Unit 7 - Borrow Costs & Contingents

Unit 7 - Borrow Costs & Contingents - Unit 7...

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Unit 7 Borrowing Costs (HKAS 23) And Provisions, Contingent Liabilities and Contingent Assets (HKAS 37)
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2 Borrowing Costs - HKAS23 Definition Definition Interest and other costs incurred by an entity in connection with borrowing of funds Examples Examples loan loan interests amortization of upfront fees connected with the arrangement of borrowings amortization of discounts or premiums relating to borrowings finance charges on finance lease exchange differences arising on foreign currency borrowings
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3 Borrowing Costs - HKAS23 Core Principles : Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset when it is probable that the asset will result in future economic benefits to the entity Other borrowing costs are to be recognised as an expense in the period in which they are incurred
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4 Qualifying Assets Definition Definition An asset that necessarily takes a substantial period of time to get ready for its intended use or sale Examples Examples Inventories that require a substantial period of time to bring them to a saleable condition e.g. WIP Finished goods Investment Properties Intangible Assets Manufacturing Plants Power Generation Facilities etc.
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5 Accounting Treatments for Borrowing Costs Benchmark Treatment Method Benchmark Treatment Method Cannot be applied starting from 2009 Recognised as an expense in the period in which the borrowing costs are incurred. Dr Interest expense Cr Bank / Interest payable Allowed Alternative Method Allowed Alternative Method Borrowing costs are allowed to be capitalised when it is incurred for funds borrowed to finance the acquisition, construction or production of a qualifying asset and being part of the cost of the relevant asset. Dr PPE / Inventories
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6 Specific Borrowings : Specific Borrowings : Borrowings are specifically used for the qualifying assets Actual borrowing costs incurred, less any investment income on temporary investment of the borrowing, are to be capitalised Types of Borrowing Costs Types of Borrowing Costs
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7 Example 1 (AFA p.228) ABC borrows $10m on 1 Jan 20x1 to finance the construction of a qualifying asset. The funds was only used for payment on 1 July 20x1. Between 1 Jan 20x1 and 1 July 20x1, the funds was deposited for earning interest. Answer: Capitalised interest Interest incurred Deposit interest earned
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8 Example 2 (AFA p.228) On 2 Jan 20X2, ABC started to construct a ship which would take two years to complete. For financing, ABC borrowed $300k and $200k from the bank on 2 Jan 20X2 and 1 July 20X2, interest rates were 10% and 12% respectively. Expenditure incurred in the ship construction was $200k
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This note was uploaded on 03/21/2011 for the course ACCOUNTING 110 taught by Professor Mcwilliams during the Spring '09 term at San Jose State University .

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Unit 7 - Borrow Costs & Contingents - Unit 7...

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