Question Tag: IAS 23

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  • 20 Marks

FR – May 2017 – L2 – SB – Q3 – Partnership Account

Advise Bode Limited on accounting treatment for impairment, borrowing costs, and reclassification to investment property in accordance with IAS 36, IAS 23, and IAS 40.

You are a financial reporting consultant. The management of Bode Limited, a well-diversified company with branches in all states of the federation, has some transactions for which it requires advice. Bode Limited has a financial accountant who is not yet a qualified accountant. These transactions are as follows:

  1. Impairment of Assets: Bode Limited recognized a cash-generating unit during the year ended December 31, 2015, comprising:
    • Property, plant, and equipment: N4,050 million
    • Goodwill: N450 million
    • Other assets: N2,700 million
      Total carrying amount: N7,200 million

    The management estimated the recoverable amount of the cash-generating unit at N6,300 million as of December 31, 2015. The financial accountant understands some provisions of IAS 36 on asset impairment but is uncertain about how to allocate impairment across these assets within the unit.

  2. Borrowing Costs: On January 1, 2015, Bode Limited borrowed N300 million to fund the construction of two assets, expected to take a year to complete. The funds were drawn on January 1 and were allocated as follows, with the remaining funds invested temporarily:
    • Asset X: N50 million on January 1, N50 million on July 1
    • Asset Y: N100 million on January 1, N100 million on July 1
      The loan interest rate is 9% per annum, and surplus funds can be invested at a rate of 7% per annum.
  3. Investment Property Reclassification: The company’s head office in Abuja, previously owner-occupied, was vacated and let out on June 30, 2015, due to a cost-saving decision to move operations to a nearby branch office. The property, initially recognized under IAS 16 at a cost of N37.5 million with a 50-year useful life, was revalued to N52.5 million by an independent valuer as of December 31, 2015. Bode Limited’s accounting policy for investment properties is to use the fair value model.

Required:
Write a memo advising Bode Limited on the accounting treatments for each transaction in their financial statements. Provide relevant calculations where necessary.

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  • 20 Marks

FR – Nov 2014 – L2 – Q5 – Property, Plant, and Equipment (IAS 16)

Discuss the conditions for capitalizing borrowing costs and calculate the total interest to be capitalized for VITAMAX Plc.

In accordance with IAS 23, Borrowing Costs that are directly attributable to the acquisition, construction, or production of a qualifying asset form part of the cost of that asset, while other borrowing costs are recognized as an expense.

Required:

a. State the conditions wherein capitalisation of borrowing costs:

i. Commences

ii. Should not be suspended

iii. Should cease (6 Marks)

b. VITAMAX Plc. is constructing a factory that will take about 18 months to complete. The company commenced construction on 2 January 2013. The following payments were made during the year:

Date Amount (N’000)
31 January 40,000
31 March 90,000
30 June 20,000
31 October 40,000
30 November 50,000

The first payment on 31 January was funded from the company’s pool of debts. However, the company succeeded in raising Medium-Term Loan Notes for an amount of N160,000,000 on 31 March 2013 at a simple interest rate of 9 percent per year, calculated and payable monthly in arrears. These funds were specifically used for the construction. Excess funds were temporarily invested at 6 percent monthly in arrears and payable in cash. The pool of debts were again used for a N40,000,000 payment on 30 November 2013 which could not be funded from the Medium-Term Loan Notes.

The construction project was temporarily halted for three weeks in May 2013 when substantial technical and administrative work was carried out.

The following amounts of debts were outstanding at the reporting date of 31 December 2013:

Description Amount (N’000)
Medium-Term Loan Notes 160,000
Bank Overdraft 240,000
10% 7-Year Notes 1,800,000

For the bank overdraft, the weighted average amount outstanding during the year was N150,000,000 and the total interest charged by the bank amounted to N6,760,000 for the year.

Required:

Calculate the total amount of interest to be capitalized. (9 Marks)

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  • 7 Marks

FR – May 2019 – L2 – Q6b – Accounting for Government Grants (IAS 20)

Calculation of the amount to be capitalized for qualifying capital work-in-progress under IAS 23.

