Capitalisation borrowing cost

[jacktu0303]

Hi everyone,

I have two questions related to capitalize the borrowings cost as below:

1. Entity X purchased the land to construct apartments for sale. X obtained a short-term interest-free loan from its parent to settle the purchase price of land. After 3 months, X obtained another long-term loan from the commercial bank to refinance the loan with its parents (the loan agreement also indicates that the purpose of such loan is to refinance the purchase price of land that was settled by the previous loan with its parent). Do you think the interest expenses incurred from long-term bank borrowing can be capitalized to costs of land as well as during the period of constructing those apartments?

2. Entity Y issued the bond to finance construction cost of a residential multi-unit complex. The complex is under construction, and interests incurred from the bond have been capitalized to the cost of the complex. Currently, Y obtains a new loan from a commercial bank to refinance the above bond (due to the interest rate of the new loan is lower than the bond's). The bond will be redeemed after Y obtains a new bank loan. My question is whether interest expenses from bank loan can be capitalized to cost of the complex.

Thank in advance.

[Marek Muc]

Your questions seem to touch on the same key point. In my opinion, there's no obstacle to capitalising borrowing costs associated with various financial liabilities. Does this resolve your questions?

[jacktu0303]

Thank Marek. Do you think the interest incurred on new bank loans in both cases can be capitalized in full or apply the capitalization rate as guidance in IAS 23 for general borrowing?

[Marek Muc]

It depends on whether the borrowings are specific or general:
https://ifrscommunity.com/knowledge-bas ... ing-costs/

[jacktu0303]

Those loans are intended solely for the purpose of refinancing the project borrowings. Can it also be categorized as specific borrowings?

[Marek Muc]

yes