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Borrowing CostsIAS 23Borrowing CostsSyllabus Area B

ACCA · Question 21 · Borrowing Costs

Section B - Case 2: EcoWind (Question 1 of 5)

Scenario: EcoWind, a renewable energy firm, began constructing a new wind farm on 1 March 20X5. Construction costs (excluding interest) totaled $3,000,000. To fund this, EcoWind took out a $2,000,000 specific loan at 6% per annum on 1 February 20X5. Construction was completed on 30 November 20X5.

EcoWind received a $500,000 government grant on 1 December 20X5 to help fund the wind farm, which has a 20-year useful life. EcoWind uses the deferred income method for grants.

On 31 December 20X5, EcoWind tested an older solar plant for impairment. Its carrying amount was $1,500,000. Its Fair Value Less Costs of Disposal was $1,200,000 and its Value in Use was $1,300,000.

Question: Under IAS 23, how much borrowing cost should be capitalized into the cost of the wind farm in 20X5?

Answer options:

A.

$110,000

B.

$100,000

C.

$90,000

D.

$120,000

How to approach this question

Determine the capitalization period. It starts when expenditure is incurred, borrowing costs are incurred, AND activities to prepare the asset are in progress (1 March). It ends when the asset is substantially complete (30 Nov). Calculate interest for this specific period.

Full Answer

C.$90,000✓ Correct
Under IAS 23, capitalization of borrowing costs commences when expenditures are incurred, borrowing costs are incurred, and activities to prepare the asset are in progress. This is 1 March 20X5. Capitalization ceases when the asset is substantially complete (30 November 20X5). The period is 9 months. Capitalized interest = $2,000,000 x 6% x 9/12 = $90,000.

Common mistakes

Starting capitalization on 1 February when the loan was drawn down, resulting in 10 months of interest.
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