This document outlines the accounting standards for borrowing costs as prescribed by IAS 23. It states that borrowing costs can either be expensed as incurred each year or capitalized as part of the cost of a qualifying asset, which is an asset that takes a substantial time to get ready for its intended use or sale. It provides definitions for key terms, the benchmark and allowed alternative treatments, and guidance on which costs can be capitalized and when capitalization should commence, suspend, and cease. Disclosure requirements are also specified.

1. Borrowing
Cost
IAS – 23

2. Objective
The objective of this standard is to prescribe
the accounting treatment for borrowing
cost.
The standard requires the cost to be
expensed every year but it allows the cost
to be capitalized, which is related to
acquisition, construction or production of a
qualifying asset.

3. Scope
This should be applied in accounting for
borrowing costs.
This standard does not deal with the cost of
equity including preferred capital not
classified as liability.

4. Definitions
• Borrowing Costs are interests and other costs
incurred by an enterprise in connection with the
borrowing of funds.
• Qualifying Asset is one that necessarily takes a
substantial period of time to get ready for its
intended use or sale.
• Borrowing cost may include interest on loans,
amortization of discounts/premiums related to
borrowing, amortization of ancillary cost,
financial charges in case of finance lease and
exchange rate difference of foreign currency.
• Examples of Qualifying assets

5. Bench Mark Treatment
• Borrowing cost should be recognized as
an expense in the period in which it is
incurred.
• The financial statements should disclose
the accounting policy adopted for
borrowing costs.

6. Allowed Alternate Treatment
• Borrowing costs that are directly
attributable to the acquisition, construction
or production of a qualifying asset could
be capitalized as part of the cost of that
asset.

7. Borrowing Costs Eligible for
Capitalization
• Borrowing costs that are directly attributable to
the acquisitions, construction or production of a
qualifying asset are those borrowing costs that
would have been avoided if the expenditure on
the qualifying asset had not been made.
• To the extent that funds are borrowed
specifically for the purpose of obtaining a
qualifying asset then, actual borrowing cost
minus any income on the borrowed amount,
should be the eligible borrowing cost.

8. Commencement of Capitalization
• It should commence when:
• Expenditures of the asset are being
incurred
• Borrowing costs are being incurred
• Activities that are necessary to prepare the
asset for its intended use

9. Suspension of Capitalization
• It should be suspended during extended
periods in which active developments
interrupted.

10. Cessation of Capitalization
• It should cease when substantially all the
activities necessary to prepare the
qualifying asset for its intended use or sale
are complete.

11. Disclosure
• The financial statements should disclose:
– The accounting policy adopted for borrowing
costs
– The amount of borrowing costs capitalized
during the period
– The capitalization rate used to determine the
amount of borrowing costs eligible for
capitalization.