02-16-2010, 06:32 AM
Dear
In concept, borrowing costs have to be capitalized on borrowed funds in the cost of related asset over the period of construction or period of getting the asset ready for use for intended purpose.
Once the period of construction is over, no further borrowing cost can be capitalized as the qualifying asset starts operating and generating revenue/economic benefit. Such economic benefit is earned against two conceptual costs; the principal portion of borrowed amount used and capitalized (incl some interest during construction phase) and the borrowing cost incurred when asset is put into operational use.
The earlier one is represented in the shape of depreciation and later is obviously interest. These two costs are matched with revenues generated, so nothing can be as such capitalized.
In case the asset is not qualifying, there is no period of construction (presumably) and the asset is supposedly available for use from day 1. So costs are supposed to match revenues and no capitalization is allowed.
Regards,
Kamran.
In concept, borrowing costs have to be capitalized on borrowed funds in the cost of related asset over the period of construction or period of getting the asset ready for use for intended purpose.
Once the period of construction is over, no further borrowing cost can be capitalized as the qualifying asset starts operating and generating revenue/economic benefit. Such economic benefit is earned against two conceptual costs; the principal portion of borrowed amount used and capitalized (incl some interest during construction phase) and the borrowing cost incurred when asset is put into operational use.
The earlier one is represented in the shape of depreciation and later is obviously interest. These two costs are matched with revenues generated, so nothing can be as such capitalized.
In case the asset is not qualifying, there is no period of construction (presumably) and the asset is supposedly available for use from day 1. So costs are supposed to match revenues and no capitalization is allowed.
Regards,
Kamran.
