WEEK 8

FAR510

MFRS123
BORROWING COST
Chapter 16 FAR in Malaysia, TLT Vol 1 (7th Ed)
 LEARNING OBJECTIVES
At the end of this topic, students should be able to:
• Determine the definition of borrowing cost and
qualifying assets.
• Explain the accounting treatment for
borrowing costs.
• Determine the initial cost of the PPE (inclusive
borrowing cost).
• Explain the disclosure requirements of MFRS
123.
 OBJECTIVE
• The objective of MFRS 123 Borrowing Costs is to
prescribe the accounting treatment for borrowing costs
limited to the costs of borrowing to construct or develop
qualifying assets.

Core principle
• Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying
asset form part of the cost of that asset. Other borrowing
costs are recognised as an expense
 SCOPE

The Standard does not apply to the following:

• actual or imputed cost of equity, including preferred
capital not classified as a liability.
• a qualifying asset measured at fair value, for example
a biological asset measured in accordance with
MFRS141 Agriculture; or
• inventories that are manufactured, or otherwise
produced, in large quantities on a repetitive basis
over a short period of time.
 DEFINITION

• Borrowing costs are interests and other costs incurred

by an entity in connection with borrowing of funds.
 EXAMPLES OF
BORROWING COSTS
• Interests such as on bank overdrafts and both short-
term and long-term borrowings;
• Finance charges in respect of finance leases
recognised in accordance with MFRS 16 Leases; and
• Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs.
 DEFINITION

• A qualifying asset is an asset that necessarily takes a

substantial period of time to get ready for its intended
use or sale.
 EXAMPLES OF
QUALIFYING ASSETS
• Inventories that require a considerable
period of time to bring them to a saleable
condition
• Manufacturing plants
• Power generation facilities
• Intangible assets
• Investment properties
• Bearer plants
 EXAMPLES OF
NON QUALIFYING ASSETS
• Inventories routinely produced on a repetitive manner
over a short period of time
• Assets ready for intended use
• Land or building that are ready for use
 TRY THIS OUT
Identify whether or not the following are qualifying assets:

(a) A construction company constructing a bridge for

government which will take 6 years to complete.
(b) A very sophisticated integrated circuits being made by
an entity who manufactures and sales 10,000 to 12,000
units every month.
(c) A power plant under construction, it may take 2 years to
complete this.
(d) An equipment purchased by XY Bhd, the equipment may
be used immediately after it is delivered.
(e) Special order from a customer to manufacture a
machine for him which will take 13 months at the least.
(f) A financial asset
 RECOGNITION
An entity shall capitalise borrowing costs that are directly
attributable to the acquisition, construction or production
of a qualifying asset as part of the cost of that asset. An
entity shall recognise other borrowing costs as an
expense in the period in which it incurs them.

Such borrowing costs are capitalised as part of the cost

of the asset when:
• it is probable that they will result in future economic
benefits to the entity and
• the costs can be measured reliably
 LIMITATIONS
Specific limitations to the amount that can be capitalised:
• Funds borrowed are specifically for the purpose of obtaining
a qualifying asset.
• The amount eligible for capitalisation = the actual borrowing
costs incurred on that borrowing during the period less any
investment income on the temporary investment of those
borrowings
• Capitalisation should commence when:
 Expenditure (E) for the asset is being incurred;
 borrowing costs (BC) are being incurred; and
 activities (A) that are necessary to prepare the asset
for its intended use or sale are in progress.
• Capitalisation should cease when the asset is ready for
intended use
• The total costs capitalised should not exceed the amount of
borrowing costs incurred by the entity during that period.
 MEASUREMENT
Specific borrowings:
To the extent that an entity borrows funds specifically for
the purpose of obtaining a qualifying asset, the entity
shall determine the amount of borrowing costs eligible for
capitalisation as the actual borrowing costs incurred on
that borrowing during the period less any investment
income on the temporary investment of those borrowings.

Actual borrowing costs incurred [Outstanding borrowing x XXX

interest rate x months/12]
Less: Temporary investment income [Amount invested x interest XXX
rate x months/12]
Amount to be capitalised XXX
 ILLUSTRATION 1
On 1 July 2020 MM Bhd obtained a 7% 5-year term loan
of RM3,000,000 to partly finance a manufacturing plant.
On 1 October 2020, MM Bhd commenced construction
of the manufacturing plant and was expected to be
completed on 30 November 2021. On the same date as
the construction, MM Bhd invested half of the loan
amount in a 5% 4-month fixed deposit. MM Bhd has a
year-end of 31 December.

Required:
Calculate the amount of borrowing cost to be
capitalised for the year ended 31 December 2020.
 SOLUTION
RM

Interest expense [3m x 7% x 3/12] 52,500

Less: Temporary investment [1.5m x 5% x 3/12] (18,750)

Amount to be capitalised 33,750
 BORROWING COSTS ELIGIBLE FOR
CAPITALISATION
General borrowings:
To the extent that an entity borrows funds generally and
uses it for the purpose of obtaining a qualifying asset, the
entity shall determine the amount of borrowing costs
eligible for capitalisation by applying a capitalisation
rate to the expenditures on that asset.
The capitalisation rate shall be the weighted average of
the borrowing costs applicable to the borrowings of the
entity that are outstanding during the period, other than
borrowings made specifically for the purpose of
obtaining a qualifying asset.
 MEASUREMENT
• Capitalisation rate = Total interest on general borrowing X 100%
Total borrowings oustanding

Expenditure on QA x capitalization rate x months/12 XXX

Expenditure on QA x capitalization rate x months/12 XXX
Amount to be capitalized XXX
 ILLUSTRATION 2
KK Bhd had the following loans in place at the end of 2021:

Description RM
Bank loan, 6% p.a. 200,000
Bank loan, 8% p.a. 130,000
Debenture, 5.5% p.a 50,000

The bank loan at 6% p.a. was taken in July 2021 to finance the construction
of a new production hall (construction began on 1 March 2021).

