Some queries---FA 2

[insaan]

Q NO 01 IAS 23
plz exlain issue of average expenditure in IAS 23..
for this consider an example
specific borrowing = 100 @ 8%
general borrowing rate of capitalisation = 10%

details of exp are as under;yr end is 31 dec
1 march = Rs 200

Solution 1
specific Borrowing cost to be capitalised = 100 *.08 = 8
general borwing cost to be capitalised
= 100 * 9/12 * .10 = 7.5
so Total B.C capitalised = 8 + 7.5 = 15.5

Solution 2
total avg expenditure in the year = 200 * 9/12 = 150
thus
specific borrowing cost to be capitalised = 100 * .08 = 8
general borrowing cost to be cpaitalised = 50 * .1 = 5
so Total B.C capitalised = 8 + 5 = 13

NOW which of these 2 solutions is correct

Q NO 02IAS 17
treatment of inital direct costs incurred by lessor in case of finance lease..wat wud be
the accounting entry?

Q NO 03 IAS 38
treatment of subsequent expenditure
wat wud be treatment of development costs incurred after the intangible
asset commercial production has started,even when they meet recognition criteria..
mean they cant then be capitalised??hain naan

Q NO 04
wats the difference b/w markup,GP etc.

Q NO 05 IAS 17
wat is actuarial method of interest alocation.we arent taught dis method watz it?

Q NO 06
how can provision for gratuity have an impact on our closing stock...infact in a question
provision for gratuity increased our closing stock ..howz dat?

Q NO 07;WPPF & WFF
where taxable income and accounting income both are given...WPPF ad WFF wud be calculated on
taxable income or accounting income

Q NO 08Statement of changes in equity
Shall surplus on revaluation form part of statement of changes in equity

Q NO 09IAS 11
some material are returned to store at the b/s date..now shall they form part of WIP
as future cost or not?

Q NO 10IAS 16
12.in case of exchange transaction the incoming asset is recoeded at F.V..NOw javed zuberi
records it at fair value + cash paid....watz the rite treatment


Q NO 11IAS 16
in case where only WDV a/c is maintained how is the movement of disposals & additions,where
depreciation is provided by reducing balance method

Q NO 12IAS 11
consider this example;
work certified= 100
cost to date=90
closing stock material = 5
cost of work uncertified = 5
material returned to store =5

now profit recognised for the yr = 100-(90-5-5-5)=100 - 75 =25
is this correct solution

[Abdur.Rehman]

QNo1 Not complete information
QNo2 Debit leased asset
Credit cash
QNo3 If the development activity is carried on in phases, then we can capitalize the development expense phase by phase. In normal circumstances it depends upon the nature of the development activity. If the subsequent expense results in a better development we can capitalize such development expense.
QNo4 Markup is usually on cost and GP on sales
QNo5 Actuarial sciences is a complete field and acturial calculations are based on the balance of probabilities of different issues relating to the subject matter. Accountants are not required to be aware of acturial methods except IAS 19 to some extent.
QNo6 Well the expense recognized as a balancing figure depends upon the closing provision of gratuity. The gratuity of labours is a direct expense and is recognized in the cost of inventory like their wages. So it affects the value of stock.
QNo7 On taxable income
QNo8 Previously it was not. But as per the recent amendments in the companies ordinance it has become a part of equity.
QNo9 No
QNo10 As per previous treatment JZ is rite. But now the latest IASs doesnot distinguish b/w exchange of similar and dissimilar asset and in both cases asset shud be recorded at FV of asset acquired unless the transaction lacks commercial substance.
QNO11 The whole cost goes to WDV account and depreciation rate is applied on the total of all assets. As WDV=cost-depreciation and in case of new asset WDV=cost
QNo12 Correct.

Plz give the full question in case of Q No 1.
Sory for late reply.....

[insaan]

Ans NO 01
OKzzz Just wat wud be the solution of this question
IAS 23
ABC Ltd is constructng a qualifying asset and its sources of finance are as under

ABC ltd borrows specifically for this asset on 1 Jan 2005 an amount = Rs100 @ 8%
ABC ltd also has general borrowing fund of Rs 1000 on 1 Jan 2005
rate of capitalisation on such general boorowing = 10%

yr end is 31 dec 2005

the qualifying asset is planned to be commenced on 1Jan2005 but due to certain problems it couldn't be started before 1April 2005

an exp of Rs 200 is done on 1 April 2005 on the qualifying asset

REqcalculate amount of borrowing cost capitalised?

