Question

What interest rates should be used in determining the amount of interest to be capitalized, and how the amount of interest is determined?

Answer 1

The following answer is as per IFRS

1. Interest costs should only be capitalised for qualifying assets.

2. Qualfying assets means an asset that takes substantial period of time to get ready for intended use or sale.

3. In case of specific borrowings:

We have to identify the rate of interest for the specific borrowing then we have to capitalise the interest costs only to the extent of accumulated expenditure on the asset during the period multiplied by specific borrowing interest rate

4. In case of general borrowings:

We have to identify thecapitalization rate considers the weighted-average interest cost applicable to general borrowings outstanding during the period then we have to capitalise the interest costs only to the extent of accumulated expenditure on the asset during the period multiplied by weighted-average interest cost