Final answer:
A 'qualifying asset' is one that takes considerable time to be ready for its intended use or sale, such as construction in process. Accounting treatments for exchange differences on qualifying assets involve capitalization according to IAS 23. Meanwhile, bank deposits are liabilities and loans are assets on a bank's balance sheet— the reverse of how they are treated on an individual's balance sheet.
Step-by-step explanation:
The term 'qualifying asset' typically refers to an asset for which a considerable amount of time is required to get it ready for its intended use or sale. In the context of accounting, assets such as buildings, plant, and equipment, which are constructed or produced over a period of time, may be considered qualifying assets. Capitalization of borrowing costs is permitted for these qualifying assets under certain accounting standards like IAS 23.
When dealing with foreign currency transactions, exchange differences may arise, and the accounting treatment for these differences in relation to qualifying assets depends on applicable accounting policies. However, under IAS 23, borrowing costs, including foreign exchange differences considered an adjustment to borrowing costs, may be capitalized as part of the cost of a qualifying asset. If the exchange rate fluctuates during the borrowing period, the cost of acquiring the asset may also fluctuate accordingly. This is different from exchange differences on monetary items or non-monetary items that are typically recognized in the profit or loss statement.
Bank balance sheets operate on a different principle than personal ones. For an individual, bank deposits would generally be considered an asset, as it is money that one can claim from the bank. However, for the bank, customer deposits are liabilities, as it is the amount the bank owes to its depositors. Conversely, loans issued by a bank are assets on its balance sheet because they represent money that the bank will receive in the future, whereas for an individual, a loan would be a liability as it is an obligation they need to repay.
The money under assets on a bank balance sheet may not actually be physically in the bank due to the banking practice of lending out the majority of the deposits they receive. This practice is known as fractional-reserve banking.
In the secondary market for loans, a loan's value can fluctuate based on several factors:
- Payment History: A loan with a borrower who has been late on payments is riskier and so may be less valuable.
- Interest Rates: If interest rates rise, existing loans with lower rates are less attractive, decreasing their value; if rates fall, these loans are more attractive and could be valued higher.
- Borrower's Profitability: A loan from a borrower with high profits is perceived as less risky and thus more valuable.