I get why interest relating the the construction of an asset is capitalised.
BUT
I don’t get why “if no construction debt is outstaning”, an interest expense is capitalised and the rate used is based on “existing unrelated borrowings”.
If there was NEVER debt outstanding, why would you capitalise an interest expense you didnt incur?
If there was construction debt outstanding but this has now been cleared, but for which an interest expense was incurred, why not use the actual interest rate incurred on this debt rather than basing it on “existing unrelated borrowings”?
I think the above says that if there is no specific construction rate debt, you should capitalize interest on the outstanding debt pool. so there is at least some debt outstanding.
of course, if there is no interest expense, there is no interest to capitalize.
but lets say a mining firm for example has a pool of debt outstanding and then decides to go ahead with building a new mine.
the mining firm wants to capitlize some of the interest it is already incurring from its outstanding debt for the contstruction project…
lets say that the tax authorities didn’t allow this, claiming that the interest is not specific to the construction project… well then the mining firm could simply issue new debt in the name of the construction project and retire this old debt…
so instead of making the mining firm do this, the mining firm is simply allowed to capitize interest from the outstanding debt pool
i am not sure clear on the actual rules, but this is a simple explanation, and anyone please correct me if this is wrong