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Chapter 10

COMM 321 Chapter 10: Chapter 10

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COMM 321
William Peter Thomas Blake

Chapter 10 Borrowing Costs • 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? Qualifying Assets • 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 • 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
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