TOPIC 3 MFRS 123 BORROWING COST
INTRODUCTION MFRS 123 (PARA 5)- borrowing cost are the interest and other costs that an entity incurs in connection with the borrowing funds. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use for sale. Any may be the qualifying assets which are: • A. inventories that take a considerable period of time • B. manufacturing plants • C. power generations facilities • D. intangible assets • E. investment property MFRS 123 –BORROWING COST may include: • A. interest expenses calculated using effective interest method as describe in MFRS 9 Financial Instrument • B. finance charges in respect of finance leases recognized in accordance in MFRS 16 • C. exchange differences arising from foreign currency borrowing to extent that they are regarded as an adjustment to interest costs.
CAPITALISED BORROWING COST What is capitalised? The borrowing cost will be included in the cost of assets (qualifying assets). Qualifying assets refers to the construction costs of buildings which include material, labor, and overheads. Loan Construction of buildings Interest on loan Cost of asset
2 TYPES OF BORROWING SPECIFIC BORROWINGS 100% of qualifying assets • Example : make loan to buy a specific assets MFRS 123: the entity shall determine the amount of borrowing cost eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of these borrowings. GENERAL BORROWING for general purpose. MFRS 123: the entity borrows funds generally and uses them for the purpose of obtaining a qualifying assets, the entity shall determine the amount of borrowing cost eligible for capitalization by applying a capitalisation rate to the expenditures on that assets.
SPECIFIC BORROWINGS Cost to be capitalized The actual interest cost incurred period xxx** (-) interest income from temporary Investment (xxx) Borrowing cost eligible for Capitalised xxxx GENERAL BORROWING Qualifying asset is funded from a pool of general borrowing. Cost to be capitalized: **Capitalised rate x amount spend from general borrowing. (from the date of general borrowing are used) **Actual interest: Amount of borrowing x interest rate **Capitalised rate = weighted average of interest from multiple borrowing (non-specific borrowings for the period)
COMMENCEMENT OF CAPITALISATION Commencement of borrowing cost starts when: 1. Cost for the assets are occurring 2. Borrowing costs are being incurred 3. Activities needed to prepare asset for its use/sale are in progress CEASSATION OF CAPITALIZATION (WHEN TO STOP CAPITALIZED). • when substantially all the activities necessary to prepare the asset for its intended use or sale are complete. If all that is left are minor modifications, such as decoration or routine administrative work, then the asset is considered to be substantially complete. Suspended capitalised: • during extended periods in which active development interrupted . Non suspended capitalized: Normal temporary delays such as technical or admin works
EXAMPLE SPECIFIC BORROWINGS Redan Perdana is an established property development company in the Kuantan,Pahang. On 1 January 2021, the company entered into a contract to construct an office buildings. The estimated cost of construction is RM500,000. To help finance the project, a 10% interest bearing term loan of RM 500,000 was arranged. At the same time, the company has invested an amount of RM 300,000 of the borrowing in fixed deposit with interest at 6% per annum. You are required to: A) calculate the interest charged for borrowing loan B) calculate the interest income for fixed deposit C) identify the borrowing cost that will be capitalized D) prepare the journal entries for the transactions.
ANSWER: A) Calculate the interest charged for borrowing loan: • Interest charged= 500,000 x 10% = 50,000 B) calculate the interest income for fixed deposit • Interest income = 300,000 x 6% = 18,000 C) identify the borrowing cost that will be capitalized Borrowing Cost = interest charged – interest income = 50,000 - 18,000 = 32,000
ACCOUNTING TREATMENT: JOURNAL ENTRIES With INCOME: DT Office Buildings RM 32,000 Interest expenses 18,000 (SOCI) CT Bank RM 50,000 Without INCOME : DT Residental House RM 50,000 (capitalised) CT Bank RM 50,000
DISCLOSURE OF BORROWING COST IN FINANCIAL STATEMENT EXTRACTED STATEMENT OF PROFIT OR LOSS FOR YEAR ENDED 31 DECEMBER 2021 (-) Expenses : Interest expenses 18,000 EXTRACTED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2021 NON CURRENT ASSETS Residental House 100,000 (+) Capitalised Interest 32,000 132,000
EXERCISE
EXERCISE 3.1 ABC Sdn Bhd is an established property development company in the Klang Valley. On 1 November 2020, the company entered into a contract to construct residential house in Kuantan, Pahang. To help finance the project, a 5% interest bearing term loan of RM 500,000 was arranged. RM 400,000 of the borrowing was invested in fixed deposit at 2.5% per annum. (financial year 31 Dec) • A) calculate the interest charged for borrowing loan • B) calculate the interest income for fixed deposit • C) identify the borrowing cost that will be capitalized • D) prepare the accounting treatment for capitalized interest and interest expenses. • E) disclose the borrowing cost in Financial Statement.
