Borrowing Costs - Loan taken to construct a building was waived off and can it be set off against the asset?

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alliterationofk
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Joined: 15 Feb 2021, 08:07

Borrowing Costs - Loan taken to construct a building was waived off and can it be set off against the asset?

Post by alliterationofk »

Hi,

I would like to if the accounting treatment I've applied for a loan taken to construct a building is correct.

Scenario:
A loan was taken out to construct a building amounting to say 1 Million USD. The time period to construct it is 2 years. Interest is at 5% p.a..
Interest payments are charged to the asset work in progress account/capitalised. Now the bank has waived off the loan amounting to 250,000 USD since there was a property pledged for this loan that was sold off by the bank.

My question would be can this loan waived off be set off against the asset being constructed i.e., reduce the value of the WIP asset by this loan amount or should it be charged to the income statement as other income thereby debiting the loan account and crediting the income statement?

If the waiver can be set off against the asset, would it be under IAS 16 or under IAS 32. (Any supporting documentation/standard reference would be appreciated)

Thank you.
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Marek Muc
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Location: Warsaw, Poland

Re: Borrowing Costs - Loan taken to construct a building was waived off and can it be set off against the asset?

Post by Marek Muc »

alliterationofk wrote: 26 Jun 2021, 16:21 Now the bank has waived off the loan amounting to 250,000 USD since there was a property pledged for this loan that was sold off by the bank.
Can you give more details about this part of the arrangement?
alliterationofk
Posts: 5
Joined: 15 Feb 2021, 08:07

Re: Borrowing Costs - Loan taken to construct a building was waived off and can it be set off against the asset?

Post by alliterationofk »

The company constructing this building is a parent company and and they have 100% control of a subsidiary whose that owns, among many things, a piece of land which was pledged for the loan taken out to construct the building.
The parent company defaulted on some payments to the bank and hence the bank took over the building and sold it which amounted to 250,000 USD. This amount has been reduced from the loan outstanding of 1,000,000 USD.
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Marek Muc
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Posts: 1703
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland

Re: Borrowing Costs - Loan taken to construct a building was waived off and can it be set off against the asset?

Post by Marek Muc »

ok so this loan was repaid with proceeds from the sale of this piece of land, I don't see any basis for deducting this ammount from the carrying amount of the asset under construction

In consolidated FS, I would show it as disposal of land, in parent's separate FS as capital withdrawal from subsidiary
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