IAS 2 INVENTORIES

IAS 16 PPE
IAS38 INTANGIBLE ASSETS
IAS 36 IMPAIRMENT
IAS 10 EVENTS AFTER THE
REPORTING PERIOD
IAS 37 CONTINGENCIES
IAS 17 LEASES
IAS 20 GOVERNMENT GRANTS
IAS 23 BORROWING COST
1
REPORTING OF ASSETS
 The following standards all deal with the reporting
of assets:
◦ IAS 20 Inventories
◦ IAS 11 Construction contracts
◦ IAS 16 Property, plant and equipment
◦ IAS 38 Intangible assets
◦ IAS 36 Impairment

2
IAS 2 INVENTORIES
 Inventory should be valued on a line by line basis at the lower
of cost or net realizable value (NRV).
 The costs include:
◦ Costs of the purchase, plus
◦ Any incidental costs incurred in getting the inventory into
its present location and condition (Carriage Costs e.g.)

 The cost should be calculated using FIFO or AVCO.

 The net realizable value is

◦ Selling price, less
◦ Any costs to complete and / or any selling costs

3
Question 1
The Congo company is a manufacturing company. The cost per
unit of an item of inventory is as follows:

Materials £25
Production labor costs £33
Production overheads £14
General administration costs £10
Marketing costs £5

Requirement
What is the value of one completed unit of inventory per IAS 2?

4
ANSWER 1
 £72 (25+33+14)

 IAS 2.10-12 define the cost of inventory.

 In this example the cost includes materials, production labor

and production overheads, but not general administration or
marketing costs.

5
Question 2
The Motmot Company has partially-completed inventory
located in its factory, as follows:
£
Production costs incurred to date 3,500
Production costs to complete 2,000
Transport costs to customer 300
Future selling costs 400
Selling price 3,200

Requirement
What is the net realizable value of Motmot’s inventory,
according to IAS 2?

6
ANSWER 2

 £500 (3200 – 2000 – 300 – 400)

 IAS 2 para 6 states that NRV is the selling price less further
costs of completion and sale. This includes selling price,
costs to complete and transport costs to customers

7
IAS 16 PROPERTY, PLANT AND EQUIPMENT
 Recognize PPE if:
◦ It is probable that future economic benefit will flow to the
entity
◦ It can be measured reliably
 Initial measurement is at cost which includes:
◦ Purchase price
◦ Any other costs incurred in bringing the asset into working
condition.
 PPE should be depreciated:
◦ Write off the cost less any residual value over the useful
economic life (UEL)
◦ Choose a depreciation method to match the flow of economic
benefit
◦ Review the method, residual value and UEL at year end, and
revise if necessary
◦ Any changes will be regarded as a change in an accounting
estimate

8
 Subsequent measurement
◦ Can choose to revalue PPE, it is not mandatory
◦ If do choose to revalue, must revalue all assets in the same
class
◦ Regular revaluations are required to ensure the asset is
reflected at current market value
◦ Any upwards revaluation will be recognized as a revaluation
surplus and shown as other comprehensive income (unless
there had been a previous downwards revaluation, in which
case the subsequent increase can be shown in the income
statement)
◦ Any downwards revaluation will be recognized immediately
in the income statement (unless there has been a previous
upwards revaluation, in which case the subsequent
decrease can be deducted from the revaluation surplus).

9
QUESTION 5
a) Binkie Co has an item of land carried in its books of £13,000. Two years ago
a slump in land values led the company to reduce the carrying value from
£15,000. This was expensed in the income statement. There has been a
surge in land prices in the current year and the land is now worth £20,000.

b) As above except now assume original cost was £15,000, it was revalued to
£20,000 and has now fallen to £13,000.

c) Crinkle bought an asset for £10,000 at the beginning of 20X6. UEL was five
years. On 1 January 20X8 the asset was revalued to £12,000. The remaining
UEL is 3 years.

Requirement
a) Account for the revaluation in the current year.
b) Account for the decrease in value.
c) Account for the revaluation and state the treatment for depreciation from
20X8 onwards.

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ANSWER 5
(a) The double entry is:
Dr Asset value (statement of financial position) £7,000
Cr Profit or loss £2,000
Cr Revaluation surplus (other comprehensive income) £5,000
 The case is similar for a decrease in value on revaluation. Any decrease
should be recognized as an expense, except where it offsets a previous
increase taken as a revaluation surplus in other comprehensive income. Any
decrease greater than the previous upwards increase in value must be
recorded as an expense in profit or loss.

