THE THINKING ACCOUNTANTS
IAS 23- BORROWING COST
CORE PRINCIPLE
o Borrowing costs that are directly attributable to
the acquisition,
construction or production of a qualifying
asset
form part of the cost of that asset.
o Other borrowing
costs are recognised as an expense.
SCOPE
* WITHIN
An
entity shall apply this Standard in accounting
for borrowing costs.
* OUTWITH
i. IAS
23 does not deal with
the actual or imputed
cost
of
equity, including preferred capital not classified as a liability.
ii.
An entity
is
not required to apply the standard
to borrowing costs directly
attributable to
the acquisition, construction or
production of:
ž A
qualifying
asset measured at fair value,
for example a biological asset;
or
ž Inventories that are manufactured, or otherwise
produced, in large quantities on a repetitive basis.
DEFINITION
1. Borrowing costs are
interest and
other costs that an entity incurs in
connection with the borrowing of funds. It may
include:
• Interest expense
calculated using
the
effective
interest
method as described IAS
39/
IFRS9
• Finance charges in respect
of finance leases recognised in
accordance with IAS
17
• Exchange differences
arising from
foreign currency borrowings to the
extent
that they are regarded as
an adjustment
to interest costs .
2. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready
for its intended use or
sale.
Depending on the
circumstances, any
of the
following may
be qualifying assets:
(a) Inventories (c) power generation facilities
The following are not qualifying assets:
RECOGNITION
1. Financial
assets, and inventories that are manufactured, or otherwise
produced, over
a short period
of time.
2.
Assets that are
ready for their intended use or sale when acquired.
RECOGNITION
Benchmark
treatment
Prior to the
revision of IAS
23 the benchmark treatment was
to recognise borrowing costs
as an expense. This
benchmark/allowed alternative has now been removed.
ž An entity shall capitalise
borrowing costs
that are directly attributable to the acquisition, construction or production of qualifying asset as
part
of the cost of that asset when:
–It
is probable that they will result in future economic
benefits,
and
–The costs
can be measured reliably
•An
entity shall recognise other borrowing costs
as an expense
in the period in which it incurs them.
Borrowing costs eligible For
capitalisation
Borrowing costs that would
have been avoided if the
expenditure on the
qualifying
asset had not been
made.
Amount Eligible for Capitalisation
ž * If funds are borrowed specifically, the
amount
of borrowing costs
eligible
for capitalisation are the
actual borrowing costs incurred on that borrowing less any investment
income on the
temporary investment of any excess borrowings not yet used
N
Actual Borrowing costs (xxxx)
Investment
income xxx
Borrowing cost eligible for
CAPITALISATION (XXX)
*ž If funds are borrowed generally, the amount
of borrowing costs eligible for
capitalisation are
determined by applying a capitalisation rate (weighted
average of
borrowing costs applicable to the
general borrowings)
to the expenditures
on that asset. Let’s assume
3 sources of funds.
Capitalisation rate: a% x A
+ b% x B
+
c% x C
A+B+C A+B+C A+B+C
Where:
A,B,C are the amount
outstanding during the
period for
each debt instrument.
- a% is the effective interest rate charged on A;
- b% is the effective interest rate charged on B;
- c% is the effective interest rate charged on C.
Borrowing cost= Capitalisation
rate x Amount drawn from
the
pool of funds for
that Asset (Expenditure
for the Asset).
Commencement of capitalisation(i.e. when should
an entity commence capitalising
borrowing cost)
An entity shall begin capitalising
borrowing
costs as part of the cost
of
a qualifying asset
on the commencement
date.
The commencement date for capitalisation is the date when the entity first meets all of the following conditions:
(a) it incurs expenditure for the asset;
(b)
it
incurs borrowing
costs; and
(c) it
undertakes activities that are
necessary to prepare the asset for its intended use or sale
Suspension of
capitalisation
•An entity
shall suspend capitalization of borrowing
costs during extended periods
in
which it suspends
active development of a qualifying
asset.
•Except
where the temporary delay is a necessary part of the process of getting an
asset ready for
its intended.
Cessation of capitalisation
Therefore, we can say the Capitalisation period is the period starting from the commencement date to the cessation date after deducting any suspension period
Disclosure
The standard IAS 23 requires the disclosure of:
ž * The amount
of borrowing costs capitalized during
the period; and
ž * The capitalization rate used to determine the amount
of borrowing costs eligible for
capitalization
Steps
to capitalise borrowing costs
Step 1: identify if the
asset in which the borrowing is financing
is a qualifying asset,
if
not, expense all borrowing cost incurred in the period
that gives rise to it.
Step 2: Confirm if the “commencement of capitalisation” criteria have been met.
If not, all the borrowing
cost shall be
immediately expensed.
Step 3: Identify if the amount was
drawn from a specific borrowing or general borrowings (pool of fund)
Step 4: Apply the
requirement for step
3,
as appropriate; i.e. calculate the amount eligible for capitalisation.
