IAS 23 Borrowing Costs

Scope

• New scope exclusions:

– Qualifying assets measured at fair value• e.g.: Biological assets under IAS 41

– Inventories that are manufactured in large

quantities on a repetitive basis

Definitions

What is a “Qualifying Asset”?

“an asset that necessarily takes a substantial period of time to get ready for its intended use”

Definitions

What are “Borrowing Costs”?

• interest expense (effective interest method),

• finance charges in respect of finance leases, and

• exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs

• Borrowing costs include amortisation of ancillary costs incurred in connection with borrowings. It does not include actual or imputed cost of equity capital

Principle change -Recognition

Used to be 2 treatments:

Benchmark: Expense Alternative: Capitalise

Only Option

• Recognition

– borrowing costs directly attributable to acquisition,

construction or production of a qualifying asset shouldbe capitalised as part of the cost of that asset

• Measurement

– amount capitalised depends on the nature of the

funding used

What costs should be used in calculation?

• Capitalise costs directly attributable to the acquisition, construction or production of qualifying asset

– IF the costs would have been avoided had the investment in the asset not been made

• Costs should arise from:

– Specifically borrowed funds

– Generally borrowed funds

Specific funds

• Funds borrowed specifically

Capitalise:Actual borrowing costs incurred

less

Any investment income on temporary investment of those funds

General funds

• Funds borrowed generally

1. calculate capitalisation rate

2. apply capitalisation rate to expenditures on the asset

3. compare amount calculated to actual borrowing cost incurred

4. capitalise lesser of the 2 amounts

When to start….

• Commencement of capitalisation

– expenditures are being incurred

– borrowing costs are being incurred

– activities to prepare asset are in progress

When to Stop!

• Suspension of capitalisation

– capitalisation suspended during extended periods in

which active development interrupted

• Cessation of capitalisation

– ceases when substantially all activities needed to

prepare asset are complete

– when asset consists of separate parts, ceases for each part as that part is completed

Note!

• Expenditures must be reduced by:– Progress payments received

– Government grants received

• Impairment– borrowing costs continue to be capitalised, but

• carrying amount of asset is reduced to recoverable amount to recognise any impairment loss

Disclosure

• Disclosure

– amount capitalised during the period

– capitalisation rate used