IAS 23 BORROWING COST
Definition
Borrowing costs are interest and other costs that an entity incurs in connection with
the borrowing of funds
Borrowing costs directly attributable to acquisition, construction or production of a
qualifying asset must be capitalised as part of the cost of an asset.
Qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale.
The standard does not define 'substantial period of time' but an asset that normally
takes more than a year to be ready for use will usually be a qualifying asset. These are
what are usually called 'self-constructed assets', where an entity builds its own
inventory or non-current assets over a substantial period of time.
BORROWING COST INCLUDES:
a) Interest expense calculated using the effective interest method as
described in IFRS 9;
b) Interest in respect of lease liabilities recognised in accordance
with IFRS 16 Leases; and
c) Exchange differences arising from foreign currency borrowings to
the extent that they are regarded as an adjustment to interest costs
Examples of qualifying assets
● Depending on the circumstances, any of the following may be
qualifying assets.
● Inventories
● Manufacturing plants
● Power generation facilities
● Intangible assets
● Investment properties
● Bearer plants
COMMENCEMENT
Capitalisation of borrowing costs should commence when all of the
following conditions are met:
● Expenditure for the asset is being incurred
● Borrowing costs are being incurred
● Activities that are necessary to prepare the asset for its
intended use or sale are in progress.
● Any investment income on the temporary investment of the
borrowings during the capitalisation period is reduced from the
capitalised borrowing cost
CESSATION
● Substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are complete'
● Construction is temporarily suspended if active development
is interrupted for any extended periods, capitalisation of
borrowing costs should be suspended for those periods, eg.
due to industrial disputes
DISCLOSURE
● The amount of borrowing costs capitalised during the period
● The capitalisation rate used to determine the amount of
borrowing costs eligible for capitalisation.
● If an entity borrows funds generally and uses them for the
purpose of obtaining a qualifying asset, then weighted average
of the borrowing cost applicable to all borrowings that are
outstanding during the period is used.
Wilson received an $18 million 5% loan on 1 January 20X8 to finance
construction of a new factory. As the funds were not all required
immediately Wilson invested $6 million in 2% bonds until 31 May 20X8.
Construction of the factory began on 1 March 20X8 and was completed
on 31 December 20X8.
Answer
Interest on loan – pre construction 18,000,000*5%*2/12 150,000
01.01.20X8- 28.02.20X8. not used
for qualifying assets, hence interest
cost charged to SOPL
Interest incurred during 18,000,000*5%*10/12 750,000
construction period on qualifying
asset
Interest earned on unutilised funds 600,000*2%*3/12 (30,000)
Total interest capitalised 720,000
EXAMPLE :
Capita Co had the following bank loans outstanding during the whole of 20X8
which form the company’s general borrowings for the year:
9% loan repayable 20X9 15 million $
11% loan repayable 20Y2 24 million $
Capita Co began construction of a qualifying asset on 1 April 20X8 and withdrew
funds of $6 million on that date to fund construction.
On 1 August 20X8 an additional $2 million was withdrawn for the same
purpose.
Calculate the borrowing costs which can be capitalized in respect of this project
for the year ended 31 December 20X8.
Answer Capita
Weighted average interest rate (9*(15/39))+ (11*(24/39)) 10.23%
Interest on loan Apr- Dec 6000,000*10.23%*9/12 460,350
Interest on loan Aug- Dec 2000,000*10.23%*5/12 85,250
Total interest capitalised 545,600
Answer- Leclerc
Interest for 01.01.20X1- 28.02.20X1 2400,000*8%*2/12 32000
Preconstruction interest charged to SOPL
Interest on loan – 1.03.20X1- 31.12.20X1 2400,000*8%*10/12 160,000
1000,000*6%*4/12 (20,000)
Less Interest on loan unutilised- interest earned
Net interest capitalised with qualifying asset 140,000
Answer – a company
Weighted average rate of interest (10*140/340)+ (8*200/340) 8.81
Interest capitalised 50,000,000*8.81%*6/12 220,000
