In accordance with the "Basic Standards of Accounting Standards for Business Enterprises," the Ministry of Finance issued Accounting Standards for Business Enterprises No. 17 — Borrowing Costs on 2006/2/15, which became effective on 2007/1/1.
1. Overview of Guidelines
Borrowing costs are interest and other related costs incurred by an enterprise in connection with borrowing.
Components of Borrowing Costs
- • Loan Interest
- Amortization of discounts or premiums
- • Additional fees
- Exchange differences arising from foreign currency borrowings
Assets qualifying for capitalization
Assets such as property, plant and equipment, investment properties, and inventories that require a substantial period of construction or production to reach their intended usable or saleable condition.
II. Recognition of Borrowing Costs
Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset shall be capitalized as part of that asset's cost. All other borrowing costs shall be recognized as expenses in the period incurred and included in profit or loss for that period.
Conditions for commencing capitalization of borrowing costs
Borrowing costs are capitalized only when all of the following conditions are met:
- Asset expenditure has occurred
- Financing costs have been incurred.
- Necessary activities for the acquisition or construction of assets to bring them to the condition necessary for their intended use or sale have commenced.
III. Determination of Amount of Borrowing Costs Capitalized
Special-purpose borrowing
For special borrowings obtained to construct or produce qualifying assets, the amount of interest expense capitalized shall be determined by deducting interest income earned from depositing unused funds in a bank or investment returns from temporary investments from the actual interest expense incurred during the period.
General Borrowing
When general borrowings are used to acquire or produce assets qualifying for capitalization, the enterprise shall determine the amount of interest to be capitalized by multiplying the weighted average of asset expenditures exceeding specific borrowings by the capitalization rate applicable to those general borrowings.
4. Suspension and Cessation of Capitalization of Borrowing Costs
Suspend Capitalization
Capitalization of borrowing costs shall be suspended if an asset that meets the capitalization criteria undergoes an abnormal interruption during its construction or production, and such interruption continues for more than 3 months.
Stop capitalization
Borrowing costs shall cease to be capitalized when the qualifying asset is substantially complete and ready for its intended use or sale.
Criteria for determining when an asset is ready for its intended use
- • The physical construction (including installation) or production of assets that meet the criteria for capitalization has been substantially completed.
- • The asset under construction or production meets the design requirements, contractual specifications, or production requirements, or is substantially consistent with them.
- • Expenditures on assets qualifying for capitalization that are being constructed or produced have become minimal or have ceased almost entirely.
Regulatory Document Attachment
CAS 17 — Borrowing Costs (PDF)