Borrowing Costs Asset financed by specific borrowing

- Interest and other costs that an entity incurs in - If the funds are borrowed specifically for the
connection with borrowing of funds. purpose of acquiring a qualifying asset, the
amount of capitalize borrowing cost is the actual
Specifically Include:
borrowing cost incurred during the period less
- Interest expense calculated using effective any investment income from the temporary
interest method investment of those borrowings.
- Finance charge with respect to a finance lease.
- Exchange difference arising from foreign
currency borrowing to the extent that it is
regarded as an adjusted to interest cost.

Qualifying Asset

- Is an asset that necessarily takes a substantial

period of time to get ready for the intended use
or sale.
Ex.
a. Manufacturing plant
b. Power generation facility
c. Intangible asset investment property
d. Investment property

Exclude from capitalization:

a) Asset measured at fair value, such as Asset financed by general borrowing

biological assets.
- If the funds are borrowed generally and used
b) Inventory manufactured or produced in large
for acquiring a qualifying asset, the amount of
quantity on a repetitive basis, such as whisky,
capitalizable borrowing cost is equal to the
even if it takes a substantial period of time to
average carrying amount of the asset during the
get ready for sale.
period multiplied by a capitalization rate or
c) Assets that are ready for their intended use
average interest rate.
or sale when acquired.
- The capitalizable borrowing cost shall not
exceed the actual interest incurred.
- Capitalization rate or average interest rate is
Accounting for Borrowing Cost equal to total annual borrowing cost divided by
1. The capitalization of borrowing costs is total general borrowing outstanding during the
mandatory for a qualifying asset. period.
(Directly attributable cost) - No specific guidance when it comes to interest
2. If the borrowing is not directly attributable to income.
a qualifying asset, the borrowing cost is - Accordingly, any investment income is not
expensed immediately. deducted from capitalizable borrowing cost.
- Amount of capitalizable borrowing cost is the
average carrying amount of the building
multiplied by the capitalization rate.
- The excess of actual borrowing cost over
capitalizable borrowing cost is charged to
interest expense.

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Asset financed both by specific and general
borrowing

- The average expenditures during a period shall

include the borrowing cost previously
capitalized.

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 Commencement of capitalization

Capitalization of borrowing costs as part of QA when

3 conditions are met:

a. When the entity incurs expenditures for the

asset
b. When the entity incurs borrowing costs
c. When the entity undertakes activities that
are necessary to prepare the asset for the
intended use or sale.

Activities necessary to prepare

- Encompasses more than physical construction of

the asset.
- These include technical & administrative work
prior to the commencement of physical
construction, such drawing up plan & obtaining
permit for a building

Suspension of capitalization

- Capitalization of borrowing costs shall be

suspended during extended periods in which
active development is interrupted, it is expense.
- Capitalization of borrowing costs is not
suspended when a temporary delay is a
necessary part of the process of getting an asset
ready for its intended use or sale.

Cessation of capitalization

- Capitalization of borrowing costs shall cease

when all activities to prepare QA are complete.
- An asset is normally ready for the intended use
or sale when the physical construction of the
asset is complete even through routine
administrative work might still continue.

Disclosures related to borrowing costs.

a. The amount of borrowing costs capitalized

Specific borrowing cost for asset used for general during the period
purpose b. The capitalization rate used to determine the
amount of borrowing costs eligible for
- If asset is financed by specific borrowing but a capitalization.
portion is used for working capital purposes, the
borrowing shall be treated as general borrowing
in determining capitalizable borrowing cost. - Segregation of assets that are “Qualifying Asset”
- Thus capitalizable borrowing cost is equal to the from other assets in the statement of financial
average expenditures on the asset multiplied by position are not required to be disclosed.
the average interest rate.

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