Payments:

Particulars Specific General
31-1 1st Payment 200,000
31-3 2nd Payment 450,000
30-6 3rd Payment 100,000
Page 31 of 38
31-10 4th Payment 200,000
30-11 5th Payment 50,000 200,000
Summary of IAS 23
Borrowing Costs are interest and other costs (e.g. commitment fee/arrangement fee) incurred in connection
with borrowing of funds.
Qualifying Asset: is an asset that takes substantial time period to get ready for its intended use or sale
examples of borrowings;
Example of borrowing Related borrowing cost
Preference shares (if classified as liability) Preference dividend
Debentures, TFC's Interest expense
Long term / medium term loans /bank Overdraft Interest expense
In addition any bank charges e.g. commitment fee, charged by bank in connection with borrowings are also
borrowing cost.
Following is not borrowing cost.
 Dividend on ordinary share capital/right shares.
Examples of qualifying assets:

Depending upon the circumstances, following may be qualifying assets
I. Inventories (IAS-2)
II. Manufacturing plants and power generation facilities (IAS-l6)
III. Construction of a factory or head office building (IAS-16)
IV. Intangible assets e.g. any research and development project (IAS-38)
However inventories that are manufactured or produced over a short period of time are not qualifying assets.
Assets that are ready for their intended use or sale when acquired are qualifying assets (e.g. furniture,
computer, vehicles etc)
Recognition an entity shall recognize borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognize
other borrowing costs as an expense in the period in which they are incurred.
An example of acquisition is purchase of the building. An example of construction is manufacturing of plant.

An example of production is manufacturing of inventory.
1) Specific borrowings: borrowings which are taken for the sole purpose of construction, acquisition
are production of qualifying asset.
2) General borrowings: borrowings that are entered into for general purpose. These funds may be
utilized for buying inventories, paying off expenses and multitude of other purposes in addition to
acquisition, construction and production of qualifying asset.
 Specific borrowings: In case of specific borrowings, the amount to be capitalized is calculated as
follows:
Amount of interest incurred on outstanding balance of loan xxxx