Jacko Company Limited has three major sources of borrowings stated below as at 1 January 2018.

Types Average Loan in the Year (N’000) Interest Expense Incurred in the Year (N’000) Income Earned from Temporary Investment of the Amount Borrowed (N’000)
7 years loan notes 128,000 20,000 12,480
10 years loan notes 160,000 14,400 —
Bank overdraft 80,000 14,400 —

The 7 years loan notes have been specifically raised to fund the building of a qualifying asset.

During the year to 31 December 2018, Jacko Company Limited spent N144 million on the building and the fair value of the building is N147 million as at 31 December 2018.

The company also incurred the following expenditure on a qualifying project funded from the other borrowings for the year ended 31 December 2018.

Date Incurred Amount (N’000)
31 March 2018 16,000
31 July 2018 19,200
31 October 2018 12,600

Required:
Calculate the amount to be capitalized in respect of the qualifying capital work-in-progress for the year ended 31 December 2018.

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  • 8 Marks

FR – May 2019 – L2 – Q6a – Accounting for Government Grants (IAS 20)

Discussion of the conditions for capitalizing borrowing costs under IAS 23 and guidelines on commencement, suspension, and cessation of capitalization.

A company might incur significant interest cost if it has to raise a loan to finance the purchase or construction of an asset. IAS 23 on borrowing costs defines borrowing costs and sets out guidance on the circumstances under which such interest is to be capitalized as part of the cost of qualifying assets.

Required:
Discuss the conditions that must be met in order to capitalize borrowing costs under IAS 23, setting out when capitalization of the borrowing costs should commence, be suspended, or cease.

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  • 5 Marks

FR – Nov 2023 – L2 – Q2a – Financial Reporting Standards and Their Applications

Calculate the maximum amount of borrowing costs that could potentially be capitalised in accordance with IAS 23 for Banda Ltd.

Banda Ltd (Banda) incurred the following borrowing costs during the financial year-end 31 December 2022:

GH¢
Overdraft interest
Foreign currency loan interest (correctly translated into GH¢)
Foreign currency exchange differences on equity
In addition, a three-year fixed rate GH¢2.4 million loan was borrowed on 1 January 2022 at 6.5%. A loan set-up fee (transaction costs) of GH¢24,000 was incurred. This increased the effective interest rate on the loan to 6.88%.

Required:
In accordance with IAS 23: Borrowing Costs, calculate the maximum amount that could potentially be capitalised as borrowing costs for the year-end 31 December 2022 (assuming an asset was being financed using all available finance).

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  • 10 Marks

CR – May 2016 – L3 – Q1b – Non-current assets: sundry standards (IAS 16, IAS 23, IAS 20 and IAS 40)

Calculate borrowing costs to be capitalized for a warehouse construction project, considering specific loans and general borrowings.

Nanniama Ltd is constructing a warehouse that will take about 18 months to complete. It began construction on 1st January 2014. The following payments were made during 2014:

GH¢’000 31st January 200 31st March 450 30th June 100 31st October 200 30th November 250

The first payment on 31st January was funded from the entity’s pool of debt. However, the entity succeeded in raising a medium-term loan for an amount of GH¢800,000 on 31st March, 2014, with simple interest of 9 percent per annum, calculated and payable monthly in arrears. These funds were specifically used for this construction. Excess funds were temporarily invested at 6 percent per annum monthly in arrears and payable in cash. The pool of debt was again used to an amount of GH¢200,000 for the payment on 30th November, which could not be funded from the medium-term loan. The construction project was temporarily halted for 3 weeks in May when substantial technical and administrative work was carried out.

Nanniama Ltd adopted the accounting policy of capitalizing borrowing costs. The following amounts of debt were outstanding at the balance sheet date, 31st December 2014:

GH¢’000 Medium-term loan (see description above) 800 Bank overdraft 1,200 (The weighted average amount outstanding during the year was GH¢750,000 and total interest charged by the bank amounted to GH¢33,800 for the year) A 10%, 7-year note dated 31st October 2018 with simple interest payable annually at 31st December 9,000

Required: Calculate the borrowing costs to be capitalized (10 marks)

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  • 20 Marks

FR – May 2017 – L2 – SB – Q3 – Partnership Account

Advise Bode Limited on accounting treatment for impairment, borrowing costs, and reclassification to investment property in accordance with IAS 36, IAS 23, and IAS 40.