The bank loan at 8% p.a. and debenture were taken for no specific
purpose and KK Bhd used them to finance general spending and the
construction of a new machinery.
KK incurred RM60 000 for the construction of the machinery on 1 February
2021 and RM25 000 on 1 September 2021.
Required:
Calculate the amount of borrowing cost to be capitalised for the year
ended 31 December 2021.
 SOLUTION
• Ignore bank loan at 6% p.a., because it is a specific
borrowing for another asset.
• Only general borrowings relate to the financing of the
new machinery and therefore, we need to calculate
the capitalisation rate:
Outstanding Interest Rate Interest expenses
Amount (RM) (%) (RM)
Bank Loan 130,000 8% 10,400
Debenture 50,000 5.5% 2,750
180,000 13,150
 SOLUTION
• Capitalisation rate = Total interest on general borrowings X 100%
Total borrowings oustanding

• Capitalisation rate = 13,150 X 100%

180,000
= 7.31%
RM

Expenditure on QA : RM60 000 x 7.31% x 11/12 4,020.50

Expenditure on QA : RM25 000 x 7.31% x 4/12 609.17

Interest capitalised 4,629.67
Interest charged to SOPL (remaining balance) 8,520.33
 COMMENCEMENT OF
CAPITALISATION
 The capitalisation of borrowing costs should
commence when:
◦ expenditure for the asset is being incurred;
◦ borrowing costs are being incurred; and
◦ activities that are necessary to prepare the asset for
its intended use or sale are in progress.
 Sometimes, the borrowing may commence before
construction starts, in which case only the borrowing
costs incurred from the date when construction starts
can be capitalised.
 COMMENCEMENT OF
CAPITALISATION
 The activities necessary to prepare the asset for its intended
use or sale encompass more than the physical construction
of the asset. They include technical and administrative
work prior to the commencement of physical construction,
such as the activities associated with obtaining permits prior
to the commencement of the physical construction.

 However, such activities exclude the holding of an asset

when no production or development that changes the
asset’s condition is taking place. For example, borrowing
costs incurred while land is under development are
capitalised during the period in which activities related to
the development are being undertaken.
 SUSPENSION OF
CAPITALISATION
• An entity shall suspend capitalisation of borrowing
costs during extended periods in which it suspends
active development of a qualifying asset.

• During periods when active development is

interrupted, the borrowing costs incurred during these
interrupted periods will not be capitalised.
• However, temporary delays which are necessary, or
extended period for inventory to mature, or delays in
construction are not considered interruption of
construction.
 CESSATION OF
CAPITALISATION
• An entity shall cease capitalisation of borrowing costs
when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale
are complete. When an entity completes the
construction of a qualifying asset in parts and each
part is capable of being used while construction
continues other parts, the entity shall cease
capitalising borrowing costs when it completes
substantially all the activities necessary to prepare that
part for its intended use or sale.
 ILLUSTRATION 3
On 1 November 2019, Win Bhd started constructing a
condominium building in Bangi, Selangor. In order to partly finance
the construction, Win Bhd took a 3-year term loan of RM15 million at
an interest rate of 10% per annum on 1 June 2019.
Win Bhd invested RM10 million of the loan in a 3% 5-month
fixed deposit from 1 June 2019 till 31 October 2019. The construction
was interrupted for 5 months beginning from 1 February 2020 due to
shortage of building materials. A rectification cost of RM1,000,000 was
incurred due to carelessness of the contractor and the cost was
excluded from the construction cost.
The construction was finally completed as scheduled on 30
June 2021. The total cost of construction was RM19 million excluding
the borrowing cost. The condominium building has 50 individual units
with separate strata titles.

Required:
Discuss briefly the accounting treatment of the borrowing cost for the
loan obtained to finance the construction of a condominium building
in accordance with MFRS 123 Borrowing Costs. (No calculation is
required)
The borrowing costs cannot be capitalised from 1 June 2019 until 31
October 2019 and need to be written off to the SOPL. During this period,
the construction has not started yet and do not meet the recognition
criteria for capitalisation (Borrowing costs are being incurred,
expenditure for the asset are being incurred, construction work are in
progress).

The temporary income from the 5-month fixed deposit (1 June to 31

October 2019) will be recognised as income in the SOPL.

Borrowing costs will be capitalised in the SOFP starting from 1 November

2019, the commencement date of the construction till the completion date
of the construction, 30 June 2021. However, during the suspension
period for 5 months (1 February to 30 June 2020) due to the shortage
of building materials supplies the borrowing costs incurred should be
expensed off to the SOPL. Borrowing costs incurred after the cessation
period (1 July 2021 onwards) need to be written off in the SOPL.
 DISCLOSURES
1. Accounting policy adopted for borrowing costs;
2. Amount of borrowing costs capitalised during the period;
and
3. Capitalisation rate used to determine the amount of
borrowing costs eligible for capitalisation.
 THE END
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