IAS 23 BORROWING COSTS

Borrowing costs (BC) are interests and other costs that an entity incurs in connection with borrowing
of funds.
BC include

• Interest expense

• Finance charges in respect of IFRS 16

• Exchange difference from foreign currency borrowings

IAS 23 borrowing cost gives guidance on:

• Calculation of borrowing costs

• Capitalizing borrowing costs to qualifying asset

A qualifying asset: it is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale:
Example qualifying assets which takes substantial period of time to get ready includes:

• inventories

• manufacturing plants

• power generation facilities

• intangible assets

• investment
Example qualifying assets which takes short period of time to get ready includes

• financial assets and inventories manufactured or otherwise produced over a short period of time

• assets that are ready for their intended use/sale when acquired
Accounting for borrowing costs:
Borrowing costs are capitalized to the carrying amount of qualifying asset. Types of borrowing costs
are:

• specific borrowings

• general borrowings
Specific borrowings:

• these are the borrowing costs from funds obtained specifically for qualifying assets

• the borrowing costs which may be capitalised are those actually incurred on that borrowing
during the period less any investment income on temporary investment of those borrowing
during the capitalisation period

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General borrowings:

• the borrowing costs from funds entity has obtained for general purposes

• when general borrowing are used the amount of borrowing costs eligible for capitalization is
obtained by applying a capitalisation rate to the expenditure of that asset
The rate of interest to be taken
- funds borrowed specifically to acquire a qualifying asset – use the interest rate of the loan
- funds for the project are taken from general borrowings – use the capitalisation rate which should
be the weighted average of the borrowing costs applicable to all borrowings of the entity that are
outstanding during the period

IAS 23 also gives guidance on the:

1. the commencement of capitalization
2. suspension of capitalization
3. cessation of capitalization

The commencement of capitalization - the commencement date for capitalization is the date when
entity first meets all of the following conditions:
a) it incurs the expenditure for the asset
b) it incurs borrowing cost
c) activities necessary to prepare the asset for its intended use or sale are in progress.
Suspension of capitalization:
an entity shall suspend capitalisation of borrowing costs

• during extended periods in which it suspends active development of a qualifying asset

• holding partially completed assets

An entity shall not suspend capitalization:

• when a temporary delay is necessary

• entity carries out substantial technical and administration work

Cessation of Capitalization

• Capitalization of borrowing cost should cease when the asset is substantially complete, even
though routine administrative work might still continue

• When an entity completes the construction of a qualifying asset in parts. The entity will cease
capitalization when it completes substantially all activities, even construction continues on the
other parts.

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