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Borrowing costs are interest and other costs incurred by an entity in connection with the borrowing of
funds. They may include:
Interest on bank overdraft; short-term and long-term borrowings;
Amortization of discounts or premiums relating to borrowings;
Amortization of ancillary costs incurred in connection with the arrangement of borrowings;
Finance charges in respect of finance leases: FRS 117 Leases
Exchange differences arising from foreign currency borrowings to the extent they are regarded
as an adjustment to interest costs: FRS 121 The Effects of Changes in FOREX rates
Definition
Borrowing is specific to the construction of the asset or the borrowing could be avoided
if not for the construction of the asset
Where the borrowing for the construction is part of a general pool of borrowing, the
interest capitalized is based on the weighted average rate of the borrowing costs
applicable to the general pool
Capitalization should commence when expenditure and borrowing costs are being
incurred and activities necessary to prepare the asset for its intended use or sale are in
progress
Capitalization should cease when substantially all of the activities necessary to prepare
the asset for its intended use or sale are complete
The policy should be applied consistently to all borrowing costs incurred for the
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b) General Borrowing (borrowings are not wholly & exclusively for financing a QA)
The amount of borrowing costs eligible for capitalization should be determined by applying a
capitalization rate to the expenditure on the asset. The capitalization rate should be weighted
average of borrowing costs applicable to the borrowings of the entity that are outstanding during the
period other than borrowings made specifically for the purpose of obtaining a qualifying asset.
However the amount of borrowing costs capitalized should not exceed the amount of borrowing
costs incurred during the period. Where funds are borrowed generally the amount of borrowing
costs is not reduced by interest income earned. The base ie the amount to which the capitalization
rate is applied should be the average amount of accumulated net capital expenditure incurred on
the qualifying asset within the relevant time frame.
Borrowing costs capitalized
Capitalization Rate (CR) (see below) x Expenditure Incurred To-Date of each QA
Balance at
year-end
RM
20,000
120,000
60,000
200,000
(a)
Weighted
Average
10.00%
60.00%
30.00%
100.00%
(b)
Interest
Rate
10.00%
12.00%
7.00%
(a) x (b)
Cap
Rate
1.00%
7.20%
2.10%
10.30%
Total
Annual
Interest
2,000
14,400
4,200
20,600
Interest to be capitalized
Method 1
Total Interest paid in the year
Expenditure on the qualifying asset
Interest charged to Income Statement
20,600
16,480
4,120
RM160,000 x 10.30%
Method 2
20,600
---------------------------------20,000 + 120,000 + 60,000
Interest to be capitalized
RM160,000 x 10.30%
x 100
= 10.30%
= RM16,480
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Qualifying Assets
Capitalization
Commencement of Capitalization
The capitalization of borrowing costs should
commence when:
Expenditure for the assets are being incurred;
Borrowing costs are being incurred and
Activities to prepare the asset for its intended
use or sale in progress
Suspension of Capitalization
The capitalization of borrowing costs should be
suspended during the period in which active
development is interrupted ie charged to Income
Statement as an expense during the period work is
suspended (see Whitewater).
However, capitalization 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
(where temporary delay is unavoidable).
General Borrowing
(borrowings are not wholly & exclusively for
financing a QA)
Borrowing costs capitalized
Capitalization Rate (CR) (see below) x Expenditure
Incurred To-Date of each QA
Cessation of Capitalization
The capitalization of borrowing costs should cease when 'substantially all the activities' necessary to prepare the
QA for its intended use or sale are completed.
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Substantially all the activities can be interpreted as physical construction of the asset is completed even though
routine administration work may still continue or minor modification still outstanding.