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IAS - 23 - Borrowing - Costs IAS 23
IAS - 23 - Borrowing - Costs IAS 23
BORROWING COSTS
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University prior to reproduction
Learning Objectives
At the completion of studying this chapter, you will
be able to:
Define qualifying assets
Identify what borrowing costs are
Identify pre-conditions for the capitalisation of borrowing
costs
distinguish between the accounting treatment of
borrowing costs under US GAAP and IFRS
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List of Applicable IFRS
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The objective of IAS 38
The objective of IAS 38 is to prescribe the criteria for
determining whether borrowing costs can be capitalized
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QUALIFYING ASSETS
A qualifying asset is ‘an asset that necessarily takes a
substantial period of time to get ready for its intended use or
sale’.
Assets that are ready for their intended use or sale when
acquired are NOT qualifying assets.
IAS 23 does not define ‘substantial period of time’.
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ELEMENTS OF BORROWING COSTS
Borrowing costs, as understood generally, refer to interest
costs.
Rather, borrowing costs also include other related costs, such
as:
Exchange differences arising from foreign currency borrowings to the
extent they are regarded as an adjustment to interest costs
Finance charges in respect of finance leases recognized in accordance
with IFRS 16, Leases
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Borrowing Costs..ctd
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COMMENCEMENT OF CAPITALIZATION
Capitalization of borrowing costs shall commence when
Expenditures for the asset are being incurred;
Borrowing costs are being incurred; and
Activities necessary to prepare the asset for its intended use or sale
are in progress.
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SUSPENSION OF CAPITALIZATION
Capitalization shall be suspended during extended periods in
which active development is interrupted
Question:
should capitalization be suspended during an interruption to the
construction of a bridge during very high water levels?
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CESSATION OF CAPITALIZATION
Capitalization of borrowing costs ceases when substantially all
the activities are complete.
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CASE STUDY I &II
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Case Study
A socially responsible multinational corporation (MNC)
decided to construct a tunnel that will link two sides of the
village that were separated by a natural disaster years ago.
Realizing its role as a good corporate citizen, the MNC has
been in this village for a couple of years exploring oil and gas
in the nearby offshore area.
The tunnel would take two years to build and the total capital
outlay needed for the construction would be not less than
ETB20 million.
To allow itself a margin of safety, the MNC borrowed ETB22
million from three sources and used the extra ETB2 million for
its working capital purposes.
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Case Study…ctd
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Case Study…ctd
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Solution
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Similarities and Difference between IFRS
and US GAAP
Similarities
Both capitalize borrowing costs (e.g., interest costs) directly
attributable to the acquisition, construction or production of a
qualifying asset.
Besides, qualifying assets are generally defined similarly under both
accounting models.
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Similarities and Difference …. ctd
Significant Differences
Item of US GAAP IFRS
Difference
Measureme borrowing costs DO NOT borrowing costs include
nt of include exchange rate exchange rate
borrowing differences. differences
costs
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