Self-Constructed Assets and Borrowing Costs

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A self-constructed asset is one where the company uses its own equipment and labour to produce the asset. The cost of the self-constructed asset should include all direct out-of pocket costs and should also include appropriate cost allocations of joint costs consumed by the construction of the asset. For example, if a construction company decides to pave its company headquarters parking lot, it will put depreciable assets to use (trucks, paving equipment). It would make sense that a reasonable amount of depreciation on this equipment be capitalized to the cost of the parking lot. Note that the general recognition criteria applies to self-constructed assets, i.e., the costs can be capitalized if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity, and (b) the cost of the item can be measured reliably. The capitalization of borrowing costs is covered by IAS 23. The standard defines a qualifying asset as ‘an asset that necessarily takes a substantial amount of time to get ready for its intended use or sale’ (IAS 23.5). This includes intangible assets and inventory, but excludes inventories that are routinely manufactured or otherwise produced in large quantities or on a repetitive basis. Examples of these would include items that take some time to manufacture but that are sold as standard items such as residential housing, subway cars, aircraft, etc… (IAS 23.4). Borrowing costs are defined as interest on short-term and long-term debt and includes any amortization of discounts and premiums and finance charges on leases. The capitalization rate is defined as the annual borrowing costs divided by the weighted average debt that generated borrowing costs. The capitalization rate is applied to the weighted average expenditures made on qualifying assets. The resulting amount is the amount of

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