BORROWING COST

OBJECTIVE

The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs. Borrowing costs
include interest on bank overdrafts and borrowings, finance charges on finance leases and exchange
differences on foreign currency borrowings where they are regarded as an adjustment to interest costs.

History of IAS 23

November 1982 Exposure Draft E24 Capitalisation of Borrowing Costs

March 1984 IAS 23 Capitalisation of Borrowing Costs

1 January 1986 Effective date of IAS 23 (1984)

August 1991 Exposure Draft E39 Capitalisation of Borrowing Costs

December 1993 IAS 23 (1993) Borrowing Costs (revised as part of the 'Comparability of

Financial Statements' project)

1 January 1995 Effective date of IAS 23 (1993) Borrowing Costs

25 May 2006 Exposure Draft of proposed amendments to IAS 23

29 March 2007 IASB amends IAS 23 to require capitalisation of borrowing costs.

22 May 2008 IAS 23 amended for 'Annual Improvements to IFRSs 2007 for components
of borrowing costs

1 January 2009 Effective date of March 2007 and May 2008 amendments to IAS 23

12 December IAS 23 amended for 'Annual Improvements to IFRS Standards 2015–2017'.

2017

Borrowing cost may include: [IAS 23.6]

 Interest expense calculated by the effective interest method under IAS 39,
 Finance charges in respect of finance leases recognised in accordance with IAS 17 Leases, and
  Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs

A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or
sale. [IAS 23.5]

Scope of IAS 23

Two types of assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:

 qualifying assets measured at fair value, such as biological assets accounted for under IAS 41
Agriculture
 inventories that are manufactured, or otherwise produced, in large quantities on a repetitive
basis and that take a substantial period to get ready for sale (for example, maturing whisky)

IAS 23 – BORROWING COST TOPIC 835 – CAPITALISED INTEREST

SCOPE:
Borrowing Costs that are directly attributable to
the acquisition, construction or production of a
qualifying asset from part of the cost of that
asset. Other borrowing cost are recognized as an
expense in the period in which they are incurred.
QUALIFYING ASSET:
A qualifying asset is one that necessarily takes a
substantial period of time to be made ready for
its intended use or sale.
ELIGIBLE FOR CAPITALISATION:
Borrowing cost eligible for capitalization may
include interest expense calculated using the
effective interest method, interest in respect of
lease liabilities, and exchange differences to the
extent that they are regarded as an adjustment
to interest costs.
SPECIFIC BORROWINGS:
When an entity borrows funds specifically for the
purpose of obtaining a qualifying asset, the
amount of specific borrowing costs capitalised is
the actual borrowing costs incurred on that
borrowing less investment income or ay
temporary investment of funds pending
expenditure on the asset.
GENERAL BORROWINGS:
The amount of interest capitalised may not
exceed the actual interest incurred by the entity.
SCOPE:
Like IFRS Accounting Standards, interest costs
that are directly attributable to the acquisition,
construction or production of a qualifying asset
from part of the cost of that asset.
QUALIFYING ASSET:
Unlike IFRS, under US GAAP, qualifying asset
includes assets that are constructed or otherwise
produced for an entity’s own use.
ELIGIBLE FOR CAPITALISATION:
Like IFRS, interest cost calculated using the
effective interest method are eligible for
capitalization. On the other hand, interest cost is
capitalizable in respect of lease liability only for
finance leases and foreign exchange differences
are not eligible for capitalization.
SPECIFIC BORROWING:
Unlike IFRS, when entity borrows funds
specifically for the purpose of obtaining a
qualifying asset, the amount caoitalised may be
determined by applying the specific rate on that
borrowing to the average accumulated
expenditure for the asset.
GENERAL BORROWINGS:
Like IFRS, the amount of interest capitalised may
not exceed the actual interest incurred by the
entity.
PERIOD OF CAPITALISATION:
Capitalisation begins when the entity first meets
all of the following conditions:
 Expenditure for the asset is incurred;
 Borrowing costs are incurred; and
 Activities that are necessary to prepare
the asset for its intended use or sales are
in progress.
PERIOD OF CAPITALISATION:
Capitalisation begins when the entity first meets
all of the following conditions:
 Expenditure for the asset is incurred;
 Interest costs are incurred; and
 Activities that are necessary to prepare
the asset for its intended use or sales are
in progress.