Ans No 02

para 38 of IAS 17 reads;initial direct costs are included in the initial measurement of the finance lease receivable and reduce the amount of income recognised over the lease term

wat does it mean??

Ans No 03
Ok this shall go the similar way as it is an addition of an asset as per IAS 16,likewise the development exp eligible for capitalisation is an addition to its relative class of intangible asset

Ans No 08
Can U Plz mention the reference of this change in Co ordinance
+ wat other imp changes hav there been as relevant to our Fiancial ACcounting...means 5th schedule

Ans No 09
IAS 11What possible situation/examples of future related costs ,which shall form part of WIP can be,besides the closing Raw material

ANs No 10
YAr Javed Zuberi is then outdated 4 sure b/c i hav the latest addition of book issed by zuberi..and also his realtive rehan zuberi who is our teacher is of the point that he is outdated.....means Its DANGEROUS 4 all those who totally rely on zuberi's books

SOme other Q's
Q No 13
IAS 11
shall B/S in exams be made in columnar form or statement form....

Q no 14
IAS 23
plz elaborate the concept of average expenditure????
e.g if ABC Ltd incurred total of RS 100 in a year on a qualifying asset ,and we doont know the dates on which the expenditures were made,then we dont capitalise on RS 100
rather we take its avg i.e (Opening exp + exp during the yr)/2,in this case (0+100)/2 = 50

[insaan]

another Q so QNo 15
net assets = total assets - total liabilties(current + non current)
or net asstes = total assets - current liabilities

[Abdur.Rehman]

QNo1 Borrowing cost to be capitalized = 100*.8*9/12 + 100*.1*9/12 = 6+7.5 = 13.5
and regarding average expenditure, who gave u this concept?? and wut about the concept of opening expenditure? there is no such thing like opening expenditure in financial accounting....
QNo2 Ok previously the IDCs were expensed out and the other effect was given to the unearned finance income. But now as these costs are required to be capitalized so we shall not include them in the UFI. and due to the increase in cost of asset the receivable will automatically increase.
QNo8 My updated ordinance is at office, so i'll tell u the reference on tuesday...
Other recent amendments are the exclusion of incorporation expenses from the definition of intangible asset and the non recognition of proposed dividend as a liability, and both need a retrospective effect.
QNo9 Let me check out
QNo10 Let alone zubairi, the BPP revision kit has some mistakes like that. and let alone BPP, this summer Module E paper included a question of IAS 12 which asked the income statement approach that is disregarded by IAS 12. Now balance sheet approach is followed.
QNo13 Just give the relevant extracts of balance sheet. no need to give any format.
QNo14 c QNO 1

[Abdur.Rehman]

Net assets = Total assets - Total liabilities
or u may say Net assets = Capital + Reserves

[insaan]

ANs NO 01
OOhh i just modify my Q a bit b/c i havent got still wat i wanted
just a chnge in details of expenditure

ABC Ltd is constructng a qualifying asset and its sources of finance are as under

ABC ltd borrows specifically for this asset on 1 Jan 2005 an amount = Rs100 @ 8%
ABC ltd also has general borrowing fund of Rs 1000 on 1 Jan 2005
rate of capitalisation on such general boorowing = 10%

yr end is 31 dec 2005

the qualifying asset is planned to be commenced on 1Jan2005 but due to certain problems it couldn't be started before 1April 2005

details of exp are as under
1 April 2005 = Rs 50
1 May 2005 = Rs 50
1 JUne 2005 = Rs 100

REqcalculate amount of borrowing cost capitalised?

Ans NO 08
so now what to do of incorporation exp??

Ans No 13
Oh sorry infact i was asking abt the question where examiner asks us to make finnacial statements,there F.S shall be made in columnar form or the statement form...

