Can you capitalize borrowing costs?

The core principle of IAS 23 Borrowing Costs is that you should capitalize borrowing costs if they are directly attributable to the acquisition, construction or production of a qualifying asset. Other borrowing costs are expensed in profit or loss.

How do you calculate capitalized borrowing costs?

Cost to be Capitalized = Capitalization rate * Amount spent on qualifying asset out of general borrowingNote: Amount of borrowing cost capitalized during a period should not exceed the amount of borrowing cost incurred during the period.

When should the capitalization of borrowing cost be suspended?

Capitalisation of borrowing costs should be suspended during extended periods in which active development of a qualifying asset is suspended (IAS 23.20). Capitalisation of borrowing costs is suspended when, for example, the entity needs to redirect its workforce and efforts to development of another asset.

What is ancillary cost of borrowing?

Amortization of ancillary costs incurred in relation to the arrangement of borrowings. Finance charges relating to the assets acquired under finance leases or under any other similar arrangement. Exchange differences resulting from foreign currency borrowings.

What are the borrowing costs eligible for capitalisation?

When an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the borrowing costs eligible for capitalisation are the actual borrowing costs incurred on that borrowing during the period (IAS 23.12).

When was IAS 23 amended to capitalise borrowing costs?

The IASB amended IAS 23, ‘Borrowing costs’, in March 2007 to converge with US GAAP. The broad principles of IAS 23 (Revised) are the same as those in FAS 34, ‘Capitalisation of interest cost’, although the details differ. The revised standard requires borrowing costs incurred to finance construction of qualifying assets to be capitalised.

What are borrowing costs and how are they calculated?

Borrowing costs are defined as interest and other costs that an entity incurs in connection with the borrowing of funds. Borrowing costs may include interest expense calculated using the effective interest method, finance charges in respect of finance leases and certain exchange differences from borrowings denominated in a foreign currency.

When does a company need to suspend capitalisation of borrowing costs?

Similarly, it does not suspend capitalisation when a temporary delay is a necessary part of the development process – e.g. for an external but common event or an interruption that is a typical part of the process. Therefore, a company may need to apply judgement to determine whether it should suspend capitalisation of borrowing costs.