BORROWING COSTS AND GOVERNMENT GRANTS

PAS 23: Borrowing Costs

Borrowing cost is interest and other costs incurred by an enterprise in connection with the borrowing of funds.
Interest includes amortization of discount/premium on debt. Other costs include amortization of debt issue costs and
certain foreign exchange differences that are regarded as an adjustment of interest cost. Borrowing cost does not
include actual or imputed cost of equity capital, including any preferred capital not classified as a liability.

A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use. That could be
property, plant, and equipment and investment property during the construction period, intangible assets during the
development period, or "made-to-order" inventories.

Accounting Treatment

The revised PAS 23 has specifically mentioned that interest on loans applied to qualifying assets should be
capitalized.

Borrowing Costs Eligible for Capitalization:

Specific Borrowings - To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying
asset, the amount of borrowing costs eligible for capitalization on that asset shall be determined as the actual
borrowing costs incurred on that borrowing during the period less any investment income on the temporary
investment of those borrowings.

General Borrowings - 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 capitalization shall be determined by applying a
capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the
borrowing costs applicable to the borrowings of the entity that are outstanding during the period , other than
borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs
capitalized during a period shall not exceed the amount of borrowing costs incurred during that period.

Commencement of Capitalization

The capitalization of borrowing costs as part of the cost of a qualifying asset shall commence when:

a. Expenditures for the asset are being incurred;

Suspension of Capitalization

Capitalization of borrowing costs shall be suspended during extended periods in which active development is
interrupted.

Cessation of Capitalization

Capitalization of borrowing costs shall cease when substantially all the activities necessary to prepare the qualifying
asset for its intended use or sale are complete. When the construction of a qualifying asset is completed in parts and
each part is capable of being used while construction continues on other parts, capitalization of borrowing costs shall
cease when substantially all the activities necessary to prepare that part for its intended use or sale are completed.

PAS 20: Government Grants

Government refers to government, government agencies and similar bodies whether local, national or international.

Government assistance is action by government designed to provide an economic benefit specific to an entity or
range of entities qualifying under certain criteria. Government assistance for the purpose of this Standard does not
include benefits provided only indirectly through action affecting general trading conditions, such as the provision
of infrastructure in development areas or the imposition of trading constraints on competitors.

Government grants are assistance by government in the form of transfers of resources to an entity in return for past
or future compliance with certain conditions relating to the operating activities of the entity. They exclude those
forms of government assistance which cannot reasonably have a value placed upon them and transactions with
government which cannot be distinguished from the normal trading transactions of the entity.

Grants related to assets are government grants whose primary condition is that an entity qualifying for them should
purchase, construct or otherwise acquire longterm assets. Subsidiary conditions may also be attached restricting the
type or location of the assets or the periods during which they are to be acquired or held.

Grants related to income are government grants other than those related to assets.

Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed conditions.

Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a
knowledgeable, willing seller in an arm’s length transaction.

Recognition and Measurement

Government grants, including non-monetary grants at fair value, shall not be recognized until there is reasonable
assurance that:

a. The entity will comply with the conditions attaching to them; and
b. The grants will be received.

Notes:

A. Government grants shall be recognized as income over the periods necessary to match them with the related
costs which they are intended to compensate, on a systematic basis. They shall not be credited directly to
shareholders’ interests.

B. Grants related to non-depreciable assets may also require the fulfillment of certain obligations and would then
be recognized as income over the periods which bear the cost of meeting the obligations. As an example, a
grant of land may be conditional upon the erection of a building on the site and it may be appropriate to
recognize it as income over the life of the building.

C. Grants are sometimes received as part of a package of financial or fiscal aids to which a number of conditions
are attached. In such cases, care is needed in identifying the conditions giving rise to costs and expenses which
determine the periods over which the grant will be earned. It may be appropriate to allocate part of a grant
on one basis and part on another.
D. A government grant that becomes receivable as compensation for expenses or losses already incurred or for the
purpose of giving immediate financial support to the entity with no future related costs shall be recognized as
income of the period in which it becomes receivable.

E. In some circumstances, a government grant may be awarded for the purpose of giving immediate financial
support to an entity rather than as an incentive to undertake specific expenditures. Such grants may be confined
to an individual entity and may not be available to a whole class of beneficiaries. These circumstances may
warrant recognizing a grant as income in the period in which the entity qualifies to receive it, with disclosure
to ensure that its effect is clearly understood.

F. A government grant may become receivable by an entity as compensation for expenses or losses incurred in a
previous period. Such a grant is recognized as income of the period in which it becomes receivable, with
disclosure to ensure that its effect is clearly understood.

Presentation of Grants Related to Assets

Government grants related to assets, including non-monetary grants at fair value, shall be presented in the statement
of financial position either by setting up the grant as deferred income or by deducting the grant in arriving at the
carrying amount of the asset.

Presentation of Grants Related to Income

Grants related to income are sometimes presented as a credit in the income statement, either separately or under a
general heading such as “Other income”; alternatively, they are deducted in reporting the related expense.