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Borrowing costs – general borrowings example – ACCA Financial Reporting (FR)

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  1. Illustration – Net borrowing costs

    in this illustration question

    The interest expense for May of $0.5 million ($100 million x 6% x 1/12) and interest income of $0.07 million
    will both be recognised through profit or loss.

    can someone explain how the interest income of $0.70m is calculated?

  2. I really could not get why we are capitalizing the 10mil for 12 months, but I got there in the end. Here goes:
    Since the end date for the “Period of Construction” is not mentioned (Thanks to johncrotty’s comment), the borrowed amount is used on 1st of Jan AND ONWARD, same with 1st of July. When I say “onward” i mean the loan was spent but whatever it was spent on is still being used because the Construction has not ended.
    Therefore:
    1. the interest on the 10mil we are capitalizing from 01/01/2015 to 31/12/2015
    2. the interest on the 15mil we are capitalizing from 01/07/2015 to 31/12/2015 ( NOT FROM 01/01/2015 to 01/07/2015 – which is how i was looking at it the 1st time)
    Correct me if I’m wrong, but say the period of construction is still going on today (22/04/2023) using the resources acquired from the 10 & 15 mil loans, than to this day we would still be capitalizing the interest.

    I “snaily” got there 😀

      • Hello,

        But in the question it doesn’t indicate that the item has been fully constructed which indicates that the construction is still in progress. So is it right to expense the remaining $1.61m?
        Because then the borrowings could be used in the next year for further completion of the construction.

  8. Hello. I just want to clarify that part of the question saying that they used $10m as expenditure on 1 jan and then for 1 july they used $15m as expenditure. Are these separate expenditures? that means they’re also separate loans issued by Venezuela? bcoz you applied the interest rate for the $10m for the WHOLE YEAR while HALF OF THE YEAR for the $15m. I just got confused bcoz what I did before seeing your solution was I time apportioned the $10m interest for 6 months as well, believing that that fund was just for jan-june only and then the rest will be for the $15m. I hope you will clarify this thank you

    • Hi,

      Yes, they are two separate amounts that have been spent and therefore capitalised from those dates. The $10 million will have been for the full 12 months, whilst the additional $15 million will be for the final 6 months of the year.

      Thanks

      • I know this question can read in different ways however you have to look at it from the point of view that it is a qualifying asset over a “PERIOD OF CONSTRUCTION” therefore if no end date for construction is given than you need to capitalised over the remaining month(s).

        hope this helps

  9. Is the answer to this example correct? Your answer is $0.59m. This is broken down to ($10m x 3.38%) + ($15m x 3.38% x 6/12). $10m x 3.38% is equal to $0.38m. $15m x 3.38% x 6/12 is equal to $0.285m; giving $0.665m.Am I going wrong somewhere?

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