IAS 23 – Borrowing Costs, each with a complete solution:

Problem 1: Construction of a Manufacturing Plant

Scenario: On 1 February 2025, Alpha Textiles Ltd began constructing a new manufacturing
plant with an estimated useful life of 25 years. The company purchased land for PKR 15
million, spent PKR 10 million on building construction, and PKR 4 million on machinery and
equipment. The plant was completed on 30 November 2025 and became operational on 1
January 2026. To finance the project, Alpha borrowed:
 PKR 20 million at 9% per annum

 PKR 10 million at 6% per annum, both on 1 February 2025.

Required: Calculate the capitalizable interest as per IAS 23 at 31 December 2026.

Solution:

Construction period: 1 Feb 2025 to 30 Nov 2025 = 10 months

Interest on PKR 20 million at 9%:

10
20,000,000 × 9% × = PKR 1,500,000
12
Interest on PKR 10 million at 6%:
10
10,000,000 × 6% × = PKR 500,000
12
Total Capitalizable Interest:

PKR 2,000,000

Problem 2: Expansion of Retail Chain

Scenario: On 1 March 2025, Beta Mart Pvt Ltd began constructing a new retail outlet in
Lahore. The outlet had an estimated useful life of 30 years. Costs incurred:

 Land: PKR 25 million

 Building: PKR 8 million

 Interior fittings: PKR 6 million

The outlet was completed on 31 October 2025 and opened on 1 January 2026. To fund the
project, Beta Mart borrowed:
 PKR 30 million at 8% per annum

 PKR 10 million at 5% per annum, both on 1 March 2025.

Required: Calculate the capitalizable interest as per IAS 23 at 31 December 2026.

Solution:

Construction period: 1 Mar 2025 to 31 Oct 2025 = 8 months

Interest on PKR 30 million at 8%:

8
30,000,000 × 8% × = PKR 1,600,000
12
Interest on PKR 10 million at 5%:
8
10,000,000 × 5% × = PKR 333,333
12
Total Capitalizable Interest:

PKR 1,933,333
Under IAS 20 – Accounting for Government Grants and Disclosure of Government
Assistance, there are two acceptable methods for presenting government grants related to
assets:

1. Netting off the grant against the asset (Reduction Method)

2. Showing the grant as deferred income (Deferred Income Method)

Data Given

 Cost of new classrooms: PKR 1,000,000

 Government grant received: PKR 500,000

 Depreciation rate: 10% per annum (straight-line)

 Depreciation for full year: PKR 100,000

Method 1: Reduction Method

Financial Position (Balance Sheet)

Item Amount (PKR)

Property, Plant & Equipment (Net) 1,000,000 – 500,000 – 100,000 = 400,000

Statement of Profit or Loss

Item Amount (PKR)

Depreciation 100,000

The grant reduces the asset’s carrying amount, so depreciation is charged on the net amount
(1,000,000 – 500,000 = 500,000). Depreciation = 10% × 500,000 = PKR 50,000
Revised Profit or Loss (Reduction Method)

Item Amount (PKR)

Depreciation 50,000

Method 2: Deferred Income Method

Financial Position (Balance Sheet)

Item Amount (PKR)

Property, Plant & Equipment (Net) 1,000,000 – 100,000 = 900,000

 Item Amount (PKR)

Deferred Grant Income (Liability) 500,000 – 50,000 = 450,000

Depreciation = 10% × 1,000,000 = PKR 100,000

Grant amortization = 10% × 500,000 = PKR 50,000

Statement of Profit or Loss

Item Amount (PKR)

Depreciation Expense 100,000

Less: Grant Income (50,000)

Net Expense 50,000

Summary Comparison

Asset Deferred Depreciation Grant Net

Method
Value Income Expense Income Expense

Reduction Method 400,000 — 50,000 — 50,000

Deferred Income
900,000 450,000 100,000 50,000 50,000
Method

Both methods result in the same net impact on profit, but differ in presentation.

