Under FRS 101, what is the treatment of borrowing costs?

Under FRS 101, the treatment of borrowing costs allows for flexibility in their accounting. Specifically, entities have the option to either capitalize borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset or to expense them in the period they are incurred. This dual approach reflects the standard's alignment with the principles set out in IAS 23, which also permits the capitalization of borrowing costs but does not mandate it.

Qualifying assets typically include those that take a substantial period to get ready for intended use or sale, such as property, plant, and equipment. When borrowing costs are capitalized, they are included in the cost of the asset and subsequently depreciated over the asset’s useful life. If opted to expense, these costs impact the income statement in the period incurred, affecting profitability.

This treatment encourages entities to make judicious decisions about their borrowing costs based on their specific circumstances, such as the cost of finance and the timing of asset construction. Thus, the selected answer correctly reflects the options available under FRS 101 regarding the treatment of borrowing costs.