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ANSWER 5 (Cont.)
(b) The double entry is:
Dr Revaluation surplus (other comprehensive income) £5,000
Dr Profit or loss £2,000
Cr Asset value (statement of financial position) £7,000

 There is a further complication when a revalued asset is being

depreciated.

 An upward revaluation means that the depreciation charge will

increase. Normally, a revaluation surplus is only realized when the
asset is sold, but when it is being depreciated, part of that surplus is
being realized as the asset is used.
 The amount of the surplus realized is the difference between
◦ depreciation charged on the revalued amount and
◦ the (lower) depreciation which would have been charged on the
asset’s original cost.
 This amount can be transferred to retained (i.e. realized) earnings but
not through profit or loss. 12
ANSWER 5 (Cont.)

(c) On 1 January 20X8 the carrying value of the asset is

£10,000 – (2 x £10,000 ÷ 5) = £6,000. For the revaluation:

Dr Asset value (statement of financial position) £6,000

Cr Revaluation surplus (other comprehensive income) £6,000

The depreciation for the next three years will be £12,000 ÷ 3 = £4,000
compared to depreciation on cost of £10,000 ÷ 5 = £2,000. Each year the extra
£2,000 is treated as realized and transferred to retained earnings:

Dr Revaluation surplus £2,000

Cr Retained earnings £2,000

This is a movement within reserves, not an item in profit or loss.

13
ANSWER 5 (Cont.)

(c)
W.D.V DEP
01-01-06 10,000

31-12-06 8,000 2,000

31-12-07 6,000 2,000

01-01-08 Revalued from 6,000 to 12,000 = 6,000 increase

12,000 / 3 uel remaining = 4,000 total depreciation (4k to P&L and 2k transfer
from revaluation surplus to retained earning)

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IAS 38 INTANGIBLE ASSETS
 An intangible asset:
◦ Has no physical substance
◦ It is identifiable – either separable or arises from a contractual
or legal right
◦ Should be recognized if there is a probable economic benefit
flowing to the entity as a result and it can be measured
reliably.
 Recognition and measurement
◦ If recognizing, should capitalize at cost
◦ It should be amortized if there is a UEL
◦ Impairment reviews should be performed if there is no UEL: if
the intangible is being amortized then impairment reviews
should only be done if there is some indication of impairment,
if the asset is not being amortized then impairment should be
done every year.
◦ Can revalue if there is an active market.
15
 Types of intangibles:

◦ Acquired separately – recognize at cost.

◦ Acquired with a business combination – if it can be

identified separately recognize at fair value otherwise
include in goodwill.

16
 Research and development:

◦ Research – write off as an expense immediately

◦ Development – must capitalize if meet certain criteria

 Profit made on project
 Intention to use/sell product
 Resources available to complete project
 Ability to use/sell the product
 Technically feasible
 Expenditure is identifiable

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QUESTION 6
On 1 August 20X6 Snowcap Co commenced work on a project to develop a new
production process. In the period to 31 December 20X6 Snowcap incurred
expenditure on the project of £280,000.

The expenditure was incurred evenly over the period.

On 1 November 20X6 an externally commissioned market research survey,

costing £40,000, proved the new process had met the criteria to be recognized
as an intangible asset.

During 20X7 further expenditure on the project was £480,000 incurred evenly
over the period.

Requirement
At 31 December 20X7, what will be the value of the intangible in the statement
of financial position?

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ANSWER 6

£592,000

The company cannot capitalize expenditure incurred prior to the work

satisfying the recognition criteria on 1 November 20X6 (IAS 38.65). The market
research is not a directly attributable cost so cannot be capitalized. So the asset
is (2/5 months x £280,000) + £480,000 = £592,000.

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IAS 36 IMPAIRMENT OF ASSETS

 Assets are impaired if the carrying value exceeds the

‘recoverable amount’

 The recoverable amount is the higher of:

◦ Value in use (the present value of estimated future cash flows)

or
◦ Fair value less any costs to sell

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 Frequency of impairment reviews:
◦ Perform impairment reviews for PPE only when there is
some indication impairment has occurred
◦ Perform impairment reviews annually for purchased
goodwill and intangibles that are not being amortized

 Cash generating units

◦ If cannot estimate the recoverable amount of an individual

asset, then use cash generating units (CGUs)
◦ CGUs are the smallest group of assets that generate
independent cash flows

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 Accounting treatment

◦ Impairments are written off in the income statement,

(unless the asset has previously been revalued
upwards)

◦ If a CGU is being impaired, then the write down may

be against a number of assets. Offset against any
obviously impaired assets first, then goodwill and
then against other assets on a pro rata basis. Never
impair below NRV of an asset.

