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Hello Opentuition.
If a company purchase an asset using borrowed funds, including loan insurance and application fee with annual payments for a given period say 5 years and interest rate of say 10%. The machinery requires a standard period of 4 months do have it setup and ready for use.My question is how do we treat the loan insurance and application costs? Are they borrowing Costs to be capitalized or not? Do we include these costs on the initial loan liability or we record net proceeds. Is the interest to capitalized only for the 4months period or 5 years period of the loan period. How do we come up with the total cost of the loan in this case? Thanks
Borrowing costs are any directly attributable to the loan – the examiner will use the phrase directly attributable.
I haven’t come across loan insurance in the standard – so I’m guessing this is not an exam question – in which case don’t worry about it.
Capitalisation would cease after set up when asset is ready for use. (PARA 17-18)
ANY ANSWERS GIVEN ARE FOR EXAM PURPOSES ONLY. NO LIABILITY IS ASSUMED.
As I was reading through the standard, I came to know that ancillary costs like application fees and the loan insurance costs are also borrowing Costs. Should such costs be added to the loan amount when calculating borrowing Costs to be capitalized or instead they should be expensed. But remember the costs to be capitalized are those are directly attributable to the constructing of the qualifying costs ( that are are avoidable had there been no construction of the qualifying asset. Some clarification here.
Thanks Stephen
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