ACYFARP: Borrowing Cost

Borrowing Costs

Are defined as interest and other costs that an entity incurs in connection with borrowing of funds.

Borrowing Costs

Specifically include:

a. Interest expense calculated using the effective interest method.

b. Finance chargers with respect to a finance lease.

c. Exchange differences arising from foreign currency borrowing to the extent that it is regarded as an adjustment 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.

Include the following:

a. Manufacturing plant

b. Power generation facility

c. Intangible asset

d. Investment property

Exclusions from Capitalization

PAS 23 does not require capitalization of borrowing costs to the following:

a. Assets measured at fair value, such as biological assets.

b. Inventory manufactured or produced in large quantity on a repetitive basis, such as maturing whisky, even if it takes a substantial period of time to get ready for sale.

c. Assets that are ready for their intended use or sale when acquired.

Borrowing is Directly Attributable to the Acquisition of Qualifying Asset

In accounting for this, the borrowing cost is required to be capitalized as cost of the asset.

Directly Attributable Borrowing Costs

These are borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset. These are borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made.

Borrowing is Not Directly Attributable to a Qualifying Asset

These borrowing costs shall be expensed when incurred.

Specific Borrowing Costs

Are borrowed funds intended specifically for the purpose of acquiring a qualifying asset. The amount capitalizable is the actual borrowing cost incurred during the period less any investment income from the temporary investment of these borrowings.

Capitalizable Specific Borrowing Cost

Actual Borrowing Cost - Investment Income

General Borrowing Costs

Funds that are borrowed generally and used for acquiring a qualifying asset, the amount capitalizable is equal to the average carrying amount of the asset during the period multiplied by a capitalization rate or average interest rate.

General Borrowing Cost

Average Carrying Amount of Asset x Capitalization Rate

Capitalization Rate or Average Interest Rate

Total Annual Borrowing Cost / Total General Borrowings Outstanding During the Period

True

(True or False) Any investment income from general borrowings is not deduction from the capitalizable borrowing costs.

True

(True or False) The excess of the capitalizable borrowing costs from the non-capitalizable borrowing costs will be charged to interest expense.

General Borrowing

Average Expenditures - Specific Borrowing

True

(True or False) If an asset is financed by specific borrowing but a portion is used for working capital purposes, the borrowing shall be treated as a general borrowing in determining capitalizable borrowing cost.

Commencement of Capitalization

Shall commence when the following three are present:

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

Activities that encompass more than the physical construction of the asset. These include technical and administrative work prior to the commencement of physical construction, such as drawing up plans and obtaining permit for a building.

True

(True or False) Merely holding assets for use or development without any associated development activity does not qualify for capitalization.

Suspension of Capitalization

Occurs during extended periods in which development is interrupted.

True

(True or False) Capitalization of borrowing cost is not normally suspended during a period when substantial technical and administrative work is being carried out.

True

(True or False) Capitalization of borrowing costs is not also 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

Occurs when substantially all the activities necessary to prepare the qualifying asset for the intended use or sale are complete.

True

(True or False) An asset is normally ready for the intended use or sale when the physical construction of the asset is complete even though routine administrative work might still continue.

Disclosures Related to Borrowing Costs

a. The amount of borrowing costs capitalized during the period.

b. The capitalization rate used to determine the amount of borrowing costs eligible for capitalization.

True

(True or False) Segregation of assets that are "qualifying assets" from other assets in the statement of financial position is not required to be disclosed.