22
QUESTION 7
The Antimony Co acquired its head office on 1 January 19X8 for £5 million.
Antimony’s policy is to depreciate property on a straight line basis over 50
years with zero residual value.

On 31 December 20X2 Antimony revalued the head office to £8 million.

Antimony does not transfer annual amounts from the revaluation reserve.
In Dec 20X7 localized flooding occurred and the recoverable amount of the
head office fell to £2.9 million

Requirement

What impairment charge should be recognized in the income statement of

Antimony in the year ended 21/12/X7, per IAS 36?

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ANSWER 7
 £0.7 million
 IAS 36.60 and 61 (also IAS 16.40) require that an impairment
that reverses a previous revaluation should be recognized
through the revaluation reserve to the extent of that reserve.
Any remaining amount is recognized through profit or loss.
Thus:
◦ The carrying amount at 31 December 20X2 is 45/50 x
£5.0m = £4.5m.
◦ The revaluation reserve created is £3.5m (ie £8.0m -
£4.5m)
◦ The carrying amount at 31 December 20X7 is 40/45 x
£8.0m = £7.1m
◦ The recoverable amount at 31 December 20X7 is £2.9m.
◦ The total impairment charge is £4.2m (i.e. £7.1m - £2.9m).
◦ Of this, £3.5m is a reversal of the revaluation reserve, so
only £0.7 million is recognized through profit or loss.
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ANSWER 7

0 01-01-08 5 (0.1) (5/50yrs)

1 31-12-08 4.9
2 31-12-09 4.8
3 31-12-10 4.7
4 31-12-11 4.6
5 30-12-12 4.5revalued to £ 8 m
6 30-12-13 7.8 (0.2) (8 / 45yrs)
7 30-12-14 7.6
8 30-12-15 7.4
9 29-12-16 7.3
10 29-12-17 7.1recoverable value £ 2.9 m

Revaluation Reserve = 8 - 4.5 = 3.5

Impairment 7.1 - 2.9 = 4.2
of this 3.5 m is charged to the Revaluation Reserve
and 0.7 m is charged to the income statement
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 Impairment testing is time intensive and includes:
◦ the identification of impairment indicators;
◦ assessing or reassessing the cashflows;
◦ determining the discount rates;
◦ testing the reasonableness of the assumptions; and
◦ benchmarking the assumptions with the market.
 Companies should plan ahead.
 Certain intangibles such as goodwill can be tested for
impairment at an earlier date than at the end of the year with
any changes updated in the year-end valuation.
 Regulators have stated that many companies are not fully
complying with the somewhat onerous disclosure
requirements of IAS 36.
 Therefore, it is essential to disclose the discount rate and
long-term growth rate assumptions in the discounted
cashflow models used. There are no exemptions from the
disclosure requirements
26
 Purchased goodwill has to be allocated to all the CGUs which
benefit from the acquisition.
 Before finalizing the allocation of goodwill, it is useful to
think about how goodwill is going to be tested.
 The cash flows being tested should be consistent with the
assets that they relate to and the final position must make
sense by comparison to any market data available.
 Forecasts need to be based on the latest budgets or
forecasts, be reasonable and supportable and consistent with
analysts' forecasts for the sector and the views of third-party
experts

27
 IAS 10 covers events between the end of the reporting period
and the date the accounts are authorized for issue.

 The events are split into two types:

◦ Adjusting events – which provide evidence of conditions

which existed at the reporting date. The financial
statements should be adjusted to reflect them.

◦ Non adjusting events – are indicative of conditions that

arose after the reporting date. Disclosure should be made
in the financial statements.

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Going concern basis

 Financial statements are prepared on a going concern basis.

 When an entity goes into liquidation after the reporting date,

it is no longer considered to be a going concern and the
financial statements should therefore be prepared on a break
up basis.

