IAS 23 requires that borrowing costs DIRECTLY attributable to the acquisition, construction or production of a ‘Qualifying Asset’ (one that necessarily takes a substantial period of time to get ready for its intended use or sale) are included in the cost of the asset. Other borrowing costs are RECOGNIZED as an expense in the Profit or Loss (P&L).
Table of Contents
IAS 23 Borrowing Costs – Key Definitions
1. Borrowing Costs
These are interest and other costs incurred by an entity in connection with the borrowing of funds.
| Borrowing Costs May Include: |
|---|
| (a) Interest on bank overdrafts and short-term and long-term borrowings (INCLUDING inter-company borrowings) |
| (b) Amortization of discounts or premiums relating to borrowings |
| (c) Amortization of ancillary costs incurred in connection with the arrangement of borrowings |
| (d) Finance charges in respect of finance leases |
| (e) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs |
2. Qualifying Asset
It is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
| Examples Include: |
|---|
| (a) Inventories (that are not produced over a short period of time) |
| (b) Property, Plant and Equipment |
| (c) Intangible Assets |
| (d) Power generation facilities |
| (e) Investment Properties |
Recognition of Borrowing Costs
IAS 23 recognizes directly attributable borrowing costs as part of the cost of an asset while others are recognized as an expense in P&L.
1. Specific Borrowing
| If funds are borrowed specifically, the amount of borrowing costs eligible for capitalization are the actual borrowing costs incurred on that borrowing LESS any investment income on the temporary investment of any excess borrowings not yet used. |
2. General Borrowing
| If funds are borrowed generally, the amount of borrowing costs eligible for capitalization are determined by applying a ‘Capitalization Rate’ (weighted average of borrowing costs applicable to the general borrowings) to the expenditures on that asset. |
| The amount of borrowing costs capitalized during the period CANNOT exceed the amount of borrowing costs incurred during the period. |
| The capitalization rate is applied from the time expenditure on the asset is incurred. |
IAS 23 Capitalization Criteria
1. Commencement of Capitalization
Capitalization of borrowing costs COMMENCES when:
- Expenditures for the asset are being incurred;
- Borrowing costs are being incurred; AND
- Activities necessary to prepare the asset are in progress.
2. Suspension of Capitalization
Capitalization of borrowing costs is SUSPENDED if the development of the asset is suspended for an extended period of time.
3. Cessation of Capitalization
Capitalization of borrowing costs should CEASE when the asset is substantially complete.
When the construction of a ‘qualifying asset’ is completed in parts and part is capable of being used while construction continues on other parts, capitalization of borrowing costs ceases when substantially all the activities necessary to prepare that part for its intended use or sale or completed.
IAS 23 Disclosures
| Amount of borrowing costs capitalized during the period. |
| Capitalization Rate used to determine the amount of borrowing costs eligible for capitalization. |
Synopsis
IAS 23 was REISSUED in March 2007 and applies to annual periods beginning on or after 1 January 2009. It requires that borrowing costs directly attributable to the acquisition, construction or production of a ‘qualifying asset’ are included in the cost of the asset.
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia