Interpretation and Application of UK GAAP: For Accounting Periods Commencing On or After 1 January 2015

Chapter 14Borrowing Costs

1. Introduction
2. Definition and Recognition of Borrowing Costs
3. Capitalisation Rate
4. Suspension of Asset Construction
5. Transitional Issues
6. Disclosure Issues

Introduction

There is a specific section in FRS 102 that deals with the concept of borrowing costs, which is that of Section 25 Borrowing Costs. In the previous UK GAAP, such issues were dealt with in FRS 15 Tangible Fixed Assets but it has become more widely prevalent that entities often construct their own assets and the issue concerning borrowing costs had to be addressed.

Borrowing costs had been the subject of lots of debate with the previous Accounting Standards Board (ASB) (now the Financial Reporting Council) who had previously issued a discussion paper entitled Measurement of Tangible Fixed Assets that discussed the issue. The discussion paper outlined that the capitalisation of borrowing costs should either be mandatory or prohibited, but not optional. However, the consensus was that different entities have valid reasons for either writing borrowing costs off to profit or loss or capitalising them and thus the argument was finely balanced. On this basis, the ASB permitted borrowing costs to either be capitalised or written off to profit or loss provided the accounting treatment was consistent from one period to the next.

In the previous Exposure Draft of UK GAAP, FRED 44 prohibited the capitalisation of borrowing costs and followed the same stance as the IFRS for SMEs and required such costs ...