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    Chapter 25: Borrowing Costs Borrowing Cost

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    Imma Therese Yu
    This document discusses accounting for borrowing costs. It defines borrowing costs and qualifying assets that allow capitalization of borrowing costs. Specifically, it outlines the accounting treatment for capitalizing borrowing costs that are directly attributable to a qualifying asset versus those that are not. It also provides guidance on calculating capitalizable borrowing costs for assets financed by specific versus general borrowings.

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    Chapter 25: Borrowing Costs Borrowing Cost

    Uploaded by

    Imma Therese Yu
    35 views3 pages
    This document discusses accounting for borrowing costs. It defines borrowing costs and qualifying assets that allow capitalization of borrowing costs. Specifically, it outlines the accounting treatment for capitalizing borrowing costs that are directly attributable to a qualifying asset versus those that are not. It also provides guidance on calculating capitalizable borrowing costs for assets financed by specific versus general borrowings.

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    Chapter 25

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    This document discusses accounting for borrowing costs. It defines borrowing costs and qualifying assets that allow capitalization of borrowing costs. Specifically, it outlines the accounting treatment for capitalizing borrowing costs that are directly attributable to a qualifying asset versus those that are not. It also provides guidance on calculating capitalizable borrowing costs for assets financed by specific versus general borrowings.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    35 views3 pages

    Chapter 25: Borrowing Costs Borrowing Cost

    Uploaded by

    Imma Therese Yu
    This document discusses accounting for borrowing costs. It defines borrowing costs and qualifying assets that allow capitalization of borrowing costs. Specifically, it outlines the accounting treatment for capitalizing borrowing costs that are directly attributable to a qualifying asset versus those that are not. It also provides guidance on calculating capitalizable borrowing costs for assets financed by specific versus general borrowings.

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    Cha p t e r 2 5 : Bo rro w i ng Co s t s

    Bo rro w i ng c o s t
     I n t e r e st a n d o t he r co st s t h a t a n e n t i t y i n cur s i n
    co n n e cti o n wi t h b o rr o wi n g o f f u n d s
    Sp e ci fi call y i n cl u de s:
    a . I n t e r e st e xp e n se cal cul a t ed u si n g t h e e f fe cti ve
    i n t er e st me t h o d
    b . F in a n ce cha r g e s in r e spe ct o f fi na n ce l e a se
    c. Exch a n g e d i f f e r en ce a ri si n g fr o m f o r ei g n cu rr e n cy
    b o r r o wi n g t o t h e e xt e n t t h a t i s re g a r d ed a s a n
    a d ju st me n t t o i n t er e st co st

    Q ua l i f yi ng a s s e t
     An a sse t t h a t n e ce ssaril y t a ke s a sub st a n ti al p e rio d
    o f t i me t o g e t re a d y f or t h e in t e n d ed u se o r sal e
    I n cl ud e s:
    a . Ma n u f a ct u ri n g pla n t
    b . Po we r g e n e r a ti o n f a cili t y
    c. I n t a n gi bl e a sse t
    d . I n ve st me n t p r o p e r t y

    Ex c l ud e d f ro m Ca p it a l i zat i o n
    a . Asse t s me a su r e d a t fa ir val u e ( Bio lo gi cal a sset s)
    b . I n ve n t o r y ma n u f a ct u r ed o r p ro d u ce d in l ar g e q u an ti t y
    o n a r e pe ti ti ve b a si s (W hisky) e ven i f i t t a ke s a
    su b st a n ti al p eri o d o f ti me t o g e t r e a dy f o r sal e
    c. Asse t s t h a t a r e r e ad y f or t he ir i n te nd e d u se o r s al e
    wh e n a cq u i re d

    Ac c o unt i ng f o r Bo rro w i ng c o s t
    1 . I f it i s di re ctl y a t tri b u t a bl e t o th e a cq ui si ti o n,
    co n st r u cti o n o r pr o d u cti on o f a q u ali fyi n g a s se t
    o Ca p it a l ize d a s co st o f a sse t
    o Bo r r o wi n g co st s t h a t wo u l d h a ve be en a voi d e d
    i f t h e e xp e n di t u re o n t h e q u ali f yi n g a sse t h a d
    n o t b e e n ma d e
    2 . I f i t i s n o t di re ctl y a t tr ib u t a bl e t o a qua li f yi n g a sse t
    o Exp e n se d a s i n cur r e d (i mme d i a t e l y)

