IAS 23 Borrowing Costs

1. Definitions:
 BORROWING COSTS. Interest and other costs incurred by an entity in connection with the borrowing of funds.
 QUALIFYING ASSET. An asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

2. Capitalization:
IAS 23 requires that all eligible borrowing costs must be capitalized. Eligible borrowing costs are those borrowing costs
which are directly attributable to the acquisition, construction or production of a qualifying asset. These are the borrowing
costs that would have been avoided had the expenditure on the qualifying asset not been made.
IAS 23 Borrowing Costs
3. Interest rate:
Interest Rate

Specific fund used

Yes No

Specific Rate Average Rate for Period

 Where specific borrowings have been used to finance the acquisition, construction or production of an asset, it is
straightforward to work out the borrowing costs eligible for capitalization. The interest rate applicable will be that
associated with the specific borrowings.
 Where no specific borrowings have been used, but the entity has used its general borrowings to finance an asset, the
entity must work out an interest rate at which borrowing costs can be capitalized. This is known as the capitalization rate
and is calculated as the weighted average of the entity’s borrowing costs in the period.
IAS 23 Borrowing Costs
4. Period of Capitalization:
Three events or transactions must be taking place for capitalization of borrowing costs to be started.
 Expenditure on the asset commences
 Borrowing costs are being incurred
 Activities necessary to prepare the asset are in progress

If active development is interrupted for any extended periods, capitalization of borrowing costs should be suspended for
those periods. Once substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are
complete, then capitalization of borrowing costs should cease. .
IAS 23 Borrowing Costs
5. Disclosure:
The following should be disclosed in the financial statements in relation to borrowing costs.
a) Amount of borrowing costs capitalized during the period
b) Capitalization rate used to determine the amount of borrowing costs eligible for capitalization
IAS 23 Borrowing Costs
Example -1 :
ABC Co had the following loans in place at the beginning and end of 20X6.
1 January 31 December
20X6 20X6
$m $m
10% Bank loan repayable 20X8 120 120
9.5% Bank loan repayable 20X9 80 80
8.9% debenture repayable 20X7 – 150

The 8.9% debenture was issued to fund the construction of a qualifying asset (a piece of mining equipment), construction
of which began on 1 July 20X6.
On 1 January 20X6, ABC Co began construction of a qualifying asset, a piece of machinery for a hydroelectric plant, using
existing borrowings. Expenditure drawn down for the construction was: $30m on 1
January 20X6, $20m on 1 October 20X6.
Required
Calculate the borrowing costs that can be capitalized for the hydro-electric plant machine.