MFRS 123

BORROWING COSTS
Topic Outline

 Definition
 Recognition
 Disclosure
 MPERS for private entities
 MFRS 123 – INTRODUCTION & DEFINTION
1
• Borrowing costs are interest and other costs/ finance charges that an entity incurs in
connection with the borrowing of funds.

•MFRS 123 limited to the costs of borrowing related to construct or develop qualifying
assets.

•Qualifying asset as ‘an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale’.
2
•Those asset produced over a short period of time or assets that are ready for their
intended use or sale when acquired, are not qualifying assets (Refer TLT -BC p541).

•Depending on the circumstances (Refer TLT- BC p541), any of the following may be
qualifying assets:
(a) inventories
(b) manufacturing plants
(c) power generation facilities
(d) intangible assets
(e) investment properties
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 MFRS 123– BORROWING COSTS

3
• Borrowing costs include:

•interest expense calculated using the effective interest method as

described in MFRS 139 Financial Instruments: Recognition and
Measurement (i.e. bank overdraft,long term borrowings)
•finance charges in respect of finance leases recognised in accordance
with MFRS 16 Leases; and
•exchange differences arising from foreign currency borrowing.

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 MFRS 123 – ACCOUNTING TREATMENT

MFRS 123 Borrowing Costs prescribes the accounting treatment for

borrowing costs limited to the costs of borrowing to construct or
develop qualifying assets.

MFRS 123 defines a qualifying asset as ‘an asset that necessarily takes
a substantial period of time to get ready for its intended use or sale’.
 MFRS 123 –RECOGNITION

Borrowing costs that are directly attributable to the acquisition, construction

or production of a qualifying asset are to be capitalised as part of the cost of
the asset provided it is probable that they will result in future economic
benefits to the entity and the costs can be measured reliably.
Costs on funds borrowed specifically for the purpose of obtaining the
qualifying asset less income from temporary investment of the borrowing are
to be capitalised as part of the cost of the asset.

 Borrowing may be done centrally, or the entity might take up different

loan packages with varying interest rates.
 When funds are borrowed, the borrowing cost applicable to obtaining a
qualifying asset is measured by applying a weighted average interest rate,
excluding that borrowed specifically for the purpose of obtaining a
qualifying asset.
 The amount of borrowing costs capitalised during a period should not
exceed the actual borrowing costs incurred during that period.
 MFRS 123 – Capitalisation of Borrowing Costs

BORROWING COSTS

CONDITIONS FOR
ACCOUNTING TREATMENT
CAPITALISATION

SPECIFIC BORROWINGS/ COMMENCEMENT

GENERAL BORROWINGS

SUSPENSION

CESSATION

DISCLOSURE REQUIREMENTS
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MFRS 123 – COMMENCEMENT OF CAPITALISATION

 The capitalisation of borrowing costs should commence when:

◦ expenditure for the asset is being incurred;
◦ borrowing costs are being incurred; and
◦ activities that are necessary to prepare the asset for its intended
use or sale are in progress (related development activities e.g.
construction works are in progress).
 Sometimes, the borrowing may commence before construction
starts, in which case only the borrowing costs incurred from the
date when construction starts can be capitalised.
 MFRS 123 – Capitalisation of Borrowing Costs

Capitalised the borrowing cost incurred for the acquisition,

ACCOUNTING TREATMENT
construction or production of qualifying asset.

The amount of borrowing costs eligible for capitalisation =

SPECIFIC BORROWINGS actual borrowing cost incurred less income on the
temporary investment of those borrowings

Example:

On 1 January 2010, Alif Bhd secured an 8% long-term loan of RM10 million to fully
finance the construction of an office building. Construction will be completed on 31
December 2011. Alif made a temporary investment which provided an interest
income of RM200,000. The amount of borrowing cost capitalized shall be:

Interest on loan - RM10 million x 8% x 2 years RM 1,600,000

Investment income (200,000)

Borrowing costs capitalise RM 1,400,000

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 MFRS 123 – Capitalisation of Borrowing Costs

Capitalisation rate should be applied

GENERAL BORROWINGS Capitalisation rate = Total general borrowing costs for the
period/ Weighted average total general borrowing

Example:

Company A raised finance amounting to RM400,000 to finance both construction

of plant (RM300,000) and operations (RM100,000). They want to capitalise
borrowing costs on qualifying assets. Details of the borrowing are as follows:-

RM
12% Loan stock 100,000
10% Term Loan 220,000
8% Redeemable preference share 80,000
Total 400,000

Compute capitalisation rate and the amount of interest that qualifies for
capitalisation

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 MFRS 123 – Capitalisation of Borrowing Costs

 Answer:

Loan (i) RM Weighted Interes Total Interest Total

average t Rate (RM) (i) x (b) Weightage
(a) (b) (a) X (b)
12% Loan 100,000 25% 12% 12,000 3%
stock
10% Term 220,000 55% 10% 22,000 5.5%
Loan
8% 80,000 20% 8% 6,400 1.6%
Redeemable
preference
share
Total 400,000 100% 40,400 10.1%

Out of Rm400,000 only RM300,000 is eligible for capitalisation.

