EXAMPLES

Suppose further that ABC Co had three types of loan or payable in place at the beginning and end of
financial year 2018 as follow:
The rate to fund the construction of a qualify asset (a piece of mining equipment) is at 8.9% debenture.
This construction began on 01 July 2018;

The rate to fund the construction of a qualify asset (a piece of mining equipment) is at 8.9% debenture.
This construction began on 01 July 2018.
ABC Co began the construction of a qualifying asset, a piece of machinery for a hydroelectric plant,
using existing borrowings, on 1 January 2018. ABC has incurred the expenditure in which such
expenditure was drawn down for the construction at $20m on 01 January 2018, $15m on 01 October
2018.
Determine the borrowing costs that ABC Co can capitalize for the hydro-electric plant machine.

Solution:
In this example, the borrowing were obtained generally for qualify asset. Thus, the amount of
borrowing costs eligible for the capitalization is the amount that come from applying the capitalization
rate which is the weighted average rate of the loans to the expenditure incurred for that qualify asset.
Therefore, the capitalization rate is calculated as follow:
Weighted average rate = 10%*[100/ (100+50)] + 9.5%*[50/ (100+50)]
= 0.06 + 0.03 = 9%
Thus the borrowing costs will be calculated as follow:
Borrowing costs = US$20m*9% + US$15m*9%*3/12
= US$1.8m + US$0.33m
= US$2.13m
Therefore, the total borrowing costs of US$2.13m shall be capitalized into the asset value.