IAS 23


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IAS 23

  1. 1. IAS 23: Borrowing Costs Roshankumar S Pimpalkarroshankumar.2007@rediffmail.com
  2. 2. IAS 23 prescribes the accounting treatment for borrowing cost. It also givesguidelines on determining the amount and timing for the capitalisation of borrowingcosts, if any.This standard does not deal with actual or imputed cost of equity. In addition, twotypes of assets that would otherwise be qualifying assets are excluded from thescope of IAS 23: Qualifying assets measured at fair value, such as biological assets accounted for under IAS 41: Agriculture Inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis; even if they take a substantial period to get ready for sale (e.g. maturing whisky)However this exclusion does not prohibit entities from following the capitalisationapproach in respect of such assets if they choose to do so as a matter of accountingpolicy.Borrowing Costs are interest and other costs incurred by an enterprise inconnection with the borrowing of funds.e.g. Interest expense calculated using effective interest rate method Finance charges in respect of finance lease Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to the interest costs.Basic principles of Capitalisation of Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as a part of the cost of that asset. All other borrowing costs incurred during the period shall be recognised as an expense. As per IFRIC 1.8, capitalisation is not permitted for the periodic unwinding of the discount in relation to changes in obligations to dismantle, remove or restore the item of property, plant and equipment. The periodic unwinding of the discount shall be recognised in profit or loss as a finance cost as it occurs.Qualifying asset is an asset that necessarily takes substantial period of time to getready for its intended use or sale.General recognition and measurement criteria for assets: Borrowing costs are capitalised only when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. If the capitalisation of borrowing costs leads to an asset’s carrying amount exceeding its recoverable amount, the impairment requirements under IAS 36: Impairment of Assets apply.Commencing the capitalisation of borrowing costsroshankumar.2007@rediffmail.com
  3. 3. The capitalisation of borrowing costs, as a part of cost of qualifying asset, shallcommence when all these factors are present: Expenditure on qualifying asset is incurred through payments of cash, transfer of other assets or the assumption of interest bearing liabilities. Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. The company shall therefore have outstanding borrowings. The activities necessary to prepare the asset for intended use or sale involve more than the physical construction of asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of the physical construction. However such activities exclude the holding of an asset when no production or development that changes the assets condition is taking place.Stopping CapitalisationThe capitalisation of borrowing costs shall be suspended during extended periods inwhich active development is interrupted.When substantial technical and administrative work is carried out, thecapitalisation of borrowing costs is not normally suspended. The capitalisation ofborrowing costs is also not suspended when a temporary delay is a necessary partof the process of getting an asset ready for its intended use or sale. E.g. when thetemporary delay is caused due to reasons which are common during theconstruction, capitalisation is not suspended.The capitalisation of borrowing costs shall cease when substantially all the activitiesnecessary to prepare the qualifying asset for its intended use or sale are complete.When the construction of qualifying asset is completed in parts and each part iscapable of being used while construction continues on other parts, the capitalisationof borrowing cost shall cease when substantially all the activities necessary toprepare that part for its intended use or sale are complete.Amounts to CapitaliseSpecific loan: it is the amount borrowed for the construction of specific asset. Insuch case the amount of borrowing costs eligible for capitalisation on that assetshall be determined as the actual borrowing costs incurred on that borrowing duringthe period, less any investment income on the temporary investment of thoseborrowing.General Borrowing: these are the funds borrowed generally and used for thepurpose of obtaining a qualifying asset. The amount of borrowing cost eligible forcapitalisation shall be determined by applying the capitalisation rate to theexpenditures on that asset. However the amount of borrowing cost capitalisedroshankumar.2007@rediffmail.com
  4. 4. during the year shall not exceed the amount of borrowing cost actually incurredduring the year.The capitalisation rate shall be the weighted average of borrowing cost applicable toborrowings of the enterprise that are outstanding during the period, other than theborrowings made specifically for the purpose of obtaining the qualifying asset.roshankumar.2007@rediffmail.com