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  1. Hello, need help with this question Which of the following would be qualify as a borrowing cost as defined in IAS 23 Borrowing costs?

    1) Premium on redemption of preference share capital
    2) Discount in the issue of convertible debt
    3) Interest expense calculated using the effective interest rate
    4) Finance charges related to finance lease

    A. 1, 2 and 3 only
    B. 2, 3 and 4 only
    C. 1 and 4 only
    D. All four

    Anwser given is D, but I dont understand how no1 is borrowing cost? Or is it not?

  3. dear sir, please help me with the exercise. i saw your video but i don’t know how to solve it
    Imperia Ltd has several loans as follows:
    + The loan is worth $ 1,600,000 from 1/1 / N to 31/12 / N, interest rate of 7% / year.
    + The loan is worth $ 2,000,000 from 1/1 / N to 31/12 / N + 1, interest rate of 8% / year.
    + A loan of $ 2,500,000 from 1/1 / N + 2 to 31/12 / N + 2, interest rate of 10% / year.
    The company intends to use these loans to invest in the construction of a factory with an estimated cost of approximately $ 3,800,000, construction period of 24 months, expected to start from 1/6 / N. Due to unfavorable weather, construction work was delayed to 1/8 / N until 1/8 / N + 2, the production plant was completed and to 1/1 / N + 3 began to be commissioned. into use. The estimated residual liquidation value (after 20 years) is $ 30,000.
    Requirements: Please apply the relevant international financial statements standards to:
    a. Determining the time when borrowing costs start to capitalize, the time to stop capitalization and the value of capitalization? Implementing related entries?

    • It’s the application of the matching principle

      We cannot capitalise the borrowing costs incurred during the prolonged period of inactivity

      We shall still have to pay those borrowing costs – it’s just that they will be debited to finance charges rather than to the capital project itself

      Similarly, we can only offset income earned on temporary investment of surplus funds during the same period that we are capitalising the borrowing costs. That income earned in the prolonged period of inactivity will still be earned and credited to Investment Income. But we cannot credit it to the capital project itself

      OK?

  6. Dear Sir,

    The question says that the amount which can be borrowed from the bank is 300 million but the contract price for the stadium is 350 million. Wont the contract price be included in the calculation instead of the loan amount?

  7. Hi Mr. Mike Little,

    I understood that the borrowing cost should not be capitalized where incurred during extended periods of inactivity, ie., from 1.11.03 to 31.12.03 in the above example. But what about the investment income, why is it getting stopped in the same period. Can you please help me understand this concept? Thank you.

  8. 1-1-2008 R co. borrowed $15m to finance the production of 2 assets X and Y which were expected to take a year to build.production started on 1-1-2008 and loan facility was utilized as follows,with the remaining funds invested temporarily.

    DATE ASSET-X($m) ASSET-Y($m)
    1-1-2008 2.5 5

    1-7-2008 2.5 5

    The loan rate was 10% and R co. can invest surplus funds at 8%.(ignoring compound interest) calculate the borrowing costs to be capitalized for each of the asset and the cost of each asset as on 31-12-2008

    please must reply
    thank you

      • Dear sir,

        I would like to know if my calculation is correct

        For Asset X

        Borrowing cost would be 10% of 5 million and inventment income would be 8% of 2.5 million for 6 months which gives $400,000

        therefore the asset value would be 5.4 million

        For Asset Y

        Borrowing cost would be 10% of 10 million and investment income would be 8% of 5 million for 6 months which gives $800,000

        Therefore the asset value would be 10.8 million

        Thank you

    • Hi my brother I think borrowing cost for (x) is 150000 $ and borrowing cost for (y) is 300000$ so a total borrowing cost for x and y equal 450000$ at 31/12/2008 so we will say cost of asset at the ending period 2008 for x equal 5150000 (5000000+150000) and for y equal 10300000 (1000000+300000)

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