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CMA Final · Corporate Financial Reporting · Borrowing Costs (Ind AS 23)

Mahalaxmi Steels Ltd is constructing a qualifying asset using a specific loan of ₹1,00,000 at 9% for the full year and general borrowings. Interest is ₹9,000 on the specific loan. Which statement is correct about how the entity should compute the capitalisation for the general borrowings component?

For the general pool, the entity applies a capitalisation rate, being the weighted average of borrowing costs on its general borrowings, to the expenditure on the asset that exceeds the specific borrowings. It does not use the specific loan rate or capitalise all general interest.

  1. AApply a capitalisation rate, the weighted average of borrowing costs on general borrowings, to expenditure on the asset exceeding the specific borrowingsCorrect
  2. BApply the specific loan rate of 9% to all expenditure on the asset
  3. CCapitalise all interest on general borrowings because the asset is a qualifying asset
  4. DExpense all general borrowing costs because a specific loan exists

Explanation

Ind AS 23 uses a weighted average of borrowing costs on general borrowings as the capitalisation rate, applied to expenditure on the asset not covered by specific borrowings. The specific loan rate is not used for the general pool, and general interest is not capitalised in full.

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