The capitalisation rate

Learning objectives

• Calculate the capitalisation rate (weighted average of the borrowing costs of the period) and the borrowing costs eligible for capitalisation on the expenditures on the asset.L2, L3
• Justify and defend in a professional file (L4) the treatment adopted for the "General borrowings: weighted-average capitalisation rate" concept, distinguishing the IFRS requirement, the case data, the teaching assumption and judgement.L4

Normative references

• IAS 23 §14General borrowings: capitalisation rate = weighted average of the borrowing costs of the period, applied to the expenditures on the asset, provided that the amount capitalised during the period does not exceed the borrowing costs incurred during that period (last sentence of para. 14); since the 2015-2017 annual improvements, a specific borrowing that remains outstanding after the asset is ready becomes part of general borrowings.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

9 questions

• For funds borrowed generally and used to obtain a qualifying asset, how is the capitalisation rate determined?L2
• Mauzac's general borrowings, outstanding all year, are: a borrowing of {borrowing_a} (costs for the year: {costs_a}) and a borrowing of {borrowing_b} (costs for the year: {costs_b}). Calculate the capitalisation rate for the year.L3
• Perrin is building a workshop financed by its general borrowings. The weighted average expenditure for the workshop in the year is {weighted_expenditure} and the capitalisation rate is {capitalisation_rate}. Case convention: the borrowing costs incurred in the period exceed the amount calculated and are payable at the end of the year. Record the entry for the borrowing costs capitalised.L3
• The Meridian group finances plant P, under construction, with a specific borrowing. It is also building warehouse Q, financed by its general borrowings (a bond and a bank loan). The specific borrowing for plant R, already completed, is still outstanding. In a few sentences, justify the borrowings you would include in the capitalisation rate for warehouse Q.L4
• The Sérignan group finances a plant with the general borrowings of the parent ({parent_borrowings}, costs for the year: {parent_costs}) and those of a subsidiary ({subsidiary_borrowings}, costs for the year: {subsidiary_costs}), outstanding all year. Group judgement (case data): pooling the borrowings is appropriate for computing the rate. The weighted average expenditure on the plant is {weighted_expenditure}. Calculate the group's capitalisation rate and the costs eligible for capitalisation.L4
• Brémont is building a warehouse financed by its general borrowings: 3,000,000 outstanding all year, with borrowing costs incurred of 195,000 (a capitalisation rate of 6.5%). The weighted average expenditure on the warehouse is 3,400,000 (case data, part being financed from own cash). What amount of borrowing costs can be capitalised for the year?L3
• Maury is building a plant financed by its general borrowings. Eligible expenditure for the year: {expenditure_1} incurred {months_1} ago; {expenditure_2} incurred {months_2} ago; {expenditure_3} incurred {months_3} ago. The capitalisation rate is {capitalisation_rate}. Calculate the weighted average expenditure, then the borrowing costs eligible for capitalisation (cap not reached, case data).L3
• To prepare its notes, Rivoire has the following data on its general borrowings: borrowing costs for the year {total_costs}; weighted average amount outstanding {weighted_borrowings}. The weighted average expenditure on the qualifying asset is {weighted_expenditure} (cap not reached, case data). Calculate the capitalisation rate to disclose and the amount of borrowing costs capitalised to disclose.L3
• What is the scope of the 2015-2017 annual improvements on the calculation of the capitalisation rate, and how do they apply?L3