Objective: IAS 23 prescribes the accounting treatment for borrowing costs and requires capitalization of borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset.
- Applies to all borrowing costs that are directly attributable to qualifying assets
- Mandatory capitalization for qualifying assets (no option to expense)
- Key principle: Capitalize borrowing costs during construction period
Borrowing Costs: Interest and other costs that an entity incurs in connection with the borrowing of funds.
Qualifying Asset: An asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
- Borrowing Costs Include:
- Interest on bank overdrafts and borrowings
- Amortization of discounts or premiums on borrowings
- Amortization of ancillary costs incurred in connection with borrowings
- Finance charges on finance leases
- Exchange differences from foreign currency borrowings
- Examples of Qualifying Assets:
- Manufacturing plants
- Power generation facilities
- Investment properties
- Inventories requiring substantial time
| Condition | Requirement |
|---|---|
| Expenses Incurred | Borrowing costs are being incurred |
| Activities in Progress | Activities necessary to prepare asset are in progress |
| Borrowing Costs Incurred | Borrowing costs are being incurred |
Commencement: Capitalization begins when all three conditions are satisfied.
Suspension: Capitalization should be suspended during extended periods in which active development is interrupted.
Cessation: Capitalization should cease when substantially all activities necessary to prepare asset are complete.
- Suspension Examples: Labor disputes, delays in permits, technical issues
- Cessation Point: When asset is ready for use or sale
- Partial Completion: Capitalize costs for completed parts ready for use
Specific Borrowings: Borrowings obtained specifically for qualifying asset.
General Borrowings: Borrowings used for general purposes but also for qualifying asset.
Capitalizable Amount = Actual borrowing costs incurred
Less: Investment income on temporary investments
Capitalization Rate = Total borrowing costs ÷ Total general borrowings
Capitalizable Amount = Expenditure on asset × Capitalization rate
Scenario: Company constructs building over 2 years
Specific Loan: $10 million at 6% interest
General Borrowings: $50 million at average 5%
Expenditure: $8 million from specific loan, $2 million from general funds
Calculation:
• Specific portion: $8M × 6% = $480,000
• General portion: $2M × 5% = $100,000
• Total capitalizable: $580,000 annually
- Specific Borrowings: Actual costs incurred less investment income
- General Borrowings: Weighted average of borrowing costs
- Capitalization Rate: Weighted average of borrowing costs applicable to general borrowings
- Exchange Differences: Capitalized if related to foreign currency borrowings
- Excess Funds: Investment income on temporary investments deducted from capitalizable amount
| Requirement | Description |
|---|---|
| Accounting Policy | Disclose accounting policy for borrowing costs |
| Capitalization Rate | Capitalization rate used to determine borrowing costs |
| Amount Capitalized | Total borrowing costs capitalized during period |
| Qualifying Assets | Description of qualifying assets for which costs capitalized |
- Commencement Date: When expenditures and activities begin
- Temporary Investments: Income from temporary investments of borrowed funds reduces capitalizable amount
- Multiple Assets: Allocate borrowing costs to multiple qualifying assets
- Impairment: Consider impairment if carrying amount exceeds recoverable amount
- Tax Effects: Consider tax implications of capitalization
- Inventories: Capitalize if require substantial period to bring to salable condition
- Investment Properties: Qualifying assets if measured at cost
- Assets at Fair Value: No capitalization for assets measured at fair value
- Short-term Assets: No capitalization for assets ready for use within short period