Borrowing Cost

• Borrowing cost can be capitalized as part of an asset when the asset is a qualifying asset, it is probable that it will result in future economic benefits to the entity, and the costs can be measured reliably
• The amount of interest cost capitalized should not exceed the actual interest incurred
• Capitalization of borrowing cost is suspended only during extended periods of delay in which active development is delayed
• Borrowing cost is the portion of the total interest cost that would not have been incurred if expenditures for asset construction had not been made
• Capitalization of interest should commence whenever incurring of interest and expenditures overlaps until the asset is substantially complete
• Types of borrowing cost:

  • Specific borrowing: loaned specifically for construction
  • General borrowing: loaned for working capital requirements
• When a construction spans more than 1 period, in Year 2, the ending balance in Year 1 would be the beginning balance in Year 2 to compute for Weighted Average borrowing
• Methods for Computation of Borrowing Cost:

  • Traditional Method
  • Contemporary Method: first deduct Specific borrowing from General borrowing before computing the Weighted average borrowing