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