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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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