Under FRS 123, What Is The Criteria, Accounting Treatment of Borrowing Costs and The Limitations to The Amount That Can Be Capitalized

Criteria for Capitalization of borrowing costs:

FRS 123 prescribes that borrowing costs can be capitalized on qualifying assets.

Borrowing costs definition are interest and other costs incurred in relation to borrowing of funds. This includes interest amortization of discounts, premiums and ancillary costs relating to borrowings.

For qualifying asset, it is an asset that takes a substantial period of time to be ready for intended use or sale.

Accounting treatment of borrowing costs:

  • Expensed¬† when incurred
  • Capitalize

Limitations to the amount of borrowing costs to be capitalized:

  • 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
  • Where funds specifically borrowed are utilized progressively as the construction progresses, the borrowing costs capitalized are reduced by any income earned on the idle funds invested
  • 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 be suspended during periods in which active development is interrupted
  • 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 apply consistently to all borrowing costs incurred for the acquisition, construction and production of qualifying assets.

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