PPE CAPITALIZATION AND CONPUTING

Hi Sir,

Just a small ques from Dec 2013 Paper (Dipifr).

Why are we capitalising Borrowing costs from 1 Oct 2012 till 31st May 2013 (8 months)?
If the construction is commencing from 1st Nov 2012, should not we take it for 7 months (ie. 1st Nov 2012 to 31st May 2012)?

Here is the ques:
Omega is a listed company which prepares financial statements in accordance with International Financial Reporting Standards (IFRS).
(a) On 1 October 2012, Omega purchased some land for $10 million (including legal costs of $1 million) in order to construct a new factory. Construction work commenced on 1 November 2012. Omega incurred the following costs in connection with its construction: – Preparation and levelling of the land – $300,000.
– Purchase of materials for the construction – $6·08 million in total.
– Employment costs of the construction workers – $200,000 per month.
– Overhead costs incurred directly on the construction of the factory – $100,000 per month.
– Ongoing overhead costs allocated to the construction project using Omega’s normal overhead allocation model – $50,000 per month.
– Income received during the temporary use of the factory premises as a car park during the construction period – $50,000.
– Costs of relocating employees to work at the new factory – $300,000.
– Costs of the opening ceremony on 31 July 2013 – $150,000.

The factory was completed on 31 May 2013 and production began on 1 August 2013. The overall useful life of the factory building was estimated at 40 years from the date of completion. However, it is estimated that the roof will need to be replaced 20 years after the date of completion and that the cost of replacing the roof at current prices would be 30% of the total cost of the building. At the end of the 40-year period Omega has a legally enforceable obligation to demolish the factory and restore the site to its original condition. The directors estimate that the cost of demolition in 40 years’ time (based on prices prevailing at that time) will be $20 million. An annual risk adjusted discount rate which is appropriate to this project is 8%. The present value of $1 payable in 40 years’ time at an annual discount rate of 8% is 4·6 cents. The construction of the factory was partly financed by a loan of $17·5 million taken out on 1 October 2012. The loan was at an annual rate of interest of 6%. During the period 1 October 2012 to 28 February 2013 (when the loan proceeds had been fully utilised to finance the construction), Omega received investment income of $100,000 on the temporary investment of the proceeds.

We have to compute the carrying amount of Factory in SOFP of Omega at 30 Sept 2013. (14 marks)

Thanks,
Swati

Yes, thanks.
So capitalisation starts from 01 Oct 2012 (when we purchased the land for construction purposes)

But, there is one more thing which was bothering me. Do we also have to split this net borrowing costs into depreciable and non-depreciable elements?

Regards,
Swati

Alright Sir, thanks for the clarification.

But when i saw the Solution in the BPP Revision Kit, they have not split the borr cost. So, I thought they might have done the error there..

Also, in another similar question (past papers), I noticed that they have done the split of borr costs..

Therefore, I got confused when to split and when not to split the borr costs..??

Yes..

There is no explanation with respect to it. Also, in this particular question they have not even split the borr cost.

Regards.