    As s e t f i na nc e d b y s p e c if i c b o rro w ing
     t h e a mo u n t o f ca p i t ali za bl e bo r ro wi n g co st i s t he
    a ct u al b o r ro wi n g co st i n cu rr e d d uri n g t h e p e ri o d l e ss
    any i n ve st me n t i n co me from the t e mp o r a r y
    i n ve st me n t o f t h o se b o rr o wi n g s
    Ca p i t a l i za b l e b o r r o w i n g c os t
    = Actual Borrowing cost – Interest income from investment of proceeds

    As s e t f i na nc e d b y g e ne ra l b o rro w i ng
     t h e a mo u n t o f ca p i t ali za bl e bo r r o wi ng co st i s e q ual
    t o t h e a ver a g e car r yi n g a mo u n t o f t h e a sse t d uri n g
    t h e p e ri o d mu l t ip lie d b y a ca pi t ali za ti o n r a t e o r
    a ve r a g e in t e r e st r a t e
     sh a ll n o t e xce e d t h e a ctu al i nt e r e st i n cur r e d , an d
    e xce ss i s ch a r ge d t o i nt e r e st e xp e n se
     a n y i n ve st me n t i n co me f r o m g e n e r a l b o r r wi n g i s no t
    d e d u ct e d fr o m ca p i t ali za bl e b o rr o wi ng co st

    Ca p i t a l i za t i o n r a t e o r A v e r a g e i n t e r es t r at e
    Total annual borrowing cost
    =
    Total general borrowing outstanding during the period

    Date E xp e n d i t ur e s M o nt h s O u t st a n d i n g A m o u nt
    (a) (b) (a x b)
    A v e r a g e c a r r yi n g a m o u n t
    = Total amount / 12 months or one cycle
    OR
    Date E xp e n d i t ur e s Fract io n A ve r a g e
    (a) (b) (a x b)

    A m o u n t of c a p i t a l i za b l e b o r r ow i n g c o st
    = Average carrying amount of the building X Capitalization rate

    Asset financed both by specific and general borrowing


    Date E xp e n d i t ur e s Fract io n A ve r a g e
    (a) (b) (a x b)

    General borrowing
    = A v e r a g e e x p e n di t u r e s – S p e ci fi c b or r o win g

    T o t a l c a p i t a l i za b l e b o r r ow i n g c o st
    = S p e c i f ic b or r o wi n g + Ge n e r a l b or r o wi n g

    Co ns t ruc t i o n p e ri o d mo re o r l e s s tha n a ye a r
    Date E xp e n d i t ur e s Fract io n A ve r a g e
    (a) (b) (a x b)

    Applicable to General loan


    = A v e r a g e e x p e n d i t ur e s – A p p l i c ab l e t o s p e c i fi c l o a n

    T o t a l c o st of _ _ _ _ t o d a t e
    = A c t u a l e x p e n d i t u re s + T o t a l c a pi t a l i za b l e b o r ro w i n g c o s t

    *Dfference
    = No . o f m o nt h s o r t h e p e r i o d of c o n st r u ct i o n ( f r ac t i o n )
    Sp e c i f i c b o rro w i ng fo r a s s et us e d fo r g e ne ra l p urp o s e s
     b o r r o wi n g sh all b e tr e a t ed a s a g e n er a l b or r o wi n g i n
    d e t e r mi n in g ca pi t ali zab le b or r o wi n g co st

    Ca p i t a l i za b l e b o r r o w i n g c os t
    = Average expenditures on the asset X Average interest rate

    Commencement of Capitalization
    When the following three conditions 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 the asset for the intended user or sal e
    encompass more than the physical construction of the asset. These
    includes technical and administrative work prior to the
    commencement of physical construction such as drawing up plans
    and obtaining permit for a building. Howevery, merely holding assets
    for use or development without any associated development activity
    does not qualify for capitalization.

    Suspension of Capitalization
     During extended periods in which active development is
    interrupted
    Excludes:
     During a period whe substantial technical and administrative
    work is being carried out
     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
     When substantially all the activities necessary to prepare the
    qualifying asset for the intended use or sale are complete

    Asset is 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.

    Segregation of assets that are qualifying assets from other assets in


    the statement of financial position is not required to be disclosed.

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