Less: investment income (if any) on temporary investment of surplus funds (xxx)
Amount of interest to be capitalized xxx
General borrowings amount to be capitalized is calculated as follows
Expenditure on qualifying asset X capitalization rate X time period
Capitalization rate is to be calculated if there are more one general loan, otherwise the rate applicable on a
single general loan is capitalization rate.
borrowing cost incurred
Capitalization rate = × 100
weighted Borrowing outstanding
Period during which capitalization of borrowing cost must occur:
Commencement of capitalization
Page 32 of 38
a) It incurs expenditures for the asset; and
b) It incurs borrowing cost and undertake activities to prepare the asset
The activities necessary to prepare the asset for its intended use or sale encompass more than physical
construction of the asset. They include technical and administrative work prior to commencement of physical
construction, such as the activities associated with attaining permits prior to commencement of the physical
construction of the asset. [Consider Spin Limited].
Suspension of Capitalization
An entity shall suspend capitalization of borrowing costs during extended periods in which it suspends active
development of a qualifying asset unless temporary delay is a necessary part of the process of getting the
asset ready for its intended use or sale.
Cessation of Capitalization
An entity shall cease capitalizing borrowing costs when substantially all the activities necessary to prepare
the Qualifying asset for its intended use or sale are complete.
Important considerations
 When determining whether your borrowings are either general or specific it is useful to remember
that whilst a bank overdraft facility is often used as general purpose borrowings, it is also possible
for a bank overdraft facility to be arranged specifically for a qualifying asset. The particular
circumstances, should therefore always be considered when deciding whether the borrowing is
general or specific
 if an entity has funds available from its own resources, specific borrowings and general borrowings
at any given date then assume that:
• First; own funds are utilized
• Second; funds from specific borrowing ;and
• Then funds from general borrowings
• If an entity has funds available from:
 Owned resources
 Specific borrowings; and
• General Borrowings
At the date of repayment of principal and interest then assume that funds were utilized in above order.
 When construction of a qualifying asset is completed in parts and each part is capable of being
used separately while construction continues on other parts, capitalization of borrowing costs
ceases when substantially all activities necessary to prepare that part for its intended use or sale are
complete.
Disclosure [Para 26]
a) Amount of borrowing Cost capitalized during the period
b) Capitalization rate used in case of general borrowings is to determine the amount of borrowing cost
eligible for capitalization.
Page 33 of 38
Extra practice questions:
Question No. 1
NRA Limited started construction of building on 01 January 2010. Building was completed in two years
time with cost of Rs. 30 million. Company financed this construction mainly from existing running finance
facility which carries mark up at 14% per annum. Running finance limit is 100 million.
NRA Limited obtained a loan of Rs. 10 million at 12% per annum for this building on 1 December 2010
but due to some breach of contract with bank it had to return the total amount of loan with interest on 01
June 2011. Surplus funds were invested in a saving account @ 14%.
Construction activities remained suspended for the month of August 2011 due to shortage of material.
Following is the detail of payments made to contractor for the construction of building:
Date Amount
01-March-2010 3,200,000
30-June-2010 4,400,000
16-Sep-2010 2,300,000
01Dec-2010 6,200,000
31-jan-2011 5,500,000
01-May-2011 4,400,000
01-Oct-2011 2,500,000
01-Dec-2011 1,500,000
Required:
Calculate the cost of building at 31 Dec., 2010 and 31 Dec., 2011 after capitalizing borrowing cost where
applicable. (Marks 15)
Answer No. 2
Cost of Capital work In Process: Building
As on 31-12-2010
Payments (3.2 + 4.4 + 2.3 + 6.2) 16,100,000
Add borrowing cost to be capitalised on Specific borrowings 55,667
Add borrowing cost to be capitalised on General borrowing 775,250
16,930,917
As on 31-12-2011
Opening balance 16,930,917
Add Payments (5.5 + 4.4 + 2.5 + 1.5) 13,900,000
Add borrowing cost to be capitalised on Specific borrowing 455,667
Add borrowing cost to be capitalised on General borrowing 2,675,166
33,961,750
(W-1) borrowing cost to be capitalised on Specific Borrowings:

2010
Interest incurred 10,000,000 × 12% × 1/12 = 100,000
Interest income 3,800,000 × 14% × 1/12 = (44,333)
55,667
Page 34 of 38
2011
Interest incurred 10,000,000 × 12% × 5/12 = 500,000
Interest income 3,800,000 × 14% × 1/12 = (44,333)
455,667
(W-2) Borrowing cost to be capitalised in case of General Borrowings:

2010 3,200,000 × 14% × 10/12 = 373,333
4,400,000 × 14% × 6/12 = 308,000
2,300,000 × 14% × 3.5/12 = 93,917
9,900,000 775,250
2011
On opening 9,900,000 × 14% × 11/12 = 1,270,500
balance
1,700,000 × 14% × 10/12 = 198,333
4,400,000 × 14% × 7/12 = 359,333
10,600,000 × 14% × 6/12 = 742,000
2,500,000 × 14% × 3/12 = 87,500
1,500,000 × 14% × 1/12 = 17,500
2,675,166
(W-3) Detail of Payments:
Funds Used From

Date Particulars Amount
Specific General
st
1-3-2010 1 Payment 3,200,000 -- 3,200,000
nd
30-6-2010 2 Payment 4,400,000 -- 4,400,000
rd
16-9-2010 3 Payment 2,300,000 -- 2,300,000
th
1-12-2010 4 Payment 6,200,000 6,200,000 --
th
31-1-2011 5 Payment 5,500,000 3,800,000 1,700,000
th
1-5-2011 6 Payment 4,400,000 -- 4,400,000
1-6-2011 Loan repayment + Interest 10,600,000 -- 10,600,000
(10 + 0.6)
th
1-10-2011 7 Payment 2,500,000 -- 2,500,000
th
1-12-2011 8 Payment 1,500,000 -- 1,500,000
Page 35 of 38
Borrowing Cost questions for assignment
Question No. 1
Borrowing made Date of Borrowings Amount in rupees Rate of Interest
From HBL 01-07-00 10 million 13%
From NBP 01-10-00 15 million 12%
From PICIC 01-11-00 20 million 15%
st
Year end is 31 December 2000.
Required:
Calculate the capitalization rate by assuming that above mentioned borrowings are general purpose.
Question No. 2
Wise group Ltd borrowed the following amounts from various financial institutions/banks for their
business:
Date of Borrowing Loan (Rs.) Rate of Interest Borrowing Cost (Rs.)