You are a financial reporting consultant. The management of Bode Limited, a well-diversified company with branches in all states of the federation, has some transactions for which it requires advice. Bode Limited has a financial accountant who is not yet a qualified accountant. These transactions are as follows:

  1. Impairment of Assets: Bode Limited recognized a cash-generating unit during the year ended December 31, 2015, comprising:
    • Property, plant, and equipment: N4,050 million
    • Goodwill: N450 million
    • Other assets: N2,700 million
      Total carrying amount: N7,200 million

    The management estimated the recoverable amount of the cash-generating unit at N6,300 million as of December 31, 2015. The financial accountant understands some provisions of IAS 36 on asset impairment but is uncertain about how to allocate impairment across these assets within the unit.

  2. Borrowing Costs: On January 1, 2015, Bode Limited borrowed N300 million to fund the construction of two assets, expected to take a year to complete. The funds were drawn on January 1 and were allocated as follows, with the remaining funds invested temporarily:
    • Asset X: N50 million on January 1, N50 million on July 1
    • Asset Y: N100 million on January 1, N100 million on July 1
      The loan interest rate is 9% per annum, and surplus funds can be invested at a rate of 7% per annum.
  3. Investment Property Reclassification: The company’s head office in Abuja, previously owner-occupied, was vacated and let out on June 30, 2015, due to a cost-saving decision to move operations to a nearby branch office. The property, initially recognized under IAS 16 at a cost of N37.5 million with a 50-year useful life, was revalued to N52.5 million by an independent valuer as of December 31, 2015. Bode Limited’s accounting policy for investment properties is to use the fair value model.

Required:
Write a memo advising Bode Limited on the accounting treatments for each transaction in their financial statements. Provide relevant calculations where necessary.

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  • 20 Marks

FR – Nov 2014 – L2 – Q5 – Property, Plant, and Equipment (IAS 16)

Discuss the conditions for capitalizing borrowing costs and calculate the total interest to be capitalized for VITAMAX Plc.

In accordance with IAS 23, Borrowing Costs that are directly attributable to the acquisition, construction, or production of a qualifying asset form part of the cost of that asset, while other borrowing costs are recognized as an expense.

Required:

a. State the conditions wherein capitalisation of borrowing costs:

i. Commences

ii. Should not be suspended

iii. Should cease (6 Marks)

b. VITAMAX Plc. is constructing a factory that will take about 18 months to complete. The company commenced construction on 2 January 2013. The following payments were made during the year:

Date Amount (N’000)
31 January 40,000
31 March 90,000
30 June 20,000
31 October 40,000
30 November 50,000

The first payment on 31 January was funded from the company’s pool of debts. However, the company succeeded in raising Medium-Term Loan Notes for an amount of N160,000,000 on 31 March 2013 at a simple interest rate of 9 percent per year, calculated and payable monthly in arrears. These funds were specifically used for the construction. Excess funds were temporarily invested at 6 percent monthly in arrears and payable in cash. The pool of debts were again used for a N40,000,000 payment on 30 November 2013 which could not be funded from the Medium-Term Loan Notes.

The construction project was temporarily halted for three weeks in May 2013 when substantial technical and administrative work was carried out.

The following amounts of debts were outstanding at the reporting date of 31 December 2013:

Description Amount (N’000)
Medium-Term Loan Notes 160,000
Bank Overdraft 240,000
10% 7-Year Notes 1,800,000

For the bank overdraft, the weighted average amount outstanding during the year was N150,000,000 and the total interest charged by the bank amounted to N6,760,000 for the year.

Required:

Calculate the total amount of interest to be capitalized. (9 Marks)

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  • 7 Marks

FR – May 2019 – L2 – Q6b – Accounting for Government Grants (IAS 20)

Calculation of the amount to be capitalized for qualifying capital work-in-progress under IAS 23.

