MFRS 123 BORROWING COSTS DEFINITIONBorrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.Borrowing costs may include:(a) Interest expense calculated using the effective interest method as described in MFRS 139 Financial Instruments: Recognition and Measurement,(b) Finances charges in respect of finance leases recognised in accordance with MFRS 117 Leases; and(c) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.RECOGNITIONAn entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of that asset. An entity shall recognise other borrowing costs as an expense in the period in which it incurs them.Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are included in the cost of the asset. Such borrowing costs are capitalized 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.

MFRS 123 BORROWING COSTSMEASUREMENTWhen an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity should consider three items, which are qualifying assets, capitalization period and amount to capitalize.Qualifying AssetsA qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or resale.Depending on the circumstances, any of the following may be qualifying assets:(a) Inventories(b) Manufacturing plants(c) Power generation facilities(d) Intangible assets(e) Investment propertiesFinancial assets, and inventories that are manufactured, or otherwise produced, over a short period of time, normally less than one year or less than one financial period, are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

Capitalization PeriodThe capitalization period is the period of time during which a company must capitalize interest. It begins with the presence of the following conditions:(a) Expenditures for the asset are being incurred.(b) Activities those are necessary to get the asset ready for its intended use or sale in progress.(c) Interest cost is being incurred.Interest capitalization continues as long as these conditions are present. The capitalization period ends when the asset is substantially complete and ready for its intended use.

MFRS 123 BORROWING COSTSAmount to CapitalizeThe amount of interest to capitalize is limited to the lower of actual interest cost incurred during the period or avoidable interest.Avoidable interest is the amount of interest cost during the period that an entity could theoretically avoid if it had not made expenditures for the asset.To apply the avoidable interest concept, an entity determines the potential amount of interest that it may capitalize during an accounting period by multiplying the appropriate interest rate(s) by the weighted-average accumulated expenditures for qualifying assets during the period.Weighted-Average Accumulated Expenditures (WAAE):In computing the WAAE, an entity weights the construction expenditures by the amount of time (fraction of year or accounting period) that it can incur interest cost on the expenditure.

Interest Rates:Entities follow these principles in selecting the appropriate interest rates to be applied to the WAAE:(a) For the portion of WAAE that is less than or equal to any amounts borrowed specifically to finance construction of the assets, use the interest rate incurred on the specific borrowings.(b) For the portion of WAAE that is greater than any debt incurred specifically to finance construction of the assets, use a weighted average of interest rates incurred on all other outstanding debt during the period.

MFRS 123 BORROWING COSTSSpecial Issues Related to Interest Capitalization:(a) Expenditures for landWhen an entity purchases land as a site for a structure (such as a plant site), interest costs capitalized during the period of construction are part of the cost of the plant, not the land.(b) Interest revenueInterest revenue should be offset against interest cost when determining the amount of interest to capitalize.

DISCLOSUREAn entity shall disclose:(a) the amount of borrowing costs capitalized during the capitalization period and(b) the capitalization rate used to determine the amount of borrowing costs eligible for capitalization.

MFRS 123 BORROWING COSTSPRESENTATIONOn November 1, 2010, Shalla Company contracted Pfeifer Construction Co. to construct a building for RM 1,400,000 on land costing RM 100,000 (purchased from the contractor and included in the first payment). Shalla made the following payments to the construction company during 2011.DateJan 1March 1May 1Dec 31Total Amount (RM)210,000300,000540,000450,000

1,500,000

Construction was completed the building was ready for occupancy on December 31, 2011. Shalla Company had the following debt outstanding at December 31, 2011.Specific Construction Debt1. 15%, 3-year note to finance purchase of land and construction of the building, dated December 31, 2010, with principal on December 31 RM 750,000.Other Debt2. 10%, 5-year note payable, dated December 31, 2007, with principal on December 31 RM 550,000.3. 12%, 10-year bond issued December 31, 2006, with principal on December 31 RM 600,000.Interest revenue earned in 2011 on funds related to specific borrowing RM 10,000.

MFRS 123 BORROWING COSTSCompute WAAE for 2011: ExpendituresCurrent-Year Capitalization Period

WAAE

DateAmount

January 1RM 210,00012/12RM 210,000

March 1300,00010/12250,000

May 1540,0008/12360,000

December 1450,00000

RM 1,500,000RM 820,000

Compute the avoidable interest:

WAAEInterest RateAvoidable Interest

RM 750,00015%RM 112,500

70,000*11.04%**7,728

RM 820,000RM 120,228

* The amount by which the WAAE exceeds the specific loan.** Weighted-average interest rate computation:PrincipalInterest

10%, 5-year noteRM 550,000RM 55,000

12%, 10-year bond600,00072,000

RM 1,150,000RM 127,000

MFRS 123 BORROWING COSTSCompute the actual interest cost, which represents the maximum amount of interest that it may capitalize during 2011:Construction note= RM 112,500

5-year note= RM 55,000

10-year bond= RM 72,000

Actual interest costRM 239,500

The interest cost that Shalla capitalizes is the lesser of RM 120,228 (avoidable interest) and RM 239,500(actual interest) deduct with the interest revenue earned RM 10,000. Hence, the interest cost that Shalla capitalizes is RM 110,228.Shalla records the following journal entries during 2011:JournalDateDescriptionsDebit (RM)Credit (RM)

January 1LandBuildingCash100,000110,000

210,000

March 1BuildingCash300,000300,000

May 1BuildingCash540,000540,000

December 31BuildingCash450,000450,000

BuildingInterest ExpenseCash110,228129,272

239,500

MFRS 123 BORROWING COSTSAt December 31, 2011, Shalla discloses the amount of interest capitalized either as part of the statement of profit or loss and other comprehensive income (income statement) or in the notes to the financial statements.Statement of Profit or Loss and Other Comprehensive IncomeOther Income and ExpenseInterest expenseLess: Capitalized interestIncome before taxIncome taxNet incomeRM 239,500110,228

129,272XXXXXXXXXXX

Notes to the Financial StatementsNote 1: Accounting Policies. Capitalized interest. During 2011, total interest cost was RM 239,500, of which RM 110,228 was capitalized and RM 129,272 was charged to expense. The capitalization rate used was 11.04%.