Page 15 - 2018 FAC4864 Test 4 slides - Borrowing Costs & IFRS 5

BORROWING COSTS

Tax implications

• The accounting treatment of capitalised borrowing costs where
the cost of the asset (including borrowing cost capitalised) is

depreciable over the useful life of the asset from the date when
the asset is ready for use, is in contrast with the taxation
treatment. For taxation purposes the total interest is referred to

as pre-production interest, which does not form part of the asset.
This pre-production interest will for taxation purposes be allowed
as a deduction in full when the asset is brought into use. This

difference in treatment will give rise to a temporary difference
and deferred tax will have to be provided thereon.

• The capitalisation of borrowing costs to a non-depreciable asset

gives rise to a non-reversing difference. For accounting purposes,
no expense will occur, whilst for taxation purposes, the borrowing
costs capitalised will be deducted as pre-production interest in

the year the asset is brought into use. No deferred tax will
therefore be provided for, as it gives rise to an exempt difference.

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