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Assuming I borrowed 100m specifically for construction of an qualifying asset at start of year.
All required activities also started on same day and asset is still under construction by year end. However out of 100m I only invested 50m used this year rest I will need next year. So temporarily I invested bal. 50m to earn interest income.Effective interest rate is 6% p.a
Temporary Investment interest rate 4%As per IAS 23, we are allowed to capitalise “net” interest costs if borrowed funds are used for construction, acquisition and purchase of Qualifying asset.
By this way effectively, aren’t we allowed to capitalise 2% (6% – 4%) of interest cost on funds which are actually not used at all this year for any activity related to construction of asset .
What could be rationale for this?Hi,
No we will incur interest at 6% on what we’ve borrowed (100m) and then receive interest at 4% on what we’ve invested (50m).
Thanks
Thanks for your revert.
But my question was, isn’t it wrong to allow capitalisation of borrowing cost at “net” of interest costs of unutilised funds.
I mean we should not allow interest income to be adjusted against interest expense for those funds which are temporarily investment outside business.
Just like when there is halt in construction activities.It should directly hit SOPL as interest income and expenses separately for those unutilised (50m).
What do you think?
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