Advanced Financial Accounting Lecture-32 IAS-23 & IAS-33 Borrowing Cost & EPS

Solution Amount of interest Loan-1 = 300,000x 6% = 18,000 Loan-2 = 200,000x 8%x9/12 = 12,000 Loan-3 = 150,000x 9%x6/12 = 6,750 36,750 Weighted average Loan-1 = 300,000 Loan-2 = 200,000x9/12 = 150,000 Loan-3 = 150,000x6/12 = 75,000 525,000

Solution Capitalization Rate = 36,750 x 100 = 7% 525,000

Borrowing Cost Eligible for Capitalization Jan 31 = 70,000 x 7.31% x 11/12 = 4,689 April 1 = 80,000 x 7.31% x 9/12 = 4,386 Dec 1 = 10,000 x 7.31% x 1/12 = 61 9,136

Question MCQ Pvt. Limited has the following loans outstanding as at December 31st 2005   Rs. Loan – 1@ 6 % 300,000 Loan – 2 @ 8 % 200,000 Loan –3 @ 9 % 150,000   All the three loans were brought forward from previous year. Neither loan is acquired during the year nor is paid. The company spent following amounts on construction of an asset . January 31, 2005 70,000 April 01, 2005 80,000 December 01, 2005 10,000 Calculate (I ) capitalization rate (ii ) borrowing cost eligible for capitalization .

Borrowing Cost Eligible for Capitalization Jan 31 = 70,000 x 7% = 4,900 x 11/12 = 4,492 April 1 = 80,000 x 7% = 5,600 x 9/12 = 4,200 Dec 1 = 10,000 x 7% = 700 x 1/12 = 58 8,750

Total Borrowing Cost Total borrowing = 650,000 Amount of interest = 36,750 Revenue Exp.= Total borrowing cost - Borrowing Cost Eligible for Capitalization = 36,750 – 8,750 = 28,000

Commencement of Capitalization The capitalization of borrowing costs as part of the cost of a qualifying assets shall commence when: Expenditure on the assets are being incurred. Borrowing costs are being incurred. Activities that are necessary to prepare the assets for its intended use or sale are in progress.

Example Silver Star (Pvt) Limited is engaged in the manufacturing of surgical items. Currently the company is manufacturing its power plant. The company started the project on Feb. 1, with its own funds. Later on due to shortage of funds, the company takes a loan to sponsor the project on May 1. The first payment out of the loan on the plant is made on June 1. Required: when should the company commence capitalization of borrowing cot on the plant.

Suspension of Capitalization Capitalization of borrowing cost shall be suspended during extended period in which active development is interrupted.

Example A company which is constructing an assets for its own use in the business. The production of assets started on 30 Sep 2006. Due to some internal problems the company, the construction remains closed from Nov 1 till Nov 31. The assets was completed on 31 Dec. The assets were constructed by utilizing the borrowed funds.

Cessation of Capitalization

Earnings Per Share (EPS) IAS-33 Earnings Per Share (EPS)

Formula EPS = Earnings Shares

Methods for the Calculation of EPS Basic EPS Diluted EPS

Basic EPS Earning available for distribution to ordinary share-holders Weighted Average No. of ordinary share outstanding during the period

Question 1 Jan. Opening balance 200,000 shares 10 Oct. Further issued 200,000 shares Find the No. of weighted shares outstanding at 31 Dec. Solution Opening balance 200,000 shares Further issued 200,000 x 3/12 50,000 shares Total weighted shares 250,000