CMA Intermediate · Financial Accounting

Borrowing Costs (AS 16): formula sheet

Full chapter guide

Key formulas

Capitalisation rule: Borrowing costs directly attributable to a qualifying asset → capitalised; all other borrowing costs → expense; Capitalise only while the conditions of AS 16 are met; otherwise charge to Profit and Loss.
Qualifying asset test: Asset that necessarily takes a substantial period of time to get ready for intended use or sale; Both the time and the necessity matter. Ready-to-use assets do not qualify.
Borrowing costs include: Interest + commitment charges + amortisation of discount/premium + amortisation of ancillary costs + finance lease charges + exchange differences treated as interest adjustment; List these five or six heads in definition answers.
Excluded from scope: Actual or imputed cost of owners' equity (including preference capital not classified as a liability) is outside AS 16; Equity dividends and notional return on own funds are not borrowing costs.
Specific borrowing: Capitalise = Actual borrowing cost incurred in the period − Income on temporary investment of the unspent funds; Applies when funds are borrowed specifically to obtain a qualifying asset (para 10). Investment income is deducted (para 11).
General borrowing: Capitalise = Capitalisation rate × Expenditure on the qualifying asset; Capitalisation rate is the weighted average of borrowing costs of outstanding borrowings, excluding specific borrowings for the asset (para 12).
Capitalisation rate: Rate = Σ (borrowing cost on general borrowings) ÷ Σ (weighted average general borrowings outstanding) × 100; Use only general borrowings outstanding in the period.
Ceiling: Amount capitalised in a period ≤ Borrowing costs incurred in that period; Never capitalise more than was actually incurred (para 12).
Expenditure base: Expenditure = Cash payments + Transfers of other assets + Interest-bearing liabilities assumed − Progress payments and grants received; Average carrying amount of the asset, including borrowing costs already capitalised, is normally a reasonable approximation (para 15).
Foreign currency borrowing (para 4(e)): Borrowing cost = Interest on FC loan + Lower of (Exchange loss on principal; Interest on local currency loan − Interest on FC loan); The remaining exchange difference, if any, goes to AS 11.
Conditions for commencement: Expenditure incurred + Borrowing costs incurred + Activities in progress; All three must be met. The date the last one is met is the commencement date.
Suspension rule: Extended interruption of active development → stop capitalising; expense the borrowing cost; Do not suspend for brief interruptions, for substantial technical or administrative work, or for a delay that is a necessary part of the process.
Cessation rule: Substantially all activities complete → stop capitalising; Minor modifications or routine administrative work do not delay cessation.
Part-by-part completion: Each part usable while the rest is under construction → cease for that part when it is substantially complete; Applies only when the part can be used independently.
Capitalised cost in a period: Borrowing cost × (months in capitalisation period ÷ total months); Use for simple time apportionment of interest on a specific loan.
Specific borrowings: Capitalisable cost = Actual interest on the specific loan for the capitalisation period − Income from temporary investment of unused funds; Use only the months when capitalisation is on. Any investment income earned in that period is deducted.
Capitalisation rate: Capitalisation rate = (Σ Interest on general borrowings ÷ Σ Weighted average amount of general borrowings) × 100; Use the borrowing cost for the period and weighted average amounts outstanding in that period. If all general loans are outstanding throughout, a simple weighted average of the interest amounts and loan amounts gives the same result.
General borrowings: Capitalisable cost = Weighted average expenditure on the asset funded by general borrowings × Capitalisation rate; Weight each expenditure by the time it was outstanding in the period. Exclude the part funded by specific borrowings.
Ceiling: Amount capitalised ≤ Actual borrowing cost incurred in the period; Apply this limit to general borrowings. If the calculated amount is more than actual interest, capitalise only the actual interest.
Total cost of asset: Cost of asset = Expenditure on asset + Capitalised borrowing costs; Borrowing costs not capitalised are charged to the Statement of Profit and Loss.
Disclosure (a): accounting policy: State the policy adopted for borrowing costs; Mention capitalisation of costs directly attributable to a qualifying asset and expensing of other borrowing costs.
Disclosure (b): amount capitalised: Borrowing costs capitalised during the period = specific borrowings amount + general borrowings amount; Disclose the total figure for the period.
Specific borrowings: Actual borrowing cost incurred − income on temporary investment of those borrowings; Rule in paragraph 10, with the deduction in paragraph 11.
General borrowings: Capitalisation rate × expenditure on the asset; Rate is the weighted average of borrowing costs on general borrowings outstanding in the period (paragraph 12).
Ceiling: Amount capitalised ≤ borrowing costs incurred in the period; Paragraph 12. Check this before disclosing.

