Q

Explain qualifying asset and how do we treat exchange rate differences relating to the acquisition of qualifying assets

Home, - Discuss Acquisition of qualifying assets

Question: Explain the ‘qualifying asset' and how do we treat exchange rate differences relating to the acquisition of qualifying assets? Compare and contrast this with the treatment for assets that are not qualifying assets?

ANSWER:

Qualifying Asset
Assets that take a substantial period of time before being able to work in the manner intended by the management are called qualifying assets(AASB123, 2021). Infrastructure assets like roads, bridges, dams or intangible assets, inventories are examples of qualifying assets. Apart from the cost of production and other direct costs, borrowing costs that can be directly attributed to the construction, purchase of these assets also form part of the cost of such assets.

Borrowing costs include finance costs like interest expense, exchange rate differences and other finance charges(AASB123, 2021). When funds are borrowed specifically for the purpose of a qualifying asset, then the borrowing cost that can be directly identified to the asset is included in the cost of the asset. The capitalization of borrowing costs will cease when all the activities necessary for the intended use of the asset has been completed.

Exchange rate differences occur when the same number of units are exchanged from foreign currency to home currency at different rates(AASB123, 2021). It is to be noted that only those differences are to be considered that happen before the asset ceases to be a qualifying asset. Further, any profit or loss arising as a result of any foreign exchange fluctuation on a qualifying asset will be adjusted in its cost till it is classified as a qualifying asset.

Assets that are non-qualifying assets may be inventories that turn into finished goods within a short span of time or within a year. Any profit or loss that subsequently arises due to exchange rate differences is not to be taken into the cost of the non-qualifying asset. Instead, it will be transferred as a foreign exchange loss to the Profit and Loss account.Further, no capitalization is done for any finance cost to the cost of a non-qualifying asset(AASB123, 2021). Such finance expenses are closed by transfer to the Profit and Loss Account.


Leave a comment


Captcha

Related :-