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.