Question

Capitalization of borrowing costs, including exchange differences:

Options:
A) Is not allowed under any accounting standards.
B) Depends on the entity's policy and the specific requirements of the accounting standards it follows.
C) Is required for tax purposes only.
D) Is required for all entities, regardless of their accounting standards or policies.

Answer 1

The capitalization of borrowing costs, including exchange differences, is dictated by an entity's accounting policy and the specific requirements of the accounting standards it adheres to, such as IFRS or GAAP, where capitalization is typically applied to qualifying assets.

Step-by-step explanation:

The capitalization of borrowing costs, including exchange differences, depends on an entity's accounting policy and the specific requirements of the accounting standards it follows (Option B). When a firm decides to access financial capital through borrowing from banks or issuing bonds, it needs to handle the related costs, such as interest payments. These borrowing costs can sometimes include exchange differences when dealing with foreign currencies. The decision on whether to capitalize or expense these costs is guided by the relevant accounting standards, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP).

Under IFRS, specifically IAS 23 'Borrowing Costs', certain borrowing costs that are directly attributable to the acquisition, construction, or production of a 'qualifying asset' must be capitalized as part of the cost of that asset. This implies that a firm can add interest expenses and other loan costs to the value of the asset being constructed with that loan. Qualifying assets are ones that necessarily take a substantial period of time to get ready for their intended use or sale. For assets not considered as qualifying, borrowing costs must be recognized as an expense in the period they are incurred.

Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to the interest costs may also be capitalized under certain conditions. However, these practices are subject to the specifics outlined within the chosen accounting framework.

Answer 2

Capitalization of borrowing costs is subject to the entity's policy and the requirements of the accounting standards it follows, such as IFRS or GAAP, and is not uniformly required across all entities.

Step-by-step explanation:

The correct answer to the student's question on the capitalization of borrowing costs, including exchange differences, is B) Depends on the entity's policy and the specific requirements of the accounting standards it follows. Each entity must adhere to the accounting standards such as the International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP) that apply to its jurisdiction. Specifically, IAS 23 under IFRS allows the capitalization of borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset as part of the cost of that asset. This includes certain exchange differences arising from foreign currency borrowings.

Therefore, an entity must follow the specific guidelines of its accounting framework to determine whether to capitalize or expense borrowing costs. It's not a practice that is uniformly required across all entities or for tax purposes, but it is subject to the conditions set by the relevant accounting standards.