29
QUESTION 8
An entity’s draft financial statements for the year ended 31
December 20X3 were completed on 30 May 20X4, approved by
the finance director on 7 June 20X4, authorized for issue on 20
June 20X4 and approved by the shareholders on 5 July 20X4.
The following events occurred after the reporting date:
1) Notification on 18 Feb 20X4 that a customer owing £100,000
as at 31 December 20X3 has gone into liquidation. The
financial statements already include a specific provision of
£20,000 for this customer. No general provisions are made.
2) A rights issue on 6 April 20X4 to raise £1,500,000 for an
acquisition
3) Confirmation on 28 May 20X4 from the entity’s insurers that
they will pay £500,000 for inventories that were destroyed in a
fire on 24 December 20X3. The entity had claimed £650,000
and included this as a receivable in the financial statements
Requirement
How should the entity treat these events in its financial statements?
30
ANSWER 8
(1) This is an adjusting event as it provides more up-to-date
information about a provision that was recognized at the
reporting date. The £100,000 receivable should be written
off.
(2) This is a disclosable non-adjusting event. The rights issue
occurred after the reporting date, but is considered to be of
significant importance and should be disclosed in the
financial statements.
(3) This is an adjusting event since it is in relation to an asset
that was recognized at the reporting date. The receivable
should be reduced to £500,000.

31
 A provision is a liability of uncertain timing or amount.

 A provision should be recognized when:

◦ An entity has a present obligation arising from a past event
◦ It is probable that there will be an outflow of economic
benefit
◦ A reasonable estimate can be made of the amount

 The measurement of a provision should consider:

◦ The best estimate of the amount needed to settle the
liability
◦ Discounting to present value when the time value of money
is material
◦ Reviewing and revising at each year end, to reflect the best
estimate

32
IAS 37 considers the following specific examples:

 Onerous contracts – where the cost of fulfilling the contract

outweighs the benefit that will be received. If the contract is
unavoidable these should be provided for

 Future operating losses – there is no obligation to make

losses in the future, therefore they should not be provided for

 Restructuring costs – should only be provided when there is a

constructive obligation, this would arise from;
◦ A detailed formal plan, that includes an estimate of the
costs and the timescale, and
◦ An announcement to those affected by the restructuring

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QUESTION 9
 The Noble Co operates a fleet of commercial aircraft. On 1
April 20X7 a new law was introduced requiring all operators
to use aircraft fitted with fuel-efficient engines only.
 At 31 December 20X7 Noble had not fitted any fuel-efficient
engines and the total cost of fitting them to the fleet was
£4.2m.
 Under the terms of the legislation, the company is liable for a
£1m fine for non compliance with the legislation for any
calendar year, or part of a year, in which the law has been
broken.
Requirement
What provision would be required by Noble at 31 December
20X7 under IAS 37?

34
ANSWER 9
 No provision is required for the fitting of the engines. This is
because the present obligation as a result of the past event
required by IAS 37.14 does not exist. The company can
choose not to fit the engines and then not to operate the
aircraft.
 A provision of £1.0 million is, however required in relation to
the fines, because at the reporting date there is a present
obligation in respect of a past event (the non-compliance
with legislation).

35
 A contingent liability is a possible obligation or a present
obligation that is not recognized (because it is not probable
or cannot be measured reliably).
 It should be disclosed in the financial statements unless the
outflow of benefits is deemed remote.
 A contingent asset is a potential asset that arises from past
events but whose existence can only be confirmed by the
outcome of future events not wholly in the entity’s control.
 It should be disclosed in the financial statements only when
the expected inflow of benefit is probable. Example:
 An entity may be entitled to reimbursement for all of or part
of the expenditure required to settle a provision. E.g. from an
insurance company.
 A provision and reimbursement are recognized separately
and a reimbursement is only recognized when it is virtually
certain the amount will be received. The maximum the
reimbursement can be is the size of the provision
36
 IAS 17 identifies two types of lease, an operating lease or a
finance lease. It determines the type by considering the
substance.
 IAS 17 identifies five situations that would normally lead to a
lease being classified as a finance lease:
◦ The lease transfers ownership at the end of the lease term
◦ The lessee has the option to purchase the asset for less than
fair value
◦ The lease term is for the major part of the assets economic life
◦ Present value of the minimum lease payments are substantially
all of the assets fair value
◦ The leased asset is so specialized it can only be used by the
lessee

37
OPERATING LEASE – LESSEE

Accounting treatment:

• Rentals are charged to the income statement on a straight

line basis over the period of the lease.