Ans no 14
IAS 23
ok just how to solve this Q

Specific loan = 10 @ 9%
general loan = 100 @ 12%

all loans have remained outstanding throughhout the year.
cost incured on the project as at June 30,2003 and 2002 stood at Rs 15 and Rs 10 respectively.the cost has been incurrred evenly throughout the year

calculate the amount of interest to be capitalised for the year ended 30June2003?

Ans NO 15
infact what confused me was Zuberi's statement
here we have considered(assumed) long term loan as part of equity???
how valid is that assumption?

[insaan]

ANs NO 01
OOhh i just modify my Q a bit b/c i havent got still wat i wanted
just a chnge in details of expenditure

ABC Ltd is constructng a qualifying asset and its sources of finance are as under

ABC ltd borrows specifically for this asset on 1 Jan 2005 an amount = Rs100 @ 8%
ABC ltd also has general borrowing fund of Rs 1000 on 1 Jan 2005
rate of capitalisation on such general boorowing = 10%

yr end is 31 dec 2005

the qualifying asset is planned to be commenced on 1Jan2005 but due to certain problems it couldn't be started before 1April 2005

details of exp are as under
1 April 2005 = Rs 50
1 May 2005 = Rs 50
1 JUne 2005 = Rs 100

REqcalculate amount of borrowing cost capitalised?

Ans NO 08
so now what to do of incorporation exp??

Ans No 13
Oh sorry infact i was asking abt the question where examiner asks us to make finnacial statements,there F.S shall be made in columnar form or the statement form...

Ans no 14
IAS 23
ok just how to solve this Q

Specific loan = 10 @ 9%
general loan = 100 @ 12%

all loans have remained outstanding throughhout the year.
cost incured on the project as at June 30,2003 and 2002 stood at Rs 15 and Rs 10 respectively.the cost has been incurrred evenly throughout the year

calculate the amount of interest to be capitalised for the year ended 30June2003?

Ans NO 15
infact what confused me was Zuberi's statement
here we have considered(assumed) long term loan as part of equity???
how valid is that assumption?

[Abdur.Rehman]

QNo1 BC to be capitalized = 50*9/12*.8+50*8/12*.8+100*7/12*.1
QNo8 expense out in first year
QNo13 well i like statement form as it is more informative and can show the picture of the position of the company more well. But for exam point of view both are acceptable.
QNo14 Let me discuss it with someone.....im not much in touch with that expense evenly throughout the year
QNo15 If the loan is convertible to equity.i.e. convertible debentures etc or any other liability convertible to equity, we may take it there. but normally v dont..

[insaan]

Ans No 01
now,i dont agree to this solution
look speific borowing is capitalised irrespective of expenditure,infact it depends on the borrowing itself,so the day it meets the recognition cirtiea that shud be capitalised,however,this wud be reduced by in case there is any temporary investment income during that 1 month
its only general borowing whose capitalisation is dependant on expenditure
so solution shud be as under
BC to be capitalized = 100*9/12*.8+100*7/12*.1
and this is as per a very credible source..so plz do discuss it with any1 else 2

[Abdur.Rehman]

yar look wut v r doing in IAS 23 is capitalizing the cost of borrowing or in other words including the cost of borrowing in the cost of asset. So when the expenditure is incurred on the asset then v shud start capitalizing on it. not when borrowing is taken. V will simply expense out the borrowing when it is not used....
anyways i will discuss it with my teacher, but i think this is right treatment.....

[insaan]

OH i feel i was unable to convey my point here
now i try to elaborate it...

Question was
ABC Ltd is constructng a qualifying asset and its sources of finance are as under

ABC ltd borrows specifically for this asset on 1 Jan 2005 an amount = Rs100 @ 8%
ABC ltd also has general borrowing fund of Rs 1000 on 1 Jan 2005
rate of capitalisation on such general boorowing = 10%

yr end is 31 dec 2005

the qualifying asset is planned to be commenced on 1Jan2005 but due to certain problems it couldn't be started before 1April 2005

details of exp are as under
1 April 2005 = Rs 50
1 May 2005 = Rs 50
1 JUne 2005 = Rs 100

REqcalculate amount of borrowing cost capitalised?

