Question

1. Per GAAP, if we borrow some of the project’s costs in a specific loan and get the rest from cash that we have from the other general borrowings we have made in the past, what interest rate or rates do we use?

2. Per GAAP, this project is unique. It is one project with two parts—a hotel and a small retail area with shops. The hotel is going to take three years to complete and the retail shops will only take one year to complete. We will be able to open the shops in one year and start earning rent from our tenants. So my question is: Do we just capitalize on interest on the whole project for the full three years since that is when the whole project is complete? Or do we split it into parts? What are the rules?

Answer 1

Borrowing costs are capitalised as part of the costof a qualifying asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. Other borrowing costs are recognised as an expense in the period in which they are incurred.

Disclosure. The standard requires the entity todisclose the following: Borrowing cost capitalized during the accounting period; The weighted averageborrowing cost rate or percentage used to determine the borrowing costs eligible for capitalization.

Borrowing cost can be defined as interest and othercosts incurred by an enterprise in relation to theborrowing of funds. Explaining in a more technical way, borrowing costs refer to the expense of taking out loan expenses like interest payments incurred from a loan or any other kind of borrowing.

Generally accepted accounting principles, or GAAP, are a set of rules that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.

The four basic constraints associated with GAAP include objectivity, materiality, consistency and prudence.