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Questions and Answers
Capitalization of borrowing costs starts when expenditures for the asset are being __________
incurred
Borrowing costs are capitalized if they are __________, meaning they would not have been incurred if the expenditure on the qualifying asset had not been made
avoidable
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as ______ of that asset.
cost
Capitalization is suspended during extended periods in which active development is __________
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Other borrowing costs are ______ when incurred.
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Capitalization of borrowing costs ceases when the qualifying asset is substantially __________
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Specific borrowing refers to funds borrowed specifically for the purpose of obtaining a qualifying __________
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Borrowing costs refer to the expense of taking out ______ expenses like interest payments incurred from a loan or any other kind of borrowing.
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The capitalizable borrowing costs on general borrowings are computed as Ave. Expenditure x __________ Rate
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Incurred is an accounting term that means that all transactions, regardless of their nature, must be recorded when ______.
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Qualifying asset - is 'an asset that necessarily takes a substantial period of time to get ready for its intended use or ______.' (PAS 23.5)
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Examples of qualifying assets: Inventories that take a long period of time to ______.
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Study Notes
Borrowing Costs Under PAS 23
- Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset are capitalized as part of the asset's cost.
- Other borrowing costs are expensed when incurred.
Definition of Borrowing Costs
- Borrowing costs refer to expenses incurred in relation to borrowing funds, such as interest payments on loans or other borrowing.
- Examples of borrowing costs include interest expense on financial liabilities or lease liabilities, and exchange differences on foreign borrowings.
Qualifying Asset
- A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale.
- Examples of qualifying assets include:
- Inventories that take a long time to produce
- Items of Property, Plant, and Equipment (PPE) that take a long time to construct or prepare for use
- Intangible assets that take a long time to develop
Exclusions from Qualifying Assets
- Financial assets
- Inventories that are routinely produced over a short period or are mass-produced
- Assets that are ready for their intended use or sale when acquired
- Assets measured at fair value
Capitalization of Borrowing Costs
- Borrowing costs are capitalized if they are avoidable, meaning they would not have been incurred if the expenditure on the qualifying asset had not been made.
- The capitalization rate is the weighted average of the borrowing costs applicable to the borrowings outstanding during the period.
- Capitalization starts when:
- Expenditures for the asset are being incurred
- Borrowing costs are being incurred
- Activities necessary to prepare the asset for its intended use or sale are being undertaken
- Capitalization is suspended during extended periods in which active development is interrupted, and resumed when development resumes.
Specific Borrowing
- Specific borrowing refers to funds borrowed specifically for the purpose of obtaining a qualifying asset.
- Capitalizable borrowing costs on specific borrowings are computed as: Capitalizable BC = Actual borrowing costs - Investment income
General Borrowing
- General borrowings are funds obtained for more than one purpose, including the acquisition or construction of a qualifying asset.
- Capitalizable borrowing costs on general borrowings are computed as: Capitalizable BC = Ave. Expenditure x Capitalization Rate
Disclosure
- The amount of borrowing costs capitalized during the period should be disclosed.
- The capitalization rate used to determine the capitalizable borrowing costs should also be disclosed.
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Description
Test your understanding of borrowing cost capitalization principle under PAS 23. Learn about when borrowing costs are capitalized as part of the cost of a qualifying asset and when they are expensed. Explore the concept of borrowing costs and their accounting treatment.
