IAS 23 Borrowing Costs

Key Points of IAS 23: Borrowing Costs

1. Overview: IAS 23 provides guidelines on the accounting treatment of borrowing costs. The primary objective is to determine whether borrowing costs should be capitalized as part of the cost of a qualifying asset or expensed in the period they are incurred.

2. Definitions:

• 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. Examples include manufacturing plants, power generation facilities, and investment properties​(ias-23-borrowing-costs)​.

3. Recognition: Entities must capitalize borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset. Other borrowing costs should be recognized as expenses in the period in which they are incurred​(ias-23-borrowing-costs)​.

4. Borrowing Costs Eligible for Capitalization:

• Directly attributable borrowing costs include those that would have been avoided if the expenditure on the qualifying asset had not been made.

• When an entity borrows funds specifically for a qualifying asset, the borrowing costs can be readily identified and capitalized.

• For general borrowings, a capitalization rate is applied to the expenditures on the asset. This rate is the weighted average of borrowing costs applicable to all borrowings​(ias-23-borrowing-costs)​.

5. Commencement of Capitalization: Capitalization of borrowing costs begins when the entity:

• Incurs expenditures for the asset.

• Incurs borrowing costs.

• Undertakes activities necessary to prepare the asset for its intended use or sale​(ias-23-borrowing-costs)​.

6. Suspension of Capitalization: Capitalization of borrowing costs is suspended during extended periods when active development of the qualifying asset is interrupted​(ias-23-borrowing-costs)​.

7. Cessation of Capitalization: Capitalization ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. If an asset is completed in parts, each part is considered complete when it is capable of being used independently while construction continues on other parts​(ias-23-borrowing-costs)​.

8. Disclosure: Entities must disclose the amount of borrowing costs capitalized during the period and the capitalization rate used​(ias-23-borrowing-costs)​.

Practical Examples

• Directly Attributable Borrowing Costs: If a company borrows funds specifically to build a new factory, the interest on that loan would be capitalized.

• General Borrowings: If a company uses general borrowings to finance the construction of a qualifying asset, a weighted average capitalization rate is applied to the expenditures on the asset.

Key Considerations

• Judgment Required: Identifying directly attributable borrowing costs can be challenging, especially when an entity's financing is centrally coordinated or involves various debt instruments and currencies.

• Temporary Investment Income: When borrowed funds are temporarily invested before being used for a qualifying asset, any investment income earned should be deducted from the borrowing costs capitalized​(ias-23-borrowing-costs)​.

By adhering to IAS 23, entities ensure that their financial statements accurately reflect the costs associated with acquiring, constructing, or producing long-term assets.