๐ Overview
This standard requires capitalisation of borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are expensed in the period they occur.
๐ฏ Scope
This standard applies to the accounting treatment for borrowing costs, including interest and fees associated with borrowing. The standard requires capitalization of borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset.
โ๏ธ Key Principles
1. **Qualifying Asset**: An asset that takes a substantial period of time (typically more than one year) to get ready for its intended use or sale.
- **Examples**: Factories, machinery, investment property, inventory requiring long production periods.
- **Not qualifying assets**: Inventory produced in large quantities over a short period, assets acquired ready for use.
2. **Capitalizable Borrowing Costs**: Actual borrowing costs incurred during the construction period, less any temporary investment income.
๐ Measurement
**Capitalizable Borrowing Costs:**
- **For Specific Borrowings**: Actual borrowing cost during construction.
- **For General Borrowings**: A capitalization rate is applied to the average accumulated costs of the asset.
**Capitalization Rate =** (Total borrowing costs on general borrowings) รท (Total general borrowings)
**Capitalization Period**: Begins when:
1. Expenditures on the asset are incurred.
2. Borrowing costs are incurred.
3. Activities necessary to prepare the asset are underway.
โ Recognition
**Capitalizable Borrowing Costs:**
- Added to the cost of the qualifying asset (appear as part of the asset on the balance sheet).
**Non-Capitalizable Borrowing Costs:**
- Expensed in the income statement in the period they are incurred.
**Cessation of Capitalization:** Capitalization of borrowing costs ceases when the asset is substantially complete and ready for use or sale.
๐ Presentation
**On the Statement of Financial Position:**
- Capitalized borrowing costs appear as part of the qualifying asset's cost.
**On the Income Statement:**
- Non-capitalized borrowing costs appear within financing expenses.
**In the Notes:**
- Amount of borrowing costs capitalized during the period.
- Capitalization rate used.
- Accounting policy (capitalization or immediate expensing).
๐ Disclosure Requirements
Disclosures required:
- Accounting policy for borrowing costs.
- Amount of borrowing costs capitalized during the period.
- Capitalization rate used to determine capitalizable borrowing costs.
- Period during which borrowing costs were capitalized.
- Any temporary suspension of construction activities and its effect on capitalization.
๐ Related Standards
IAS 16 (Property, Plant and Equipment), IAS 38 (Intangible Assets), IAS 40 (Investment Property)