EXERCISE 3.2: On 1 July 2020, the company entered into a contract to construct warehouse buildings in Kuantan, Pahang. To help finance the project, a 6% interest bearing term loan of RM 300,000 was arranged. On 1 August 2020, RM 100,000 of the borrowing was invested in fixed deposit at 2% per annum .(financial year end 31/12) • A) calculate the interest charged for borrowing loan • B) calculate the interest income for fixed deposit • C) identify the borrowing cost that will be capitalized
EXERCISE 3.3 On 1 July 2020, the company entered into a contract to construct warehouse buildings in Kuantan, Pahang. To help finance the project, a 6% interest bearing term loan of RM 300,000 was arranged. On 1 August 2020, construction has started. On 1 October 2020, RM 100,000 of the borrowing was invested in fixed deposit at 2% per annum .(financial year end 31/12) • A) calculate the interest charged for borrowing loan • B) calculate the interest income for fixed deposit • C) calculate the interest expenses • D) identify the borrowing cost that will be capitalized
EXERCISE 3.4 On 1 January 2020, the company entered into a contract to construct warehouse buildings in Kuantan, Pahang. To help finance the project, a 6% interest bearing term loan of RM 300,000 was arranged. On 1 March 2020, construction has started. On 1 October 2020, 50% of the borrowing was invested in fixed deposit at 2% per annum. During November 2020, the construction was suspended due to machine breakdown.(financial year end 31/12) • A) calculate the interest charged for borrowing loan • B) calculate the interest income for fixed deposit= • C) calculate the interest expenses • D) identify the borrowing cost that will be capitalized
EXAMPLE 2 (GENERAL BORROWINGS) • On 1 Nov 2020, Joyah borrow a loan A at RM 500,000 at 6% and RM 200,000 of Loan B at 7% . Some of the money used to purchased material for construction of warehouse , RM 40,000. calculate: • A) calculate the interest charged for borrowing loan A and B • B) identify the borrowing cost that will be capitalised • C) calculate the interest that can be charged as expenses
ANSWER INTEREST CHARGED FOR LOAN A AND B Borrowing Item Principle Interest rate Total interest ((2/12) Loan A 500,000 6% 5,000 Loan B 200,000 7% 2,333 700,000 7,333 Item Principle Interest rate (a) Weighted average (b) a * b Loan A 500,000 6% 5/7 4.29% Loan B 200,000 7% 2/7 2 % Capitalised Rate 6.29%
ANSWER • A. Capitalised Interest (loan to purchase of material for warehouse) • = capitalized rate x amount spending x time period incurrend. • = RM 40,000 x 6.29% x 2/12 = RM 419.23 (capitalised-NCA) • B. Interest that charged as expenses: (SOP/L) • = RM 7,333 – RM 419.33 = RM 6914 • DT Warehouse (Asset) RM 419.33 • Interest expenses RM 6,914 • Ct Bank RM 7,333
EXERCISE 3.5 On 1 Oct 2020, Tan BHD borrow a loan A at RM 1,500,000 at 10% and RM 1,000,000 of Loan B at 6% . Tan BHD began a project to construct a condominium amount of RM 2,000,000 on 1 Oct 2020. Calculate: • A) Calculate the interest charged for borrowing loan A and B • B) identify the borrowing cost that will be capitalised • C) calculate the interest that can be charged as expenses •
EXERCISE 3.6 On 1 July 2020, Tan BHD borrow a loan A at RM 3,500,000 at 9% and RM 2,000,000 of Loan B at 6% on 1 September 2020. Tan BHD began a project to construct a condominium amount of RM 2,000,000 on 1 Oct 2020. Calculate: • A) calculate the interest charged for borrowing loan A and B • B) identify the borrowing cost that will be capitalised • C) calculate the interest that can be charged as expenses •
EXERCISE 3.7 BABA BHD borrowing was: • 1. loan A at RM 500,000 at 10% on 1 July 2020 and • 2. loan B at RM 600,000 at 6% on 1 November 2020 . • 3. loan C at RM 400,000 at 9% on 1 October 2020. BABA BHD began a project to construct a condominium amount of RM 1,000,000 on 1 July 2020. Calculate: A) calculate the interest charged for borrowing loan A, B and C B) identify the borrowing cost that will be capitalised C) calculate the interest that can be charged as expenses
EXERCISE 3.8 BABA BHD borrow a loan A at RM 500,000 at 10% on 1 July 2020 and RM 600,000 of Loan B at 6% on 1 November 2020. BABA BHD began a project to construct a condominium amount of RM 300,000 on 1 September 2020 and RM 200,000 on 1 December 2020. Calculate: • A) calculate the interest charged for borrowing loan A and B • B) identify the borrowing cost that will be capitalised • C) calculate the interest that can be charged as expenses
EXERCISE 3.9 • LALA BHD borrow a loan A at RM 180,000 at 8% on 1 January 2020 and RM 50,000 of Loan B at 6% on 1 July 2020. • LALA BHD began a project to construct a machinery. The expenditure were as folloes: • i. RM 60,000 on February 2020 • ii. RM 25,000 on 1 September 2020. • iii. RM 40,000 on 30 December 2020. • iv. RM 30,000 on 3 January 2021. • Calculate: • A) calculate the interest charged for borrowing loan A and B • B) identify the borrowing cost that will be capitalised • C) calculate the interest that can be charged as expenses for year 2020.
EXERCISE 3.10 Amin Iklas Sdn. Bhd has entered a contract to build an office buildings. The company has made some borrowing to finance the contraction. The company has the borrowing as follows: The Debenture was issued was specifically for the constraction of buildings. The expenditure were as follows: • i. RM 60,000 on February 2020 • ii. RM 25,000 on 1 September 2020. • iii. RM 40,000 on 30 December 2020. Calculate: A) calculate the interest charged for borrowing loan A and B B) identify the borrowing cost that will be capitalised C) calculate the interest that can be charged as expenses for year 2020. Type of borrowing Amount (RM0 Interest rate (%) Loan A 150,000 10% Loan Stock 200,000 12% Debenture 250,000 8%