Quick revision

Borrowing costs include interest and other costs incurred in connection with borrowing funds.
A qualifying asset necessarily takes a substantial period to get ready for intended use or sale.
Directly attributable borrowing costs on a qualifying asset are capitalised.
Borrowing costs not eligible for capitalisation are expensed in the period incurred.
Capitalisation starts when expenditure is incurred, borrowing costs are incurred and activities to prepare the asset are in progress.
Capitalisation is suspended during extended periods when active development is interrupted.
Capitalisation stops when substantially all activities to prepare the asset are complete.
For specific borrowings, capitalise actual cost less income earned on temporary investment of those funds.
For general borrowings, apply a capitalisation rate to the expenditure on the asset.
The capitalisation rate is the weighted average of borrowing costs on the general borrowings outstanding in the period.
Capitalised borrowing cost cannot exceed the borrowing costs actually incurred in the period.
Disclose the accounting policy and the amount of borrowing costs capitalised during the period.

Common mistakes

Treating dividend on equity shares or notional interest on own capital as a borrowing cost. Fix: Remember AS 16 covers only borrowed funds. Cost of owners' equity is outside its scope.
Capitalising interest on every asset bought with a loan. Fix: Capitalise only if the asset necessarily takes a substantial period to get ready for use or sale.
Capitalising borrowing costs on every asset. Fix: First test for a qualifying asset. A ready-to-use asset or one taking a short time to get ready gets no capitalisation.
Forgetting to deduct income from temporary investment of specific loan funds. Fix: Always write: actual interest − investment income = amount capitalised for specific borrowings.
Starting capitalisation on the date the loan is taken. Fix: Check all three conditions. Without expenditure and active preparation, the interest is an expense.
Suspending capitalisation for every interruption. Fix: Suspend only for extended interruptions of active development. Brief gaps, necessary delays and periods of substantial technical or administrative work continue to be capitalised.
Capitalising the full specific loan interest without deducting temporary investment income Fix: Always check the question for surplus funds or fixed deposits. Deduct that income from the specific interest.
Applying the capitalisation rate to the total expenditure instead of only the portion not funded by specific loans Fix: First subtract specific borrowing used from expenditure. Apply the rate only to the balance.
Disclosing only the amount capitalised and forgetting the accounting policy. Fix: Always give both (a) policy and (b) amount. Treat them as a pair.
Disclosing total interest instead of interest capitalised. Fix: Disclose only the part capitalised to the asset. The rest is an expense.

Exam tips

In theory answers, begin with the definition of borrowing costs and list every head included. Step marks follow the list.
For MCQs, look for equity dividend or ready-to-use assets, which are the usual traps.
Give a reason in every classification answer, such as 'substantial period' or 'directly attributable'.
Always give one example of a qualifying asset and one of a non-qualifying asset to show you understand the test.
In MCQs, the usual traps are the qualifying asset test and the exchange difference cap. Check these first.
In written answers, state the asset qualifies and why, then show the specific and general calculations on separate lines. This earns step marks.
Always show the comparison with total interest incurred as the final check.
For foreign currency questions, list the four figures: FC interest, exchange loss, local interest, differential. Then pick the lower.