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IAS 23 - Presentation

IAS 23 outlines the principles for capitalizing borrowing costs directly attributable to the acquisition, construction, or production of qualifying assets, which are assets that take a substantial time to prepare for use. It specifies that only borrowing costs incurred during the asset's development can be capitalized, while others should be expensed. Additionally, the standard requires disclosures regarding the amount of borrowing costs capitalized and the capitalisation rate used.

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0% found this document useful (0 votes)
7 views7 pages

IAS 23 - Presentation

IAS 23 outlines the principles for capitalizing borrowing costs directly attributable to the acquisition, construction, or production of qualifying assets, which are assets that take a substantial time to prepare for use. It specifies that only borrowing costs incurred during the asset's development can be capitalized, while others should be expensed. Additionally, the standard requires disclosures regarding the amount of borrowing costs capitalized and the capitalisation rate used.

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Murtuza Haider
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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IAS 23:

BORROWING COSTS
Compiled by: Murtaza Quaid, ACA
IAS 23: BORROWING COSTS

In this Part:
 Introduction

 Borrowing Costs eligible for Capitalization

 Period of Capitalization

 Disclosures

Compiled by: Murtaza Quaid, ACA IAS 23: BORROWING COSTS


INTRODUCTION

 The core principle of IAS 23 Borrowing Costs is that you should capitalize borrowing
Objective costs if they are directly attributable to the acquisition, construction or production of
a qualifying asset.

Borrowing  Borrowing costs are interest and other costs that an entity
Costs incurs in connection with the borrowing of funds.

 A qualifying asset is an asset that necessarily takes a substantial period of


time to get ready for its intended use or sale.

 Note here that IAS 23 does not say it must necessarily be an item of a
Qualifying
property, plant and equipment under IAS 16. It can also include some
Asset inventories or intangibles, too!

 But what is a “substantial period of time”? Well, that’s not defined in IAS
23, so here you need to apply some judgment. Normally, if an asset
takes more than 1 year to be ready, then it would be qualifying.
Compiled by: Murtaza Quaid, ACA IAS 23: BORROWING COSTS
BORROWING COSTS ELIGIBLE FOR CAPITALISATION

 Borrowing costs that are directly attributable to the acquisition, construction


or production of a qualifying asset must be capitalised as part of the cost of
that asset. All other borrowing costs are recognized as an expense in the period in which they are
incurred.
 Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset are those that would have been avoided if the expenditure on the qualifying asset
had not been made.
 This includes the costs associated with specific loans taken to fund the production or purchase of an
asset and general borrowings. General borrowings are included because if an asset was not being
constructed it stands to reason that there would have been a lower need for cash.

Compiled by: Murtaza Quaid, ACA IAS 23: BORROWING COSTS


BORROWING COSTS ELIGIBLE FOR CAPITALISATION

SPECIFIC BORROWINGS GENERAL BORROWINGS

 When a specific loan is taken in order to  General borrowings are those funds that are obtained for
obtain a qualifying asset, the borrowing costs various purposes and they are used (apart from these other
purposes) also for the acquisition of a qualifying asset.
eligible for capitalization are the actual
borrowing costs incurred on that borrowing  When general borrowings are used, the amount of
during the period less any investment borrowing costs eligible for capitalisation is obtained by
applying a capitalisation rate to the expenditures on that
income on the temporary investment of
asset.
those borrowings.
 The capitalisation rate is the weighted average of the
borrowing costs applicable to the borrowings that are
outstanding during the period.
 The amount of borrowing costs capitalised cannot exceed
the amount of borrowing costs it incurred during a period.
 The capitalisation rate is applied from the time expenditure
on the asset is incurred.

Compiled by: Murtaza Quaid, ACA IAS 23: BORROWING COSTS


PERIOD OF CAPITALISATION

Commencement of Suspension of Cessation of


Capitalisation Capitalisation Capitalisation

 Capitalisation of borrowing  Capitalisation of borrowing  Capitalisation of borrowing


costs should start only when: costs should be suspended if costs should cease when the
 Expenditures for the asset development of the asset is asset is substantially complete.
are being incurred; and suspended for an extended The costs that have already
period of time. been capitalised remain as a
 Borrowing costs are being
part of the asset’s cost, but no
incurred, and
additional borrowing costs
 Activities necessary to may be capitalised.
prepare the asset have
started.
Compiled by: Murtaza Quaid, ACA IAS 23: BORROWING COSTS
DISCLOSURE

IAS 23 requires disclosure of the following:


(a) The amount of borrowing costs capitalised
during the period; and
(b) The capitalisation rate used to determine the
amount of borrowing costs eligible for
capitalisation.

Compiled by: Murtaza Quaid, ACA IAS 23: BORROWING COSTS

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