How to account for Temporary Investment Incomes on funds from Specific borrowing?

It is a usual practice that if entity has borrowed funds to finance a qualifying asset then they might be invested temporarily until the funds are needed. This gives rise to a question if these temporary investments are to be deducted from borrowing costs eligible for capitalization or taken to profit and loss account as expense.

IAS 23 Borrowing Costs para 23.12 provides the following guidelines:

To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.

The above para is very clear that any temporary investment income earned by investing the funds out of specific borrowings shall be deducted from the borrowing cost eligible for capitalisation. In simple words, borrowing costs to be capitalized will be net of temporary investment incomes.

Temporary investment incomes earned before capitalization commenced

IAS 23 Borrowing cost is silent on how to treat temporary investment incomes earned in the same period but before capitalization of borrowing cost is commenced. In such case, fair presentation requirement of IASB Framework requires that entity shall use such policy that gives true and fair view of the business.

So, general rule is that any temporary investment income earned before capitalization is commenced it shall be taken to profit and loss account as a credit. In short, it will not be deducted from eligible borrowing costs as by the time incomes are earned conditions of capitalization were not fulfilled and IAS 23 was not applicable. However, any temporary investment incomes in the period in which eligible borrowing costs were being incurred will be set off against borrowing costs meant for capitalization.

Temporary investment incomes earned after capitalization ceased or during suspension period

Same general rule as above is applied in this case. Even if temporary investment income pertains to the year during which borrowing costs have been capitalized but if such incomes are earned after the capitalized is ceased then they will not be reduced from eligible borrowing costs. Instead they will be taken as a credit to profit and loss account or in other words as other incomes to P&L a/c.

Similarly if the capitalization of borrowing cost has been suspended due to any reason then any investment income during the suspension period will also be taken to profit and loss account and will not be set-off against borrowing cost meant for capitalization.

Summary

Only such investment incomes will be deducted from borrowing costs meant for capitalization that are earned in the period (e.g. months) during which eligible borrowing costs were also being incurred. If there are no eligible borrowing costs (not just any borrowing cost) being incurred then any temporary investment incomes will be taken to profit and loss account.

Example

ABC Ltd took a loan of 2 million specifically to build an asset that will take substantial time to complete. Loan was taken at January 01 i.e. beginning of the year. As funds were vacant, management invested some of the funds as follows:

  1. Investment 1 for 3 months (January – March) – income earned 20,000
  2. Investment 2 for 9 months (January – September) – income earned 70,000

Work on qualifying asset was started by the first day of April and wasn’t complete until the end of year i.e. December 31.

Remarks:

In the above example income from Investment 1 will be taken completely to profit and loss account as it was earned prior to commencement of capitalization.

Regarding investment 2 only incomes earned from the month of April to September i.e. only of 6 months out of 9 months will be set off against borrowing costs eligible for capitalization. The incomes pertaining to the month of January and March will be taken to a profit and loss account as other income.

To access complete IAS 23 Borrowing Costs resources visit:

IAS 23 Borrowing Cost Summarized Standard

2 COMMENTS

  1. Thank you so much. This is very helpful.

  2. Ansar Abdul Rehman

    Thank you! sir you have been very informative to me.

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