Capitalisation of borrowing costs on qualifying assets is mandatory.
Qualifying assets is defined as “…an asset that necessarily takes a substantial period of time to get ready for its intended use or sale”
As substantial period of time is not defined in the standard. Therefore management exercises judgment that what is substantial period of time. An asset normally takes more than a year to be ready for use will usually be a qualifying asset.
For the assumption of substantial period of time management need to disclose in the notes to the financial statements.
Capitalisation of borrowing costs includes capitalising foreign exchange differences relating to borrowings to the extent that they are regarded as an adjustment to interest costs.
For foreign exchange differences IFRIC has given two methods :-
• The portion of the foreign exchange movement may be estimated based on forward currency rates at the inception of the loan.
• The portion of the foreign exchange movement may be estimated based on the interest rates on similar borrowings in the entity’s functional currency.
CAclubindia
