borrowing costs

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  • Profile photo of jemma242
    jemma242
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    I have come across two questions now which have completely confused me…. both questions have the loan starting in one moth but the work not starting till a month after so have invested the loan to gain some interest……
    1. Says that the loan is redeemable at a premium and the other question doesn’t. In the question that says this the interest received from investing hasn’t been taken off the expense as it says that it was invested before capitalisation commenced…. but the other question does remove it….

    What is the correct treatment? And I hope this makes sense one of the questions is 20 apex in the bbp book June 2010

    Thank u


    Profile photo of MikeLittle
    MikeLittle
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    The IAS comes into force when “Work has commenced and borrowing costs are being incurred”

    I think that answers your questions! We have to wait until the work on the project is under way. At that point, we start to capitalise borrowing costs and treating the income from the temporary investment of surplus funds as a deduction from the borrowing costs capitalised

    OK?


    Profile photo of jemma242
    jemma242
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    Yes that’s what I thought so the loan which is redeemable at a premium…. the interest is annually therefore the costs won’t be incurred till the end of the year so is that why the invested income interest isn’t taken off the borrowing costs that are capitalised because they haven’t been incurred yet?

    The other question was incurring interest monthly so the costs to the construction has already began so the interest income is taken away….

    Please could u clarify that for me
    Thanks


    Profile photo of MikeLittle
    MikeLittle
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    Yes, you are correct. Where the loan interest is calculated and is required to be capitalised, the income from the temporary investment of surplus funds is deducted from the interest to be capitalised, but only for the periods when the borrowing costs are being capitalised

    OK?


    Profile photo of jemma242
    jemma242
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    So where the costs are redeemed at a premium the interest on the invested income received till the end of the loan is that correct? Sorry I am trying to make sense of the questions!!


    Profile photo of MikeLittle
    MikeLittle
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    Hi Jemma

    Can you give me an exam reference for these two questions – I don’t have the BPP revision kit available?


    Profile photo of jemma242
    jemma242
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    Sorry the only reference I have is question 20 apex in bbp revision my example was from a first intuition


    Profile photo of MikeLittle
    MikeLittle
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    Hi again – I really need to see the question before I can give you a definitive answer.

    Although I hate to suggest it, have you considered contacting BPP or First Intuition?


    Profile photo of jemma242
    jemma242
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    ok, sorry for the late reply had problems with my log in! I will write part of the questions out;
    20 Apex;
    Apex issued a $10million unsecured loan with a coupon (nominal) interest rate of 6% on 1st April 20×8. The loan is redeemed at a premium which means the loan has an effective finance cost of 7.5% per annum. the loan was for the building of a new store which meet the def of a qualifying asst. construction work commenced 1st May 20×8. the proceeds of the loan were temporary invested for month April 20×8 and earned interest of $40,000.

    Dennis;
    On the 1st Jan 2005 Dennis borrowed $8million at an interest rate of 4% to finance the construction of a building. Construction began on 1March 2005 . Dennis invested the funds received on 1Jan 2005 until construction commenced earning interest of $50,000.

    Both question have more details but i have written the basics… Apex doesn’t take the invested interest away whereas Dennis does, could you explain why for me please?

    Thank you


    Profile photo of MikeLittle
    MikeLittle
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    Apex – don’t set off the investment income – the work had not commenced on May 1st, so borrowing costs and interest received before May are taken to income Statement

    I can’t imagine why Dennis does take the 50,000 into account.

    Sorry

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