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Example 1: Borrowing costs net of investment income
Company A obtained a loan of CU100,000 on a fixed rate of 10% to construct a factory. On commencement of the build, the full CU100,000 was drawn down and the unapplied funds were invested at a rate of 5%. The total interest charge on the loan was CU10,000 for the year. Details of the interest earned was:
|
CU80,000 for 6 months |
CU2,000 (CU80,000*5%/12*6) |
|
CU10,000 for 6 months |
CU250 (CU10,000*5%/12*6) |
The total amount to be capitalised is CU7,750 (CU10,000-CU2,250)
Example 2: Calculation of capitalisation rate
Company A engages a construction company to construct a factory which will cost CU100,000. Company A has taken out borrowings some of which would have been avoided had the construction not occurred. Details of the loans used for general purposes during the period is:
|
CU10,000 for full year at an interest rate of 5%= |
CU500 |
|
CU60,000 for full year at an interest rate of 10%= |
CU6,000 |
|
CU15,000 for 6 months of the year at 2.5%= |
CU187.50 |
Expenditure incurred on construction in the year was:
|
1 April |
CU20,000 |
|
1 September |
CU50,000 |
The capitalisation rate would be:
CU6,000+CU500+CU187.50 = 8.63%
CU10,000+CU60,000+(CU15,000/12mths*6mths)
The interest to be capitalised would be:
|
(CU20,000 * 8.63%) / 12mths * 9 mths |
CU1,294.50 |
|
(CU50,000 * 8.63%) / 12mths * 3 mths |
CU1,078.75 |
|
Total |
CU2,373.25 |
Example 3: Change of policy on transition
Under old GAAP Company A adopted a policy of capitalising qualifying borrowing costs. On transition to FRS 102, the company elects to expense all borrowing costs going forward. The total borrowing costs included in the carrying amount on the date of transition was CU100,000 (i.e. Net book value after accumulated depreciation of CU50,000). The asset in which these borrowings were capitalised is depreciated over 10 years. Assume the date of transition is 1 January 2014 and the asset did not qualify for capital allowances. The transition adjustments required are:
Adjustments required to 1 January 2014 TB
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
100,000 |
|
|
Cr Fixed Assets |
|
100,000 |
Being journal to derecognise the borrowing costs previously capitalised.
Adjustments required in the year ended 31 December 2014 financial statements assuming the opening balance sheet journals are reposted
|
|
CU |
CU |
|
Dr Fixed Assets |
15,000 |
|
|
Cr Depreciation in P&L (cost of CU150,000 / 10 years) |
|
15,000 |
Being journal to reverse the depreciation posted in 2014 on the borrowing costs
Adjustments required in the year ended 31 December 2015 financial statements assuming the opening balance sheet journals are reposted
|
|
CU |
CU |
|
Dr Fixed Assets |
15,000 |
|
|
Cr Depreciation in P&L (cost of CU150,000 / 10 years) |
|
15,000 |
Being journal to reverse the depreciation posted in 2015 on the borrowing costs
Example 4: Extract from an accounting policy note and critical accounting judgements and estimates in the financial statements
(a) Property plant and equipment
Cost
Property, plant and equipment are recorded at historical cost or deemed cost, less accumulated depreciation and impairment losses. Cost includes prime cost, overheads and interest incurred in financing the construction of tangible fixed assets. Capitalisation of interest ceases when the asset is brought into use. The company capitalises general borrowing costs which are directly attributable to the acquisition of the qualifying asset. The capitalisation rate used is a weighted average of the rates applicable to the company’s general borrowings that are outstanding during the period. Borrowing costs are capitalised where the asset take a substantial period of time which is usually greater than one year to get ready for its intended use.
(b) Interest paid
Interest costs comprise interest payable on borrowings and finance lease costs. The interest expense component of finance lease payments is recognised in the Profit and Loss account using the effective interest rate method.
(c) Borrowings
Borrowings are recognised initially at the transaction price (present value of cash payable to the bank, including transaction costs). Borrowings are subsequently stated at amortised cost. Interest expense is recognised on the basis of the effective interest method and is included in finance costs.
Borrowings are classified as current liabilities unless the Company has a right to defer settlement of the liability for at least 12 months after the reporting date.
(d) Trade and other payables
Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade payables, other payable and amounts due to group companies are recognised initially at the transaction price net of transaction costs and subsequently measured at amortised cost using the effective interest method.
Critical Accounting Judgements and Estimates
The preparation of these financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses.
Judgements and estimates are continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
(a) Borrowing costs – capitalisation rate
The company has adopted a policy of capitalising qualifying borrowing costs. The company capitalises general borrowing costs which are directly attributable to the acquisition of the qualifying asset. The capitalisation rate used is a weighted average of the rates applicable to the company’s general borrowings that are outstanding during the period. Given that weighted averages are utilised this results in a level of estimation. In determining the capitalisation rate the company excludes any specific borrowings related to obtaining non-qualifying assets.
Example 5: Extract from the notes to the financial statements – note fixed asset note is used here however the same narrative would be required for any other type of qualifying asset.
|
Tangible fixed assets |
Land and buildings |
Plant and Machinery |
Total |
|
|
CU |
CU |
CU |
|
Cost |
|
|
|
|
At 1 January 2015 |
19,792 |
72,731 |
92,523 |
|
Additions |
|
|
|
|
Disposals |
|
|
|
|
At 31 December 2015 |
|
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
|
|
At 1 January 2015 |
|
|
|
|
Charge for year |
|
|
|
|
Disposals |
|
|
|
|
At 31 December 2015 |
|
|
|
|
|
|
|
|
|
Net book value amount |
|
|
|
|
|
|
|
|
|
At 31 December 2015 |
|
|
|
|
At 31 December 2014 |
|
|
|
The company capitalised CUXXX (2014: CUXXXX) in borrowing costs during the year. The capitalisation rate used was X% (2014: X%).
|
Note: Interest payable and similar charges |
2015 |
2015 |
|
Interest payable on bank loans and overdrafts |
10000 |
10000 |
|
Preference share dividend |
2000 |
2000 |
|
Finance lease interest |
1000 |
1000 |
|
Interest on inter-group loan |
10000 |
10000 |
|
Total interest payable on financial assets not measured at fair value through profit and loss i.e. on an amortised cost basis |
23000 |
23000 |
|
|
|
|
|
Loss on derivative financial instruments |
1000 |
1000 |
|
Total interest payable and similar charges |
24000 |
24000 |
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