Interest that can be capitalised are RM 30,300 (RM300,000 X
10.1%) The remaining interest of RM10,100 can be charged as
expense.
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 MFRS 123– Capitalisation of Borrowing Costs

Expenditures for the asset/borrowing costs are being

COMMENCEMENT incurred
Necessary activities to prepare the asset for its
intended use or sale are in progress

SUSPENSION When active development is interrupted

When substantially all the activities necessary to

CESSATION prepare the asset for its intended use or sale are
complete

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 MFRS 123 – Capitalisation of Borrowing Costs

Expenditures for the asset/borrowing costs are being

incurred
COMMENCEMENT
Necessary activities to prepare the asset for its
intended use or sale are in progress

Example:
On July 2006 Company A started constructing a manufacturing company that
expected to have a useful life of 20 years with no residual value. The estimated
total cost of construction were RM 25 million and to be completed on June 2008.
To finance the project 5-year long-term loan of Rm10 million is obtained on 1st
May 2006 with interest rate of 8% per annum. The total construction cost for the
year is RM10 million.
Required:-
Calculate the borrowing cost for the years ended 31 Dec 2006
Prepare SOP/L&OCI and SOFP.

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 MFRS 123 – Capitalisation of Borrowing Costs

 Answer:-
 Total borrowing costs incurred = RM533,333 (RM10 mill x 8% x 8/12)
 Borrowing costs eligible for capitalisation = RM 0.4 mill (RM533,333 x 6/8)
 Borrowing costs treated as expense in the income statement = RM 133,333
(RM533,333-RM0.4 mill)
 Statement of Profit and Loss Account for the year ended 31 Dec 2006
2006 (RM)
Expenses
Finance costs 133,333
 Statement of Financial Position for the year ended 31 Dec 2006
2006 (RM)
Non Current Assets
Assets under construction
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10,400,000
9/1/13
 MFRS 123–SUSPENSION & CESSATION OF
CAPITALISATION
 Suspension
 During periods when active development is interrupted, the
borrowing costs incurred during these interrupted periods will
not be capitalised.
 However, temporary delays which are necessary, or extended
period for inventory to mature, or delays in construction are not
considered interruption of construction.
 Cessation
 Borrowing costs are not capitalised once the activities necessary
to prepare the qualifying asset for intended use or sale are
completed.
 Capitalisation should cease when substantially all the activities
necessary to prepare that part for its intended use or sale are
completed.
 MFRS 123 – Capitalisation of Borrowing Costs

SUSPENSION When active development is interrupted

Example:
On Jan 2007 Company A suspended the construction plant due to shortage of
material. The reconstruction recommenced back on 1 March 2007 and was finally
back on schedule. The total cost construction were RM10 million in the year of
2007
Required:-
Calculate the borrowing cost for the years ended 31 Dec 2007
Prepare SOP&L and SOFP.

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 MFRS 123 – Capitalisation of Borrowing Costs
 Answer:-
 Total borrowing costs incurred = RM0.8 mill (RM10 mill x 8% x 12/12)
 Borrowing costs eligible for capitalisation = RM 666,667 (RM0.8 mill x
10/12)
 Borrowing costs treated as expense in the income statement = RM 133,333
(RM0.8 mill-RM666,667)
 Statement of Profit and Loss Account for the year ended 31 Dec 2007
2007 (RM)
Expenses
Finance costs 133,333

 Statement of Financial Position for the year ended 31 Dec 2007

2007 (RM)
Non Current Assets
Assets under construction
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21,066,667
9/1/13
 MFRS 123– Capitalisation of Borrowing Costs

When substantially all the activities necessary to

CESSATION prepare the asset for its intended use or sale are
complete

Example:
On 30 June 2008 the construction completed as per schedule. The total cost
construction were RM5 million in the year of 2008
It is the company policy to capitalise borrowing costs that are directly attributable to
the acquisition ,construction or production of a qualifying asset where possible
Required:-
Calculate the borrowing cost for the years ended 31 Dec 2008
Prepare SOP&L and SOFP.

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 MFRS 123 – Capitalisation of Borrowing Costs

 Answer:-

 Total borrowing costs incurred = RM0.8 mill (RM10 mill x 8% x 12/12)

 Borrowing costs eligible for capitalisation = RM 0.4 mill (RM0.8 mill x 6/12)
 Borrowing costs treated as expense in the income statement = RM 0.4 mill (RM0.8
mill-RM0.4 mill)
 Statement of Profit and Loss Account for the year ended 31 Dec 2008

2008 (RM)
Expenses
Finance costs 400,000
Depreciation expenses (RM26,466,667/20 x 6/12) 661,667
 Statement of Financial Position for the year ended 31 Dec 2008
2008 (RM)
Non Current Assets
Plant 26,466,667
Accumulated depreciation (661,667)
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 MFRS 123 – DISCLOSURE REQUIREMENT

1. Accounting policy adopted for borrowing costs;

2. Amount of borrowing costs capitalised during the period; and
3. Capitalisation rate used to determine the amount of
borrowing costs eligible for capitalisation.
References:

1. PPT slides for FAR510 (retrieved from i-learn)

2. Tan L. T. (2017), Financial Accounting and Reporting in
Malaysia, Volume 1 (6th Edition), CCH-Asia, Malaysia