Solution
BC to be capitalized = 100*9/12*.08+100*7/12*.01


NOW HERE START THE ARGUMENTS/REASONS FOR MY SOLUTION

POINT NO 01
criteria for capitalization of borrowing cost is as under
IAS 23.20
The capitalisation of borrowing costs as part of the cost of a qualifying asset should commence when
(a) expenditures for the asset are being incurred;
(b) borrowing costs are being incurred; and
(c) activities that are necessary to prepare the asset for its intended use or sale are in progress.

thus as per this question B.C capitalization wud start from 1 ApRil2005 and not from 1 jan 2005...theek hai

so we have similar stands in this regards

POINT NO 02

IAS 23.15
To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the <u><b>actual borrowing costs incurred on that borrowing during the period</b></u> less any investment income on the temporary investment of those borrowings

in our case
actual borowing cost incurred on the specific borrowing during the period = 100 * 0.08 * (12/12)= Rs8
Where borrowing cost of Rs2 i.e 100 * .08 * (3/12) relates to period before criteria for commencement of capitalisation is met,so it should be expensed out
whereas borrowing cost of Rs6 i.e 100 * .08 * (9/12) relates to period after criteria for commencement of capitalisation is met,so it should be capiatlised

POINT NO 03

IAS 23.17
To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation should be determined by <u>applying a capitalisation rate to the</u> <b>expenditures on that asset</b>


NOTE THE DIFFERENCE B/W THE 2 TREATMENTS
specific borrowingactual borrowing costs incurred on that borrowing during the period (being eligible for capitalisation)
general borrowingapplying a capitalisation rate to the expenditures on that asset




as far as treatment in case of capiatlisation of general borrowing is concerned the solution given by U was in accordance with IAS 23
BUT
as far as treatment in case of capiatlisation of specific borrowing is concerned the solution given by U wasn't in accordance with IAS 23

and now i m 99% sure about my solution ...so the 5% doubt which i had ;has vanished in the course of writing this reply

waiting for what U say

TC
and THX for the reply

[Abdur.Rehman]

lOOK at the first condition for capitalization i.e. the expenditure are being incurred. So, when the expense of 50 in April has not yet being incurred so how can u capitalize the expense of 50 that is incurred in May.
I have confirmed it and this is the right treatment. Plz consult a senior teacher in this regard.
The capitalisation of borrowing costs as part of the cost of a qualifying asset should commence when
(a) expenditures for the asset are being incurred;
(b) borrowing costs are being incurred; and
(c) activities that are necessary to prepare the asset for its intended use or sale are in progress.

[insaan]

NO i still dont agree with u
i have confirmed this from the best Accc. teacher of TSA.. & i totally agree to this
+solutions by PAC also confirm my treatment...so i hav also got +1 Vote of PAC 4 my solution
for referenece look solution by PAC if U hav of SPRING 2003 Q.5

look how this goes as per IAS
capitalise specific borrwoing cost
theek hai
in the meanwhile ,the period for which specific borrowing is not used on the qualifying asset ,it is temporarily invested and the temporary investment income is thus reduced from the specific borrwing cost capitalised...
so here makes sense -ve capitalisation of temporary investment income

+1nce again hav a look at para15,i think u are just focusing on para20 & ignoring para 15 of IAS 23

ACHAA wat logic U have for reducing the temporay investment income on specific borrowing from Borrowing cost capitalised???????


besides as far as ur concern 4 commencemnet of capitalisation is concerned
point 1expenditures for the asset are being incurred
so from 1 april onwards expenditure for the asset are being incurred
thus the condition is fulfilled
we didnt capitalise b4 1 april b/c this criteria wasn't met

[Abdur.Rehman]

Expenditures are incurred from April 1 but upto 50 so we will not capitalize the rest of 50 until they are used in May. And regarding para 15 it is a general one and not a specific one. It also doesnt mention that the borrowing cost is to be capitalized when expenditure is being incurred. It just says that specific borrowings are to be capitalized.
and regarding the reason for subtracting the investment income. It is a sort of incidental income like one in construction contracts. So it shud decrease the cost.
And i know the PAC book very well, as during module C we pointed out many mistakes in it.
anyways, i wud say Ali to reply ur question, as he is also of the same view as mine. He may be able to reply in a better way.