PLCIC 01-07-00 15 million 10% 1.5 million
HBL 01-10-00 10 million 12% 0.9 million
MCB 01-11-00 8 million 16% 0.85 million
st
During the year, Wise group Ltd paid Rs. 13 million on 1 August 2000 to contractor. Construction has
st st st
been started on 1 August 20000 and continued up to 31 January 2001. From 1 February 2001 the
construction remained suspended due to non-availability of required quality of marble. The marble could
be purchased only at the end of the March 2001.
Some cash out of amount borrowed was temporarily invested in short term deposits and an income of Rs.
0.2 million was earned. Assume all borrowings are general purpose. Wise group Ltd. prepare their
th
financial statements on 30 June. The qualifying asset is not yet available for use.
Required:
th
Calculate the borrowing cost to be capitalized for the year ended 30 June, 2001.
Question No. 3
Ammar Corporation has following general loans in place at the beginning of 2014.
12% MCB loan repayable in 2017 50,000
8.5% Debentures repayable in 2015 70,000
10.5% Silk Bank loan repayable in 2020 60,000
st
On 1 January 2014, the construction of a qualifying asset started using existing borrowings. Expenditure
incurred on the construction was:-
Date Rs.
st
1 January, 2014 30,000
st
1 June 2014 40,000
st
1 November 2014 20,000
90,000
The construction will be complete on March 31, 2015.

Required:
Calculate the borrowing cost to be capitalized for the year ended December 31, 2014.
Page 36 of 38
Question No. 4
Nasir Corporation has following general loans in place at the beginning of 2015.
12% MCB loan 50,000
8.5% Debentures 80,000
It further borrowed following loans not specifically for the project:
13% Silk Bank loan obtained on 1-4-2015 6,000
15% HBL loan obtained on 1-9-2015 90,000
st
On 1 January 2015, the construction of a qualifying asset started. Expenditure incurred on the
construction was:
Date Rs.
st
1 January, 2015 30,000
st
1 June 2015 50,000
st
1 December 2015 70,000
150,000
The construction will be complete on March 31, 2016.

Required:
Calculate the borrowing cost to be capitaltsed for the year ended Dec. 31,2015.
Question No. 5
RISE Co had following loans in place at the beginning of 2014.
10% Bank loan repayable-2016 (General) 100,000,000
8% bank loan repayable-2018 (General) 40,000,000
7% Specific loan obtained on 1.1.2014 20,000,000
st
Construction of factory plant, a qualifying asset began on 1 January 2014.
Expenditure incurred on the construction was given below. Surplus funds are invested at 4%.
Incurred on Rs. ‘000’
st
1 January, 2014 50,000
st
1 October 2014 30,000
80,000
Required:
Calculate the borrowing cost to be capitalized for the factory plant for the year ended December 31, 2014.
Question No. 6
st
On 1 July 2006, entity A entered into Rs. 2.2 million contract for the construction of a building. The
building was completed at the end of June 2007. During the period, the following payments were made to
the contractor:
Date Rs. In ‘000’
st
1 July, 2006 200
th
30 September 2006 600
Page 37 of 38
st
31 March 2007 1,200
th
30 June 2007 200
2,200
th
Entity A’s borrowings as at its year end of 30 June 2007 were as follows:
st
(i) 10% four year loan amounting to Rs. 700,000 was obtained on 1 July 2006 with simple interest
payable annually, which relates specifically to the project. Interest of Rs. 70,000 (to be checked)
were incurred on these borrowings during the year, and interest income Rs. 20,000 was earned on
these funds while they were held in anticipation of payments.
st
(ii) 12.5% 10-year general loan with simple interest payable annually; debt outstanding at 1 July 2006
amounted to Rs. 1,000,000 and remained unchanged during the year.
st
(iii) 10% 10-year general loan with simple interest payable annually; debt outstanding at 1 July 2006
amounted to Rs. 1,500,000 and remained unchanged during the year.
Required:
Calculate the borrowing cost to be capitalized for the year ended June 30, 2007.
Question No. 7
Milo Enterprise was working on a project to construct a building.
Costs incurred on the project are as follows:
st
1 April, 2014 7,500,000
st
1 Dec., 2014 9,500,000
The following amounts were utilized for payment:
1. 10% debentures issued on April 1, 2014 specifically for construction of Rs. 5,500,000.
2. 15% bank loan outstanding since 2013 was Rs. 6,500,000.
3. 12% bank loan was obtained solely for the project on September 1, 2014 of Rs. 3,250,000.
4. 10% bank loan outstanding since December 1, 2014 was Rs. 3,000,000.
st
All the above loans and debentures are outstanding till 31 December 2014. Construction of building was
st
still in progress at 31 December 2014. Investment income is earned @ 7%.
Required:
Determine the total amount of capital work in process as on 31-12-2014.
Page 38 of 38