Problem 1: Government Grant for School Library

Scenario: On 1 January 2025, a Federal Govt. School received a government grant of PKR
600,000 to help build a new library costing PKR 1,200,000. The library has a useful life of 10
years and is depreciated using the straight-line method.

Required: Show the Financial Position and Statement of Profit or Loss at the end of the first
year using both methods under IAS 20.

Solution

Depreciation per year:

1,200,000
= PKR 120,000
10
Method 1: Reduction Method

Balance Sheet

 Asset value: 1,200,000 – 600,000 – 120,000 = PKR 480,000

Profit or Loss
 Depreciation charged on net asset (1,200,000 – 600,000 = 600,000)

 Depreciation = 10% × 600,000 = PKR 60,000

Method 2: Deferred Income Method

Balance Sheet

 Asset value: 1,200,000 – 120,000 = PKR 1,080,000

 Deferred grant income: 600,000 – 60,000 = PKR 540,000

Profit or Loss
 Depreciation: PKR 120,000

 Grant income: PKR 60,000

 Net expense: PKR 60,000

Problem 2: Government Grant for Science Lab Equipment

On 1 July 2025, a Govt. School received a grant of PKR 300,000 for purchasing science lab
equipment costing PKR 600,000. The equipment has a useful life of 5 years and is depreciated
straight-line. The equipment was brought into use immediately.

Required: Show the Financial Position and Statement of Profit or Loss at the end of the first
year (i.e., 31 December 2025) using both IAS 20 methods.

Solution

Depreciation for 6 months:

600,000 6
× = PKR 60,000
5 12
Method 1: Reduction Method
Balance Sheet

 Asset value: 600,000 – 300,000 – 60,000 = PKR 240,000

Profit or Loss
  Depreciation on net asset (600,000 – 300,000 = 300,000)

 Depreciation = 10% × 300,000 × 6/12 = PKR 30,000

Method 2: Deferred Income Method

Balance Sheet
 Asset value: 600,000 – 60,000 = PKR 540,000

 Deferred grant income: 300,000 – 30,000 = PKR 270,000

Profit or Loss

Depreciation: PKR 60,000

Grant income: PKR 30,000

Net expense: PKR 30,000

IFRS 5 – Discontinued Operations, each with a complete solution including the Statement of
Profit or Loss and an explanation of how IFRS 5 improves financial reporting clarity.

Problem 1: Closure of Electronics Division

Scenario: M/s TechNova Ltd discontinued its Electronics Division in July 2024. The division’s
assets were sold at a loss of PKR 2 million, and severance costs amounted to PKR 0.8 million.
The company also incurred restructuring costs of PKR 0.3 million for its continuing Software
Division.
Financial Summary for 2024 (in PKR millions):

Item Software Division Electronics Division

Revenue 12 5

Cost of Goods Sold 4 2

Distribution Cost 0.5 0.3

Administration 2 1.2

Interest Expense 0.6 —

Income Tax Rate 30% —

(a) Statement of Profit or Loss for the Year Ended 31 Dec 2024

Continuing Operations (Software Division)

Revenue: 12

COGS: (4)

Distribution: (0.5)

Administration: (2)

Restructuring: (0.3)

Operating Profit: 5.2

Interest: (0.6)

Profit Before Tax: 4.6

Tax (30%): (1.38)

Profit from Continuing Operations: PKR 3.22 million

Discontinued Operations (Electronics Division)

 Revenue: 5

 COGS: (2)

 Distribution: (0.3)
 Administration: (1.2)

 Operating Profit: 1.5

 Loss on Sale of Assets: (2.0)

 Severance Cost: (0.8)

 Loss Before Tax: (1.3)

 Tax Benefit (30%): 0.39

 Loss from Discontinued Operations: PKR (0.91) million

Net Profit for the Year:

3.22 − 0.91 = 𝑃𝐾𝑅2.31 million

(b) Usefulness of IFRS 5 Presentation

 Separates one-time losses from ongoing operations

 Improves comparability across years

 Helps investors assess future profitability

 Clarifies strategic decisions