Arguments for and against capitalization of borrowing costs are: 1. For capitalization: a) borrowing costs form part of acquisition costs; b) costs included in assets is matched against revenue of future periods; c) results in better comparability between assets purchased and constructed. 2. Against capitalization: a) attempts to link borrowing costs to a specific asset is arbitrary; b) different financing methods may result in different amounts capitalized for the same asset; c) expensing borrowing costs causes better comparable results.
Qualifying assets are those assets that require a substantial period of time to bring them to their intended use or saleable condition, for example: a) inventories requiring a substantial period to bring them to a saleable condition; b) other assets such as manufacturing plants, power generation facilities, and investment properties.
Two methods of accounting for borrowing costs are allowed: 1. The benchmark treatment for borrowing costs dictates that they should be recognized as an expense in the period in which they are incurred; 2. The allowed alternative dictates that they should be expensed when incurred, expect to the extent that they are allowed to be capitalized. Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset may be capitalized when: a) it is probable that they will result in future economic benefits to the enterprise, and b) the costs can be measure reliably.
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