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Whether interest income of suspension period is to be calculated to reduce the cost of interest capitalised or it should be ignored. For example:
ABC Ltd. had a Loan $9,000,000 @ 15% on Jan 1 specifically raised to finance the project. Construction commences from March 1 and continues till year end ( Financial year Jan-Dec). However, during the year construction suspended (due to strike) from 1st July to 31st July (one month).
Expenditure incurred:
1 Mar: $2,500,000
1 Oct: $4,200,000
Interest income on surplus fund earned @ 8%. What should be the borrowing cost?Interest to be capitalised:
($9,000,000 * 15% * 9/12) = $1,012,500To the extent this, I have no confusion. I am only confused about what should be the amount of interest income (to reduce the interest incurred during construction).
Whether it should be:
($6,500,000 * 8% * 6/12) + ($2,300,000 * 8% * 3/12) = $260,000 + $46,000 = $306,000or it should be:
($6,500,000 * 8% * 7/12) + ($2,300,000 * 8% * 3/12) = $303,333 + $46,000 = $349,333In short what should be the treatment of interest income of suspension period (pls give reference of para IAS 23 if possible). Thanx in advance.
We should only net off the income earned during the period that the borrowing costs are capitalised
Thus, any income earned during July will be credited to investment income in the statement of profit or loss rather than being netted off against the borrowing costs on the project
In effect, neither borrowing costs nor income earned during July will be considered as affecting the overall cost of the construction project
OK?
Well I understood. But you could only tell me what para of IAS 23 provides such treatmeant. Anyway Thanks for your help.
I believe that paragraphs 12 and 13 are the ones you seek
I have reproduced them below:
“12 To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.
13 The financing arrangements for a qualifying asset may result in an entity obtaining borrowed funds and incurring associated borrowing costs before some or all of the funds are used for expenditures on the qualifying asset. In such circumstances, the funds are often temporarily invested pending their expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalisation during a period, any investment income earned on such funds is deducted from the borrowing costs incurred.”
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