What is done with investment income from surplus funds during borrowing costs capitalization?

During the capitalization of borrowing costs, any investment income generated from surplus funds that are temporarily held while the funds are being used to finance qualifying assets is deducted from the total borrowing costs. This is in line with the guidance provided by accounting standards regarding borrowing costs.

When an entity incurs interest or finance charges on borrowed funds to finance the acquisition or construction of an asset, it is allowed to capitalize those costs as part of the asset's cost. However, if there are surplus funds during this borrowing phase, and those funds are invested elsewhere generating income, this investment income effectively reduces the net borrowing costs associated with financing the asset.

By deducting the investment income from the total borrowing costs incurred, the financial statements accurately reflect the actual cost of financing the asset. This approach ensures that only the net costs representing the true financial burden of borrowing are capitalized, which aligns with the principle of matching costs and revenues within the accounting framework. Hence, this treatment provides a clearer and more transparent picture of the financing costs related to the asset under development or construction.