What is Borrowing Costs?
Borrowing costs are the interest and other costs an entity incurs in connection with the borrowing of funds. Under IAS 23, borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset must be capitalised as part of the asset’s cost.
How It Works
- Identify a qualifying asset — one that takes a substantial period of time to get ready for its intended use or sale.
- Identify the borrowings — specific to the asset or general funds.
- Compute the capitalisation rate for general borrowings.
- Capitalise borrowing costs incurred while the asset is being constructed.
- Stop capitalisation when the asset is substantially complete and ready for intended use.
Saudi Context
Saudi developers and industrial groups capitalise material borrowing costs during construction of factories, hotels, and infrastructure projects, following SOCPA-adopted IAS 23. ZATCA reviews the basis used during income tax and zakat audits.
Example
A factory is built with a SAR 100M loan at 5%. Construction lasts two years. Capitalised borrowing costs over the period = SAR 10M, added to the cost of the building, then depreciated over its useful life.