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LONG TERM LOANS AND RELATED ISSUES:

Outstanding Balances of loan x Rate x Time period

i) Calculation of interest expense:

115 M x 12% x 6/12 (July to Dec) = 6.9

30-6-2012 Closing Balance 120

30-6-2013 Closing Balance 110

Extracts from statement of Financial Positions

i) Calculation of interest Expense

1-5-2013 Loan repaid (100,000)

1-6-2013 Loan repaid (100,000)

Current portion of loan 1,200,000

25M x 15% x 3/12 Aug to Oct = 0.9375

1-2-2013 Repayment made (5)

1-5-2013 Repayment made (5)

30-6-2013 Closing Balance 10

Current portion (5M x 2) 10

Non-current Portion Nil

ii) Extracts from statement of Financial Position as on 30-6-2013

Types of Borrowings with respect to Capitalization of borrowing cost:

Specific Borrowings General Borrowings

Amount of interest incurred on outstanding balance of loan xxxx

b) Construction started on 1-7-2014 with owned funds.

Important points to remember

Expenditure on qualifying asset x capitalization rate x time period

borrowing cost incurred

The stadium was still under construction at 31 December 20X5.

Company issued Shares:

Bank XX Investment in Shares XX

Company issued Debentures (It is simply a loan)

Bank XX Investment in Debentures XX

(Normally it is a non-current loan) (Normally it is a Non-current investment

Suspension of Capitalization [Para 21 & 22]

The stadium is a qualifying asset as defined by IAS-23.

Expenditure on Qualifying Asset:

Payment date Rs in million

On completion of 1st phase March 1, 2015 20,000,000

Date of Payment Rupees

The construction work was financed through the following sources:

The following additional information is also available:

a) Borrowing costs to be capitalized

Construction costs 500,000 + 600,000 + 800,000 1,900,000

c) Carrying amount at 31 December 20X5

d) Interest income to be recognized in income statement

1,900,000 x 20% x 1/12 31,667 (Related to Jan 2005)

 Ledgers not required in question. For Additional Information

a) Borrowing Cost to be Capitalized

Amount of borrowing cost to be capitalized 30,350

b) Carrying Amount of Building as on 31-12-2005:

A3. a) Calculation of Capitalization Rate

47,500 x 100 = 7.31%

a) Calculation of Capitalization Rate

b) Borrowing cost to be capitalised

a) Borrowing costs to be capitalized

Total Cost = 1,187,750

Capital rate = 739,375 x 100

Borrowing Cost to be Capitalized

a) Borrowing costs to be capitalized

Total Available for Interest on

(2) Specific borrowing

July and august 70,000,000 13% 2/12 1,516,667