How to decide whether there is a need to capitalise

o That depends on whether any borrowing costs incurred in the year are directly attributable
to the acquisition of a qualifying asset
o Directly attributable means it can help an entity to acquire the qualifying asset

o If yes, then there is a need to capitalise

o If no, then there is no need

qualifying asset= ?

an asset that
a) Is not yet ready for intended use or sale;
b) is definitely going to take a substantial period of time to become ready;
substantial period, what does it mean?
o Substantial period means at least a year

Which kinds of assets can be qualifying asset depending on the circumstances?

o Inventory (except the kind that is produced in large quantities and on repetitive basis)
o PPE
o IP
o Intangible assets

If there is a need for capitalisation, how to capitalise?

1. Prepare for capitalisation

o Find out which costs are directly attributable

o Highlight 3 periods in green: pre-commencement, suspension and cessation

2. Capitalise for SB

3. Capitalise for GB

4. Find the total amount of borrowing costs to capitalise

Clarifications

Specific borrowing=

o Funds borrowed specifically for the purpose of acquiring the qualifying asset

General borrowing=

o Funds borrowed for general purpose i.e. not specifically for the acquisition of QA.
Regarding commencement

When does capitalisation commence?

When following criteria are met:

a) The entity undertakes activities that are necessary for preparing the QA for intended use or
sale,
b) The entity incurs expenditures for the qualifying asset; and
c) The entity incurs borrowing costs; and

Regarding suspension of capitalisation

When capitalisation has to be suspended:

o If active development of the qualifying asset is suspended then capitalisation has to be

suspended

How can the suspension of capitalisation be taken into account in calculations?

o By reducing the time incurred in current period

o By suspension will not affect the determination of cap. rate

is active development deemed suspended in a number of instances:

Instance Capitalisation of interest should be

suspended?
Cash flow problem during development Yes

Outbreak of disease, war or other Yes

unexpected events

Suspension order by the court or other Yes

authorities

Delay or temporary suspension of work No

due to adverse weather which is
common in the geographical region
involved

e.g. a 4 week delay due to flooding

which is common to that area

no development work is done but No

substantial technical and administrative
works are carried out

Regarding cessation

When should cessation take place

o When entity completes all activities necessary to prepare the QA for intended use or sale
Issues

Are the following considered activities necessary for preparing a QA?

routine administrative works, no

minor modification like decoration outstanding No

Suppose construction is complete on the first of this month, but the last payment is made on last day
of month, when does capitalisation period end?

 First day of month

Suppose the last payment is directly attributable to the acquisition of the QA, then will it be
capitalised?

 Yes, that is despite it is made after the capitalisation has ended.

Capitalisation for SB

To find the amount to capitalise for SB in current period:

o Need to take into account of 3 factors:

o i) amount of interest to pay for SB in current period, ii) green period, iii) investment income
from temporary investment of SB

Issue

What if specific borrowing was obtained but it was not used, would interest arising from such SB still
have to be capitalised?

o yes, It does not matter whether the proceeds are used

Capitalisation for GB

To find the amount to capitalise for GB in current period

i. Find the cap. rate for that year

ii. Find out how much to capitalise for each expenditure in current period

iii. Find out how much to capitalise in total

elaborations

To find the cap. rate of a year=

o Total amount of interest to pay for GB in a period/ weighted amount of GB outstanding in

the period

To find out how much to capitalise for an expenditure:

i. Find out how much general borrowing is used for that expenditure:
i. what is the size of the expenditure?
ii. How much SB is available at this point?
 iii. How much expenditure can be covered by SB and how much would have to be
covered by GB?
ii. Find out how much to capitalise=
i. Find the time incurred on current period
ii. Use formula to find the amount to capitalise:
o amount of GB used, ii) cap. rate of current year, iii) time incurred in current period,
iv) green period

Issue

Assuming that the loan was acquired on first day of current period, what should be the interest
expense arising from it in this period?

 2M* 0.12= 0.24M

The question does not say when this loan was made, only that it is outstanding, so when should you
think it was made for the purpose of determining interest expense?

 Beginning of period

Question says: construction begins on 1 July 2021, it would take 18 months to complete. What is the
significance of 18 months for summarising info.

 Cessation of capitalisation may occur after this period, subject to other information in the
question

what if a property is under construction and is intended to be used as investment property when
completed, what would be the carrying amount in the present?

o Carrying amount= costs incurred before current period+ cost incurred in current period
o Cost incurred in current period= i) expenditure incurred, ii) cap. from SB and iii) cap. from
GB

Will depreciation have to be accounted for an asset of such nature?

o No, Because it is not yet ready for intended use so no depreciation to recognise before
completion
o Depreciation will begin after the asset becomes available for intended use or sale