Accounting for borrowing costs- FRS 102

Welcome to the Institute’s Financial Reporting Q&A pages. We have prepared these pages to address some of the commonly asked questions relating to financial reporting matters.

Whilst we hope that the below questions are beneficial to you, they are not a substitute for reading the relevant accounting standards in full and are not intended to replace the accounting standards. Users of these pages should be aware that different facts and circumstances may exist in relation to similar accounting matters which may significantly change the financial reporting implications, and as a result, these Q&As do not represent a "one size fits all" solution to financial reporting issues.

In these Q&As, we look at borrowing costs under FRS 102 and some of the commonly asked questions.

1. What are borrowing costs & what type of costs are covered under section 25 “Borrowing Costs”?
2. What is a “qualifying asset” under FRS 102?
3. What accounting policy choices are available for borrowing costs incurred on qualifying assets?
4. What does it mean for borrowing costs to be “directly attributable to the acquisition, construction or production of a qualifying asset”?
5. If an entity borrows funds specifically to acquire a qualifying asset, how are the funds eligible for capitalisation calculated?
6. If an entity uses general borrowings to obtain a qualifying asset how is the amount eligible for capitalisation calculated?
7. What are the timing considerations in relation to when borrowing costs should and shouldn’t be capitalised?

1. What are borrowing costs & what type of costs are covered under section 25 “Borrowing Costs”?

   FRS 102 defines “borrowing costs” as follows:

   “Interest and other costs incurred by an entity in connection with the borrowing of funds.”

   FRS 102 also makes it clear that borrowing costs include the following:

   • Interest expense calculated using the effective interest method;
   • Finance charges in respect of finance leases; and
   • exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
   Back to Top

2. What is a “qualifying asset” under FRS 102?

   FRS 102 defines a “qualifying asset” as;

   “An asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Depending on the circumstances any of the following may be qualifying assets:

   (a) inventories;

   (b) manufacturing plants;

   (c) power generation facilities;

   (d) intangible assets; and

   (e) investment properties.

   Financial assets, and inventories that are produced over a short period of time, are not qualifying assets.

   Assets that are ready for their intended use or sale when acquired are not qualifying assets.”

   Back to Top

3. What accounting policy choices are available for borrowing costs incurred on qualifying assets?

   An entity may capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.

   Where this policy is adopted, it should be applied consistently to a class of qualifying assets.

   Where this policy is not adopted, all borrowing costs should be recognised as an expense in the period in which they are incurred.

   Where a policy of capitalising borrowing costs is adopted under full FRS 102, the entity should disclose the amount of borrowing costs capitalised in the period and the capitalisation rate used.

   Back to Top

4. What does it mean for borrowing costs to be “directly attributable to the acquisition, construction or production of a qualifying asset”?

   Borrowing costs that are directly attributable are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made.

   Back to Top

5. If an entity borrows funds specifically to acquire a qualifying asset, how are the funds eligible for capitalisation calculated?

   The funds eligible for capitalisation are the borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.

   Back to Top

6. If an entity uses general borrowings to obtain a qualifying asset how is the amount eligible for capitalisation calculated?

   The amount eligible for capitalisation is determined by applying a capitalisation rate to the expenditure on that asset.

   • The expenditure on the asset is the average carrying amount of the asset during the period, including borrowing costs previously capitalised.
   • The capitalisation rate used in an accounting period is the weighted average of rates applicable to the entity’s general borrowings that are outstanding during the period. This excludes borrowings by the entity that are specifically for the purpose of obtaining other qualifying assets.
   The amount of borrowing costs that an entity capitalises during a period should not exceed the amount of borrowing costs it incurred during that period.

    

   Back to Top

7. What are the timing considerations in relation to when borrowing costs should and shouldn’t be capitalised?

   If a policy of capitalising borrowing costs on qualifying assets is adopted then:

   • The entity should capitalise borrowing costs from the point when it first incurs both the expenditure on the asset and borrowing costs, and undertakes activities necessary to prepare the asset for its intended use or sale;
   • The entity should suspend capitalisation during extended periods where active development of the asset has paused; and
   • The entity should cease capitalisation when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.

    

   Back to Top

These pages are provided as resources and information only and nothing in these pages purports to provide professional advice or definitive legal interpretation(s) or opinion(s) on the applicable legislation or legal or other matters referred to in the pages. If the reader is in doubt on any matter in this complex area further legal or other advice must be obtained. While every reasonable care has been taken by the Institute in the preparation of these pages, we do not guarantee the accuracy or veracity of any resource, guidance, information or opinion, or the appropriateness, suitability or applicability of any practice or procedure contained therein. The Institute is not responsible for any errors or omissions or for the results obtained from the use of the resources or information contained in these pages.