IAS 23

BORROWING COSTS

Presented By : Mr. Feysel Takele (ACCA) and Mr. Tilahun Girma(ACCA)

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 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

Topic List Standards

Borrowing Costs IAS 23
Property, Plant and Equipment IAS 16
Investment Property IAS 40
Inventories IAS 2

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The objective of IAS 23
 The objective of IAS 23 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’.

 However, an asset that normally takes twelve months or

more to be ready for its intended use will usually be a
qualifying asset.

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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

 IAS 23 does NOT deal with the actual or imputed cost of

equity, including preferred capital not classified as a liability.

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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.

 The asset is considered to be substantially complete if all that

is left are minor modifications.

 When parts of a qualifying asset become ready for use in

stages, capitalization ceases on those parts that are ready for
use.

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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

 Financing was arranged in this way:

 Bank term loans: ETB5 million at 7% per annum

 Institutional borrowings: ETB7 million at 8% per annum

 Corporate bonds: ETB10 million at 9% per annum

 In the first phase of the construction of the tunnel, there

were idle funds of ETB10 million, which the MNC invested for
a period of six months.
 Income from this investment was ETB500,000.

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Case Study…ctd

 Required : If the MNC applies IAS 23:

 How would it treat the borrowing costs?
 How would it capitalize the borrowing costs, and what would
it do with the investment income?

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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 ….

 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

Interest income cannot capitalized borrowing

offset interest costs costs are offset by
investment income
earned
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Questions?

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