Jacko Company Limited has three major sources of borrowings stated below as at 1 January 2018.

Types Average Loan in the Year (N’000) Interest Expense Incurred in the Year (N’000) Income Earned from Temporary Investment of the Amount Borrowed (N’000)
7 years loan notes 128,000 20,000 12,480
10 years loan notes 160,000 14,400 —
Bank overdraft 80,000 14,400 —

The 7 years loan notes have been specifically raised to fund the building of a qualifying asset.

During the year to 31 December 2018, Jacko Company Limited spent N144 million on the building and the fair value of the building is N147 million as at 31 December 2018.

The company also incurred the following expenditure on a qualifying project funded from the other borrowings for the year ended 31 December 2018.

Date Incurred Amount (N’000)
31 March 2018 16,000
31 July 2018 19,200
31 October 2018 12,600

Required:
Calculate the amount to be capitalized in respect of the qualifying capital work-in-progress for the year ended 31 December 2018.

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  • 8 Marks

FR – May 2019 – L2 – Q6a – Accounting for Government Grants (IAS 20)

Discussion of the conditions for capitalizing borrowing costs under IAS 23 and guidelines on commencement, suspension, and cessation of capitalization.

A company might incur significant interest cost if it has to raise a loan to finance the purchase or construction of an asset. IAS 23 on borrowing costs defines borrowing costs and sets out guidance on the circumstances under which such interest is to be capitalized as part of the cost of qualifying assets.

Required:
Discuss the conditions that must be met in order to capitalize borrowing costs under IAS 23, setting out when capitalization of the borrowing costs should commence, be suspended, or cease.

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  • 5 Marks

FR – Nov 2023 – L2 – Q2a – Financial Reporting Standards and Their Applications

Calculate the maximum amount of borrowing costs that could potentially be capitalised in accordance with IAS 23 for Banda Ltd.

Banda Ltd (Banda) incurred the following borrowing costs during the financial year-end 31 December 2022:

GH¢
Overdraft interest
Foreign currency loan interest (correctly translated into GH¢)
Foreign currency exchange differences on equity
In addition, a three-year fixed rate GH¢2.4 million loan was borrowed on 1 January 2022 at 6.5%. A loan set-up fee (transaction costs) of GH¢24,000 was incurred. This increased the effective interest rate on the loan to 6.88%.

Required:
In accordance with IAS 23: Borrowing Costs, calculate the maximum amount that could potentially be capitalised as borrowing costs for the year-end 31 December 2022 (assuming an asset was being financed using all available finance).

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  • 10 Marks

CR – May 2016 – L3 – Q1b – Non-current assets: sundry standards (IAS 16, IAS 23, IAS 20 and IAS 40)

Calculate borrowing costs to be capitalized for a warehouse construction project, considering specific loans and general borrowings.

Nanniama Ltd is constructing a warehouse that will take about 18 months to complete. It began construction on 1st January 2014. The following payments were made during 2014:

GH¢’000 31st January 200 31st March 450 30th June 100 31st October 200 30th November 250

The first payment on 31st January was funded from the entity’s pool of debt. However, the entity succeeded in raising a medium-term loan for an amount of GH¢800,000 on 31st March, 2014, with simple interest of 9 percent per annum, calculated and payable monthly in arrears. These funds were specifically used for this construction. Excess funds were temporarily invested at 6 percent per annum monthly in arrears and payable in cash. The pool of debt was again used to an amount of GH¢200,000 for the payment on 30th November, which could not be funded from the medium-term loan. The construction project was temporarily halted for 3 weeks in May when substantial technical and administrative work was carried out.

Nanniama Ltd adopted the accounting policy of capitalizing borrowing costs. The following amounts of debt were outstanding at the balance sheet date, 31st December 2014:

GH¢’000 Medium-term loan (see description above) 800 Bank overdraft 1,200 (The weighted average amount outstanding during the year was GH¢750,000 and total interest charged by the bank amounted to GH¢33,800 for the year) A 10%, 7-year note dated 31st October 2018 with simple interest payable annually at 31st December 9,000

Required: Calculate the borrowing costs to be capitalized (10 marks)

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