BORROWING

COSTS
IAS 23
CHAPTER 14
 LEARNING OBJECTIVES
 Understand what is borrowing costs
 What borrowing costs can be capitalised
 Which types of assets may we capitalise borrowing costs
 When capitalisation can commence, suspend and cease
 Difference between specific and general borrowing
 Calculation of borrowing costs to be capitalised – specific vs
general borrowing
 Disclosure of borrowing costs
 UNDERSTANDING THE TERMS
Borrowing costs – Interest and other costs that an entity incurs in connection with
the borrowing of funds (IAS 23.5)

IAS 23:6 provides a list of what borrowing costs includes:

Interest expense calculated using the effective interest rate method (IFRS 9
Financial Instruments);
Finance charges in respect of a finance lease recognised in accordance with IFRS
16 Leases;
Exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest (ie exchange differences on foreign
loan accounts).
 UNDERSTANDING THE TERMS
A qualifying asset – An asset that necessarily takes a substantial period
of time to get ready for its intended use or sale(IAS 23.5)
IAS 23:7 provides examples of what qualifying assets are:
Plant and machinery
Intangible assets
Owner occupied or Investment properties and
Inventories
Financial assets (investment in shares), inventories that takes a short
time to produce and assets that is ready for its intended use or sale on
acquisition – borrowing costs incurred on these assets must be expensed.
 UNDERSTANDING THE TERMS
How does the two terms relate to each other?

If borrowing costs are directly attributable to the acquisition,

construction or production of a qualifying asset, then the borrowing
costs must be capitalised as part of the cost of the asset. All other
borrowing costs are expensed when they are incurred.
 EXPENSING BORROWING COSTS
Recognition

 Borrowing costs which does not meet the definition per IAS 23:5
must be expensed, i.e., it is included in profit or loss (IAS 23:8)

Measurement
 The amount of borrowing costs to expense is simply the amount of
interest calculated in accordance to the loan agreement.
See Example 1 on page 722
 CAPITALISATION OF
BORROWING COSTS
 Cost are capitalised (included in the cost of the asset) only if:
 It meets the definition of borrowing costs, and
 It meets recognition criteria of IAS 23 – the cost is reliably
measured and the inflow of future economic benefits are
probable (IAS 23:8-9)

Recognition criteria: IAS 23 vs 2018 Conceptual Framework

Use recognition criteria as set out in IAS 23

Costs must be directly attributable

 COMMENCEMENT OF
CAPITALISATION
 Based on IAS 23:17, an entity should commence (start) with the
capitalisation of borrowing costs:
 If the entity incurs expenditure for the asset,
 If the entity incurs borrowing costs, and
 It undertakes activities that are necessary to prepare the asset for its
intended use or sale.
 The date on which all three of the above criteria is met, is
referred to as the commencement date.
 See example 2,3 and 4 on page 723
 SUSPENSION OF
CAPITALISATION
 An entity should suspend capitalisation of borrowing costs during
extended periods in which it suspends active development of a
qualifying asset (IAS 23:20)
 Once the delays has ended, the capitalisation of borrowing costs
continues if all the criteria for capitalisation is met.
 Capitalisation of borrowing costs must not be suspended if:
 The delay is only a temporary delay that is necessary part of getting
the asset ready for its intended use, or
 If the delay is due to a substantial technical or administrative work.
 See example 5 on page 725
 CESSATION OF CAPITALISATION
 An entity must cease capitalisation of borrowing costs when substantially
all the activities necessary to prepare the qualifying asset for its intended
use or sale (IAS 23:22) is completed.

 When an entity completes the construction of a qualifying assets in parts

and each part is capable of being used while construction continues on
other parts, the entity shall cease capitalising borrowing costs when it
completes substantially all the activities necessary to prepare that part
for its intended use or sale. (IAS 23:24)

See example 6 on page 726

MEASUREMENT OF AMOUNT CAPITALISED
 Borrowing costs which are excluded are:
 Costs of raising share capital that is recogised as equity
 Costs of using internal funds (ie no opportunity costs can be capitalised)

 The measurement of borrowing costs depends on whether the borrowings are:

 Specific borrowings
 General borrowings
 IAS 23 does not define specific and general borrowing costs.
 Specific borrowings are taken out for the sole purpose of financing
construction, acquisition or production of qualifying assets
 General borrowings are those funds that are entered for general purposes (for
example bank overdraft)
MEASUREMENT OF AMOUNT CAPITALISED
Specific loans:
 The amount of borrowing costs to be capitalised for
specific loans are actual borrowing costs incurred during
the construction period less any investment income
earned during the construction period.
 See examples 7, 8, 9 and 10 on page 727
MEASUREMENT OF AMOUNT CAPITALISED
General borrowings (IAS 23:14-15):
 Borrowing costs to be capitalised are calculated as follows:
 Expenditures incurred multiplied by the capitalisation rate
 Expenditure can be incurred:
 Evenly throughout the month
(previous expenditure + (current month’s expenditure incurred/2))
 At the beginning of the month
(previous expenditure + current month’s expenditure)
 At the end of the month
(previous month’s expenditure)
MEASUREMENT OF AMOUNT CAPITALISED
General borrowings (IAS 23:14-15):
 The capitalisation rate must be the weighted average interest rate of
the borrowing costs applicable to the borrowings of the entity that are
outstanding during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying asset. The amount
of borrowing costs can not exceed the actual borrowing costs.

The capitalisation rate is calculated as follows:

Interest incurred on borrowings during the period/ weighted average
total of general borrowings outstanding during the period

See example 11 and 12 on page 731

 DISCLOSURE
See page 741 for an illustration of disclosure as per IAS
23:26