FRS 123 Borrowing Costs prescribes the accounting

treatment for borrowing costs limited to the costs of

borrowing to construct or develop qualifying assets.

FRS 123 defines a qualifying asset as ‘an asset that

necessarily takes a substantial period of time to get
ready for its intended use or sale’.
 Borrowing costs include:
• Interests such as on bank overdrafts and both short-
term and long-term 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
recognised in accordance with FRS 117 Leases; and
• Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as
an adjustment to interest costs.
Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying
asset are to be capitalised as part of the cost of the asset
provided it is probable that they will result in future
economic benefits to the entity and the costs can be
measured reliably.

Costs on funds borrowed specifically for the purpose of

obtaining the qualifying asset less income from
temporary investment of the borrowing are to be
capitalised as part of the cost of the asset.

Example 1
 Borrowing may be done centrally, or the entity might
take up different loan packages with varying interest
rates.
 When funds are borrowed, the borrowing cost
applicable to obtaining a qualifying asset is measured
by applying a weighted average interest rate,
excluding that borrowed specifically for the purpose
of obtaining a qualifying asset.
 The amount of borrowing costs capitalised during a
period should not exceed the actual borrowing costs
incurred during that period.

Example 2 (page 512)

 The capitalisation of borrowing costs should commence
when:
◦ expenditure for the asset is 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.
 Sometimes, the borrowing may commence before
construction starts, in which case only the borrowing
costs incurred from the date when construction starts can
be capitalised.
 Suspension
◦ During periods when active development is interrupted,
the borrowing costs incurred during these interrupted
periods will not be capitalised.
◦ However, temporary delays which are necessary, or
extended period for inventory to mature, or delays in
construction are not considered interruption of
construction.
 Cessation
◦ Borrowing costs are not capitalised once the activities
necessary to prepare the qualifying asset for intended
use or sale are completed.
◦ Capitalisation should cease when substantially all the
activities necessary to prepare that part for its intended
use or sale are completed.

Example 3 (page 513)

1. Accounting policy adopted for borrowing costs;
2. Amount of borrowing costs capitalised during the
period; and
3. Capitalisation rate used to determine the amount
of borrowing costs eligible for capitalisation.