Page 6 - 9. COMPILER QB - INDAS 23

Less interest income on specific borrowing -20,000
Amount Eligible for Capitalisation 86,250

Q4 (RTP May. 21)

How will you capitalise the interest when qualifying assets are funded by borrowings in the nature of bonds
that are issued at discount?
Y Ltd. issued at the start of year 1, 10% (interest paid annually and having maturity period of 4 years) bonds
with a face value of Rs.2,00,000 at a discount of 10% to finance a qualifying asset which is ready for

intended use at the end of year 2.
Compute the amount of borrowing costs to be capitalized if the company amortizes discount using Effective
Interest Rate method by applying 13.39% p.a. of EIR.
Solution

Capitalisation Method
As per the Standard, borrowing costs may include interest expense calculated using the effective interest
method. Further, capitalisation of borrowing cost should cease where substantially all the activities necessary

to prepare the qualifying asset for its intended use or sale are complete.
Thus, only that portion of the amortized discount should be capitalised as part of the cost of a qualifying
asset which relates to the period during which acquisition, construction or production of the asset takes place.

Capitalisation of Interest
Hence based on the above explanation the amount of borrowing cost of year 1 & 2 are to be capitalised and

the borrowing cost relating to year 3 & 4 should be expensed.

Quantum of Borrowing
The value of the bond to Y Ltd. is the transaction price i.e. Rs.1,80,000 (2,00,000 – 20,000) Therefore, Y Ltd
will recognize the borrowing of Rs. 1,80,000.

Computation of the amount of Borrowing Cost to be Capitalised
Y Ltd will capitalise the interest (borrowing cost) using the effective interest rate of 13.39% for two years
as the qualifying asset is ready for intended use at the end of the year 2, the details of which are as
follows:

Year Operating Interest expenses Total Interest Closing Borrowing
Borrowing @13.39% to be
capitalized
(1) (2) (3) = (1+2) (4) (5) = (3)-(4)
1 1,80,000 24,102 2,04,102 20,000 1,84,102
2 1,84,102 24,65, 2,08,753 20,000 1,88,753
48,753
Accordingly, borrowing cost of Rs. 48,753 will be capitalized to the cost of qualifying assets.

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