QUESTION 1 (BORROWING COSTS: IAS 23) (40 Marks)

Part a

Manning Ltd has reported good profits over the past few years and the positive cash flow resulted in the repayment of all interest-bearing debt by the end of 2017.During 2017 it was decided to undertake a substantial expansion programme. This expansion programme commenced in 2018 and details thereof are as follows:

Description	Amount	Financing
Land	N$500 000	80% mortgage loan at 18% per annum from Cynch Bank
Buildings	N$1 500 000	80% mortgage loan at 18% per annum at Cynch Bank
Plant	N$2 000 000	100% loan @ 20% per annum repayable over 5 years commencing 1 January 2019.
Factory equipment	N$500 000	Finance lease of N$200 000 per annum payable in arrears over 4 years.

The assets were acquired as follows:

• Land: payment on transfer on 1 February 2018
• Buildings: commencement of construction activities on 1 January 2018

Progress payments	N$
30 April 2018	500 000
31 July 2018	250 000
31 October 2018	250 000
31 January 2019	250 000
30 April 2019	250 000

Completion of building -1 May 2019

Cash on hand was used to make 20% of each payment in respect of land and buildings

1. Plant The plant will be brought into use on 1 May 2019 but payment to the foreign supplier will be made on shipment of the plant on 31 January 2019.Funds from the N$2 000 000 loan are available from this date in order to finance the purchase.
2. Factory equipment: The supplier of the equipment undertook to deliver the equipment on 1 April 2019. The finance lease agreement will be concluded on the same date. This equipment will also be brought into use on 1 May 2019.

Part b

Required:
1.1	Briefly explain which portion of the borrowing costs from the different sources of financing may be capitalized in terms of the requirements of IAS 23 Borrowing costs.	5
1.2	Calculate the Borrowing costs which may be capitalized for the financial years ended 31 December 2018 and 31 December 2019 in accordance with IFRS. Assume the Cynch Bank Ltd compounds interest annually on 31 December.	15

On 30 September 2019 Zebra Ltd started with the construction of a plant which will take a considerable period of time to complete. The expenses on the project were paid as follows:

Period	N$
30 September 2019	50 000
31 October 2019	20 000
30 November 2019	60 000
31 December 2019	80 000

The year-end of Zebra Ltd is 31 December of each year. The following scenarios are available:

Case 1:

A loan of N$300 000 was acquired on 30 September 2019 specifically for purpose of erection of the plant. The loan carries interest at a market related interest rate of 16% per annum, payable annually in arrears. The full loan was taken up on 30 September 2019. Surplus funds that resulted from the loan were invested temporarily and earned interest income of N$10 000.

Case 2:

The erection of the plant is financed by way of a loan of N$500 000 that Zebra Ltd entered into on 1 July 2019 for general business purposes. The loan carries interest at a market related rate of 18% per annum that is payable monthly.

Case 3:

Required:
1.3	For each of the cases above calculate the borrowing costs to be capitalized for 2019.	15

The erection of the plant is financed by way of a facility of N$300 000 that was acquired on 30 September 2019 specifically for purpose of financing the erection of the plant. The facility carries interest at a market related interest rate of 16% per annum payable monthly in arrears.

Part c

Emma, a public limited company, is a sports organisation which owns several football and basketball teams. It has a financial year end of 31 May 2019.

Emma Ltd needs a new stadium to host sporting events which will be included as part of Emma's property, plant, and equipment. Emma Ltd commenced construction of a new stadium on 1 February 2019, and this continued until its completion which was after the year end of 31 May 2019. The direct costs were N$20 million in February 2019 and then N$50 million in each month until the year end. Emma Ltd has not taken out any specific borrowings to finance the construction of the stadium, but it has incurred finance costs on its general borrowings during the period, which could have been avoided if the stadium had not been constructed. Emma Ltd has calculated that the weighted average cost of borrowings for the period 1 February to 31 May 2019 on an annualised basis amounted to 9% per annum

Required:
1.4	Discuss how the above event would be shown in the financial statements of Emma Ltd under International Financial Reporting Standards.	5