Question 8

Munashe works as a graduate accountant for Sailaway Boat Ltd, a UK registered company that constructs different types of boats including yachts, sailboats, fishing and electric boats. Sailaway Boat Ltd constructs boats for its fleet and also as a contractor for other boating companies.

Sailaway Boat Ltd has historically reported under UK GAAP as an unlisted company but the directors are considering raising funds through a public listing, in the near future.

Munashe has been tasked with reviewing the companys financial statements and accounting policies to see what would change if the directorsdecided that Sailaway Boat Ltd should comply with the international accounting standards.

As part of his review, he has identified the following potential construction projects and capitalised assets that have been funded through borrowings.

Asset 1 The Dockyard

On 1^st February 2020, Sailaway Boat Ltd began to construct a new dockyard to meet the demand of increasing ship construction orders. The construction was badly impacted by the weather and construction had to cease at the beginning of March 2020 for a month. Due to a shortage of heavy-goods-vehicle (HGV) drivers in September 2020, materials required for the construction could not be delivered to the site and therefore construction had to be halted for the whole month of September too. Construction was completed on 1^st December 2020.

The construction was funded out of Sailaway Boat Ltds general funding which is as follows:

• 3 million, 3-year loan, interest at 8% per annum
• 4 million, 5-year loan, interest at 9% per annum
• 7 million, 7-year loan, interest at 5% per annum

The overall cost of construction was 3,750,000.

Asset 2 New Warehouse

To store parts and materials needed for increased ship construction orders, Sailaway Boat Ltd decided to construct a new warehouse.

On 1 January 2020 Sailaway Boat Ltd borrowed 5,000,000 at 7% per annum to fund the construction of a new warehouse. The cash received was immediately placed on deposit earning interest at 3% per annum. Construction did not begin until 1 March 2020 due to COVID-19 lockdown.

A construction payment of 3,000,000 was made on 1^st August 2020 and the remaining 2,000,000was paid on 1^st November 2020.

The warehouse was ready for use on 31^st December 2020 but Sailaway Boat Ltd did not start to use it until 1^st February 2021.

Munashe knows that under international accounting standards, interest should be capitalised. However, as he hasnt worked in a company that uses IAS 23 Borrowing costs before he is unsure whether the contracts identified are appropriate. He is also unsure how to calculate the interest that shouldbe capitalised in relation to the qualifying assets.

YOU ARE REQUIRED TO:

Write an email to Munashe, as his colleague, explaining the below. Please clearly label the question youre answering in the email format.

(3 marks awarded for appropriate email format and tone)

1. Describe whether changing from UK GAAP to International Accounting Standards would result in a change in accounting policy for every organisation in relation to borrowing costs.

(1 mark)

2. Analyse for each asset, whether the two construction projects are treated as construction contracts in accordance with IAS 23 Borrowing costs.

(10 marks)

3. Compute the total amount of interest that can be capitalised in relation to the two contracts identified by Munashe.

Show workings to 2 decimal places where possible.

(13 marks)