Complements on specific borrowings

Learning objectives

• Explain why investment income on the temporary investment of borrowed funds pending expenditure is deducted from the borrowing costs eligible for capitalisation.L2, L3

Normative references

• IAS 23 §13When funds are borrowed, and borrowing costs incurred, before the funds are used for expenditures on the qualifying asset, the funds are often temporarily invested pending their expenditure; the investment income earned is deducted from the borrowing costs incurred in determining the amount eligible for capitalisation.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

7 questions

• For a borrowing taken out specifically to obtain a qualifying asset, the borrowing costs eligible for capitalisation start from the costs actually incurred on that borrowing during the period, not from an average rate computed on all borrowings.L1
• Brisac drew a loan of {principal} on 1 March, dedicated to the construction of a plant, at an effective interest rate of {effective_rate} a year. Expenditure, borrowing costs and preparation activities all begin the same day (case data) and the year ends on 31 December, that is {months_capitalised}. No funds are temporarily invested. Calculate the borrowing costs eligible for capitalisation for the year.L3
• Hélios draws a specific borrowing of 6,000,000 on 1 January, dedicated to the construction of a warehouse. Its nominal rate is 4.5%, but its effective interest rate, which includes the issue costs, is 6% (case data). Expenditure, borrowing costs and preparation activities are all in place from 1 March; the year ends on 31 December and no funds are temporarily invested. What amount of borrowing costs is eligible for capitalisation for the year?L4
• Cordier finances a power station with a specific borrowing whose actual costs for the year are {actual_costs}. For {months_invested}, part of the funds not yet spent, {unspent_proceeds}, is temporarily invested at {investment_rate} a year. Calculate the investment income, then the amount of borrowing costs eligible for capitalisation.L2
• Fabrèges finances a logistics park with a specific borrowing whose interest for the year is {interest_incurred}, payable at the end of the year. The funds not yet spent were temporarily invested and earned {investment_income} received in cash. Case convention: the investment income is presented as a deduction from the amount capitalised. Record the entry for the interest capitalised, then the entry for the investment income.L3
• Orvault finances a power station with a specific borrowing of 8,000,000 at 6% a year, drawn on 1 January; capitalisation is open all year. The funds not yet spent were temporarily invested and earned 55,000 over the year (case data). Which treatment of borrowing costs is correct for the year?L4
• The internal controller rereads the file of Orsay, which finances a power station with a specific borrowing. Which of the following sentences is incorrect?L3