• Incentives to sign operating leases are spread over the life of

lease (SIC 15)

38
FINANCE LEASE – LESSEE
Accounting treatment:
• Capitalize the asset and recognize the liability, at the lower of
the fair value and the present value of the minimum lease
payments

• Add any direct costs to the amount recognized as an asset

• Depreciate the asset over the shorter of the lease term and
the useful economic life

• Apply the finance charge to give a constant rate on the

outstanding liability (using sum of digits or actuarial method)

• Rental payments are split between interest and the repayment

of capital
39
GUARANTEED RESIDUAL VALUE
If the lessee has guaranteed a residual value to the lessor and
the asset is worth less than this amount at the end of the lease
term:

• Recognize an impairment loss – as soon as it is identified that

the impairment has occurred
• Recognize the cash payment required to make up the
shortfall at the end of the lease.

40
QUESTION 10
A company leases an asset on 1 January 20X1. The terms of the
lease are to pay:
A non refundable deposit of £5,800 on inception and six annual
payments of £16,000 in arrears.
The fair value of the asset (equivalent to the present value of the
minimum lease payments) on 1 January 20X1 is £80,000. Its useful
life to the company is five years.
As part of the lease agreement the company guaranteed to the
lessor that the asset could be sold for £8,000 at the end of the lease
term. It also incurred £2,000 of costs setting up the lease
agreement.
The interest rate implicit in the lease has been calculated at 10%.
Requirement
a) Prepare the relevant extracts from the financial statements
(excluding notes) in respect of the lease for the year ended 31
December 20X1.
b) Explain what would happen at the end of the lease if the asset could
be sold by the lessor for i) £10,000 ii) £6,000 41
ANSWER 10

42
ANSWER 10 (Cont)
(b) Treatment of guaranteed residual value
 At the end of the lease, the lessee will have an asset at residual value of £8,000 in its
statement of financial position and a finance lease liability of £8,000 representing the
residual value guaranteed to the lessor.
◦ If the lessor is able to sell the asset for more than the value guaranteed by the
lessee, the lessee has no further liability and derecognizes the asset and lease
liability:
Dr Finance lease liability £8,000
Cr Asset carrying amount £8,000
◦ If the lessor is unable to sell the asset for the value guaranteed by the lessee, the
lessee has a liability to make up the difference of £8,000 – £6,000 = £2,000:
Recognize impairment loss on asset (as soon as known during the lease term):
Dr Profit or loss £2,000
Cr Asset carrying amount £2,000
Make guaranteed payment to lessor and derecognize the asset and lease liability:
Dr Finance lease liability £8,000
Cr Cash £2,000
Cr Asset carrying amount £6,000

43
OPERATING LEASE – LESSOR
 Accounting treatment:
◦ Record the asset by lessor and depreciate over useful
economic life
◦ Rental income is credited to income statement over the life
of the lease
◦ Initial costs of setting up the lease are added to the
carrying value of the asset

44
FINANCE LEASE – LESSOR
Accounting treatment:
◦ Derecognize the asset
◦ Recognize a receivable known as the “net
investment in lease”, this consists of:
 The PV of
 Minimum lease payments, plus
 Unguaranteed residual amount

Note. Ignore any initial costs of set up as these will be included

within the implicit interest rate.

45
QUESTION 11
A company leased an asset to another company on the
following terms:
Lease term 4 years
Inception of lease 1.1.20X1
Annual installments in advance £22,000
Residual value of asset as guaranteed by lessee £10,000
Expected residual value at the end of the lease £12,000
Fair value of the asset £82,966
Initial direct costs incurred by the lessor £700
Interest rate implicit in the lease 11%
Requirement
a) Calculate the unguaranteed residual value and the net
investment in the lease at 1 January 20X1
b) Prepare extracts from the financial statements for the year
ended 31 December 20X1 (excluding notes)
46
ANSWER 11

47
ANSWER 11 (Cont)

48
 There are two types of sales and lease back
1) FINANCE LEASE BACK
2) OPERATING LEASE BACK

SALE AND FINANCE LEASEBACK

 Accounting treatment:

◦ Derecognize the asset and record any cash received

◦ Any profit made on the sale is deferred over the lease term

◦ Bring the asset back in as a normal finance lease

49
QUESTION 12
 An entity recognizes its ownership of a freehold building
under IAS 16 cost model. The annual depreciation is
£100,000 and at 31 December 20X4 the carrying amount is
£3.5 million.
 On 1 January 20X5, the entity sells the building to an
institution for £5 million, the present value of the minimum
lease payments, and leases it back under a 40 year finance
lease.
 The lease includes a clause transferring title back to the
entity at the end of the lease. The annual rental is £400,000
payable in advance and the interest rate implicit in the lease
is 8.3%.
Requirement
How should the transaction be accounted for in the financial
statements?

