What are Borrowing Costs?
- Borrowing costs are interest and other costs incurred by an entity in connection with the borrowing of funds.
- Borrowing costs may include
– Interest on bank overdrafts and short-term and long-term borrowings (including inter-company borrowings).
– Amortisation of discounts or premiums relating to borrowings
– Amortisation of ancillary costs incurred in connection with the arrangement of borrowings.
– Finance charges in respect of finance leases.
– Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
What are Qualifying Assets?
- A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
Examples include
– Inventories (that are not produced over a short period of time)
– Fixed Assets
– Intangible assets
– Investment properties.
Recognition
- Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset.
- Other borrowing costs are recognised as an expense when incurred.
- If funds are borrowed specifically, the amount of borrowing costs eligible for capitalisation shall be the actual borrowing costs incurred on that borrowing less any investment income on the temporary investment of those borrowings.
- If funds are borrowed generally, the amount of borrowing costs eligible for capitalisation shall be determined by applying a capitalisation rate (weighted average of borrowing costs applicable to the general borrowings) to the expenditures on that asset. – The amount of the borrowing costs capitalised during the period cannot exceed the amount of borrowing costs incurred during the period.
Capitalisation commences when…
- Expenditures for the asset are being incurred
- Borrowing costs are being incurred, and
- Activities that are necessary to prepare the asset for its intended use or sale are in progress.
Capitalisation shall be suspended during extended periods in which active development is interrupted.
Cessation
- Capitalisation shall cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
- When the construction of a qualifying asset is completed in parts and each part is capable of being used while construction continues on other parts, capitalisation of borrowing costs shall cease when substantially all the activities necessary to prepare that part for its intended use or sale are completed.
Disclosures
- Amount of borrowing costs capitalised during the period.
- Capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.
How This Applies to ACCA F7 Financial Reporting
Borrowing Costs are examined under Tangible Non-Current Assets on the ACCA F7 Financial Reporting exam. You should know how to calculate the initial cost of a non-current assets, including borrowing costs and the cost of a self-constructed asset.