Borrowing Costs

IAS 23
 Overview of session

1. Introduction
2. Recognition
3. Measurement
4. Disclosure

2
 Definition

Interest on bank Amortisation of Amortisation of

overdrafts and An arrangement costs discounts or
Borrowings incurred in premiums relating
arrangement of to borrowings
Borrowings

Borrowing costs = costs incurred by an entity in connection with

the borrowing of funds

Finance charges in Exchange

respect of finance differences arising
Leases from foreign
currency borrowing
if adjustments to
3 interest costs
 Definition

Manufacturing Power generation Investment property

plants facilities

Qualifying asset = asset that necessarily takes a substantial period of

time to get ready for its intended use or sale

4
Treatment

When to start capitalization of interest?

The capitalization period is the period of time during which interest must be capitalized. It
begins when three conditions are present

1. Expenditures for the asset have been made.

2. Activities that are necessary to get the asset ready for its intended use are in progress.
3. Interest cost is being incurred.

When to stop capitalization of interest?

When the assets construction is substantially completed
 Treatment

Specific Funds: Use actual costs ,Can include income on investment of funds

General Funds: Use weighted average cost of borrowings

Notional Funds: No capitalisation

 Example
Which interest rate should be used?

Explicit rate Implicit rate

Assume a company has incurred costs for a qualified assets till 1-7-05 are $3,000,000 and also has
incurred additional cost of $800,000 during the month of July.
The company has the following debts outstanding:

- Bonds payable amounted to $ 1,000,000 rate is 1%

- bank loan specially obtained for that assets amounted To $2,000,000 rate is 1%
- Notes payable amounted to $1,500,000 rate is 1.5%
 steps

1. Average accumulated expenditure (3,000,000+3,800,000)/2=

3,400,000

2. Explicit rate should be used first for capitalization

-Bank loan= 2,000,000*1%=20,000
Description Principal Interest

3. Implicit rate should be used second Bonds payable 1,000,000 10,000

Notes Payable 1,500,000 22,500

4. Total interest to be capitalized this period= Total 2,500,000 32,500

Implicit rate 32,500/2,500000 1.3%
Interest capitalized 1,400,000*1.3% 18,200

20,000+18,200=38,200
 Example

Actual interest= 52,500

Capitalized interest Should not
exceed
38,200 Bonds Payable=1,000,000*1%=10,000
Bank Loan=2,000,000*1%=20,000
Notes Payable=1,500,000*1.5%=22,500

Interest revenue should be netted

or offset against interest cost
 Disclosures

• Accounting policy
• Capitalisation rate used in respect of general borrowings
• Amount of borrowing costs capitalised

10