• Under IFRS, borrowing costs that can be directly attributed to acquisition, construction, or
development of “qualifying assets” should be capitalized.
• Under ASPE, management has a choice of capitalizing or expensing such costs.
Capitalization of Borrowing Costs
• Four questions must be answered:
• What are the qualifying assets?
• What is the capitalization period?
• What is the amount of interest to be capitalized?
• What disclosures are needed?
• Assets that take a substantial period of time to get ready for intended use or sale.
• May include inventories, items of PPE; investment properties; or intangible assets
• Examples of assets that do not qualify:
– Assets ready for use or sale when acquired
– Assets produced over a short period of time
– Assets not undergoing development to get them ready for use
• Capitalization period begins when all three conditions are present:
1. Expenditures for the asset have been made
2. Activities for readying the asset are in progress
3. Borrowing costs are being incurred
• Capitalization continues for as long as these three conditions exist
• Capitalization ends when asset is substantially complete and ready for use
Amount to Capitalize
• Interest amount must be directly related to asset
• Lower of actual interest or avoidable interest
– the amount of interest cost that could have been avoided if expenditure for the asset
had not been made • The amount of avoidable interest is determined by multiplying an interest rate (s) by the
weighted-average accumulated expenditures (WAAE) during the period
• In calculating the WAAE, the construction expenditures are weighted by the amount of time
(fraction of a year or accounting period) that interest cost could be incurred in the expenditure
Determine WAAE- Example Amount to Capitalize – Example
ABC (in the previous example) had the following debt outstanding throughout 2014:
1. 10%, 2-year note specifically for the project: $25,000
2. 8%, 5-year note (other debt): $20,000
What is the appropriate interest rate(s), the avoidable interest and actual interest ?
Appropriate Interest Rate(s)
• For the portion of WAAE that is less than or equal to any amounts borrowed specifically to
finance construction of the assets, use the interest rate incu