I had encountered a situation in my AAA paper regarding an accounting treatment.
A company has availed a loan of $24m to build a manufacturing facility (the qualifying asset). Out of this $8m was used to buy construction equipment that will be used to build the facility.
The construction equipment can be used in the future to build more facilities. But the company does not intend to build further facilities.
The company has capitalised the entire interest expense of the $24m loan (including the interest expense of $8m).
Is this correct?
Ask the Tutor ACCA AAA
IAS 23 Borrowing Costs
1y ago#1Welcome to my AAA forum! Short answer - NO
IAS 16: The equipment is an item of PPE that is bought "outright" - borrowing costs could only be part of its initial cost if it were "self-constructed". So the $8m is not a qualifying asset.
IAS 23: Remember that to be capitalising interest, the entity needs to be:
(1) incurring expenditure for the asset, AND
(2) incurring borrowing costs, AND
(3) undertaking activities that are necessary to prepare the asset for its INTENDED USE or sale.
The construction equipment is ALREADY ready for its intended use.
The $8m spent on the construction equipment was for the purpose of building the facility.
Someone can argue that since the management does not have the intention to build any more facilities, the equipment can be considered a part of the facility. The facility cannot be built without the equipment.
1y ago#3But it's not self-contructed, its not a qualifying asset and the interest capitalisation criteria aren't met .... Whatever the reason for the purchase, it is an item of PPE in its own right and can be sold independently ...
Thanks for the clarification ?
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