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IAS 23 – Borrowing cost capitalization

22 March 2009 4,757 views 3 Comments

Dear Experts,

I would like to request for your opinion on IAS 23

Funds Borrowed $100 for construction projects
Int @5% p.a.

Out of above $100, kept in bank fixed deposits $80 and balance utilized for construction projects. Later on further $40 paid from FD for Construction projects.

Interest on $100 accounted as interest expense

Interest exepnses DEBIT

Lender A/C CREDIT

Interest on FD accounted as interest income

BANK A/C DEBIT
Interest Income A/C CREDIT

Interest on amount utilized on construction projcets from the date of borrowing till completion of projects accounted as under:

CIP A/C DEBIT
Interest expense A/C CREDIT

HEMANT

IAS 23 States, Borrowing cost should be capitalized net of investment income earned on idle funds.

Please give calculation of interest to be capitalized.

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3 Comments »

  • asadlarik3 said:

    assuming work on qualifying asset was started from date of borrowings
    expenditure was also being incurred

    time period assumed 1 year

    Interest expense on $100 = $5
    less: Investment Income on $80 = $? (interest rate not given)*

    equals Interest to be capitalized =x x x

    # 22 March 2009 at 12:05 pm
  • admin (author) said:

    Message from Sanchit

    Hi ,

    The net entry for interest capitalization in the given case would be:

    Interest income debit
    CIP debit

    Interest expense a/c credit

    Regards

    # 23 March 2009 at 9:01 am
  • admin (author) said:

    Message from Tejas

    Dear Hemant

    As per IAS 23
    When funds borrowed specifically to finance a qualifying asset are not utilized immediately,

    and instead the idle funds are invested temporarily until required, the borrowing costs that are capitalized should be reduced by any investment income resulting from the investment of idle funds.

    So in your case now entry would be of total interest received for that period.

    Particulars Amount.

    Interest Income Debit (total interest received for that period)
    To CIP A/c Credit (total interest received for that period)

    Warm Regards

    # 23 March 2009 at 9:03 am

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