50
ANSWER 12
 On 1 January 20X5, the transaction will be recorded by the
entity as follows:
◦ Recognize cash proceeds received of £5,000,000
◦ Derecognize the asset of £3,500,000
◦ Recognize deferred income of £1,500,000 and release the profit
over the lease term (£37,500 per annum)
◦ Recognize the building at £5,000,000
◦ Recognize a finance lease liability at £5,000,000
◦ Recognize £400,000 cash paid
 For the year ended 31 December 20X5, the entity will
recognize:
◦ Income of £37,500 out of the deferred profit, being £1.5m/40
years
◦ Depreciation of £125,000 (£5m/40 years)
◦ Finance charge of £381,800 being 8.3% of (£5m – £0.4m).

51
SALE AND OPERATING LEASEBACK
 Accounting treatment:
 Derecognize the asset and record any cash received

 The treatment of the profit or loss is determined by the terms of the

lease:
◦ Sale price = fair value
Recognize profit / loss immediately

◦ Sale price > fair value

Recognize the profit up to fair value immediately, any excess profit
defer over the lease term

◦ Sale price < fair value

Recognize profit / loss immediately UNLESS it is a loss compensated
for by low future rentals, in which case defer over lease term

52
LEASES – CURRENT DEVELOPMENTS (PG 88 IN ICAEW STUDY MANUAL)

 The following are all current developments relating to leases:

◦ SIC 27 Lease and leaseback agreements

◦ SIC 15 Operating lease incentives
◦ IFRIC 4 Determining whether an arrangement is a lease
◦ IASB Leasing project

 An awareness is all that is required. This area will not be testable in

detail.

53
 Government assistance is action by the government to
provide economic benefit specific to an entity or range of
entities qualifying under certain criteria, it should be
disclosed in the accounts.
 Government Grants are form of government assistance in the
form of a transfer of resources, that can be quantified, in
return for past or future compliance with certain conditions.
Initial recognition:
 Recognize at fair value when there is reasonable assurance
that:
◦ The entity will comply with any conditions, and
◦ The grant will actually be received
Measurement:
◦ Match the grant income to the related expenditure, this will
either be capital expenditure or revenue expenditure.

54
 Capital expenditure:
 If the grant relates to a depreciating asset
◦ recognize the grant over the same period as depreciation

 If the grant relates to a non depreciating asset

◦ recognize the grant over the period when the costs of
meeting the obligation are incurred.

 The grant can be shown as deferred income OR netted off

against the carrying value of the asset.

55
 Revenue expenditure e.g grant for creating jobs in areas of
high unemployment

 The grant is taken to the income statement to match the

expense. It can be shown separately or netted off.

 Expenditure already incurred - recognize the grant

immediately upon receipt

 Non monetary government grants (e.g assets instead of cash)

- recognize at the fair value

56
 Repayment of grant:

 If it relates to assets; increase the carrying amount of the

asset, or reduce any deferred income.

 If it relates to income; reduce any deferred income, if the

repayment exceeds the carrying value of the deferred income
the excess is treated as an expense.

57
 If a loan is taken out to finance a qualifying asset, the interest
is capitalized when:

◦ Expenditure on the asset is being incurred

◦ Activities to get the asset ready are taking place
◦ Interest expense is actually being incurred.

 If a specific loan is taken to fund the asset, all the interest can
be capitalized
 If the asset is funded from general borrowings, calculate the
WACC and apply to the expenditure on the asset.
 Cease capitalizing when the asset is ready for use.
 Suspend capitalizing for any periods when the asset is not
being developed.

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QUESTION 13
 On 1 January 20X8 Rechno Co borrowed £15m to finance the
production of two assets, both of which will take a year to
build.
 Production started in 20X8. The loan facility was drawn down
on 1 January 20X8 and utilized as follows, with the remaining
funds invested temporarily.
Asset X Asset Y
1 January 20X8 2.5m 5.0m
1 July 20X8 2.5m 5.0m
The loan rate was 10% and surplus funds can be invested at 8%.

Requirement
Calculate the borrowing costs which may be capitalized and the
cost of each asset as at 31 December 20X8.

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ANSWER 13

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