IAS 23 Borrowing Costs Overview
IAS 23 prescribes the accounting treatment for borrowing costs.
Borrowing costs are interests and other cost that an entity incurs in connection with borrowing of fund.
- Borrowing cost includes:
- Finance charges in respect of IFRS-16/IAS-17 Leases.
- Exchange difference from foreign currency borrowing.
Tackle IAS 23 in TWO simple steps
- Identifying the Qualifying asset.
- Accounting for the Borrowing costs from funds used for Qualifying asset.
Step 1: Identifying the Qualifying asset
- A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
Short period of time to get ready.
- Financial assets and inventories manufactured or otherwise produced over a short period of time.
- Asset that are ready for their intended use/sale when acquired.
Borrowing cost directly attributable of acquisition, construction or production of Qualifying asset are capitalized as part of cost, when probable that they will results in future benefit.
Step 2: Accounting for the Borrowing costs from funds used for Qualifying asset
Specific Borrowing may be invested temporarily, which arises interest income.
Cost to be Capitalized?
- The actual Borrowing costs are to be capitalized incurred on that borrowing during the period (less) any investment income on temporary investment of those borrowing.
Cost to be Capitalized?
When general borrowings are used the amount of borrowing costs eligible for capitalization is obtained by applying a capitalization rate to the expenditure of that asset.
Capitalization rate= Total interest (divide-by Total loan)
- When the carrying amount of qualifying asset exceeds its recoverable amount, the carrying valve is written down to recoverable amount.
The commencement date for capitalization is the date when entity first meets ALL of the following conditions:
- It incurs expenditure for the asset.
- It incurs Borrowing costs.
- Activities necessary to prepare the asset have started.
Expenditure on a qualifying asset include only:
- cash payments.
- transfer of other asset.
- interest-bearing liabilities.
An entity shall suspend capitalization:
- During extended period in which it suspends active development of a qualifying asset.
- holding partially completed assets.
An entity shall not suspend capitalization:
- when a temporary delay is necessary.
- entity carries out substantial technical and administrative work.
- Capitalization of borrowing cost should cease when the asset is substantially complete, even though routine administrative work might still continue.
- when an entity completes the construction of a qualifying asset in parts, the entity will cease capitalization when it completes substantially all activities, even construction continues on the other parts.