Capitalizing borrowing costs

Question

Our company is building an office complex for the purpose of renting out. We have taken a bank loan amounting to $5m which is repayable in 05 years. However the construction will be completed within 02 years. My question is can I capitalize the borrowing costs during 05 years or only two years? If it is 02 years do I need to recognize as interest expenses in the P&L for the other 03 years?

Answer 1

According to IAS23, capitalization of interest cost begins when activities necessary for the project are commenced and capitalization ceases when asset is completed (or substantially completed). Thus you can only capitalize interest cost for 2 year (untill the asset is completed). The remaining interest for last 3 years will be charged to PnL.

Answer 2

As per IAS 23, Capitalization of borrowing cost commences when cost for the assets are occurring, Borrowing cost are being incurred & activities needed to prepare asset for use/sale are in progress. And capitalization for the borrowing cost stops when substantially all activities necessary to prepare asset are completed.

Hence, in this case you can capitalize borrowing cost for the period of 2 years. And as per standard, remaining borrowing cost should be recognized as expense in the period in which they incurred. So for next three years remaining cost shall be charged to P&L.

Answer 3

As per IAS 23, Borrowing costs that are directly attributable to construction of a qualifying asset will be capitalized and to be the part of asset. Other borrowing costs are recognized as an expense.

Hence in your case all the cost that is directly linked with the construction of building should be capitalized up to 2 years of its completion. Whereas the remaining cost will be expense out in profit and loss for the next 3 years

Answer 4

According to  IAS 23 ,Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset and, therefore, should be capitalised. Other borrowing costs are recognised as an expense Capitalization of the borrowing cost should be ceased when substantially all of the activities necessary to prepare the assets for its intended use or sale are complete. if only minor modifications are outstanding this indicates that substantially all the activities are complete

Therefore in this scenario the borrowing cost can be capitalize only during the first two years and the borrowing cost for the remaining three years should be charge to P&L  in the period which they incurred. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset and, therefore, should be capitalised. Other borrowing costs are recognised as an expense