IAS 23 BORROWING COSTS

Download this Post in PDF Format

1.     STATUS         Mandatory

2.     OBJECTIVE         Prescribe the Accounting Treatment for BORROWING COSTS.

3.     NOT APPLICABLE     Does not deal with ACTUAL or IMPUTED Cost of Equity including Preferred Capital not classified as Equity.

4.     KEY TERMS         BORROWING COSTS (BC)         are INTEREST + OTHER COSTS incurred by an entity in connection with the borrowing of funds.

QUALIFYING ASSETS (QA)         is an asset that NECESSARILY takes a SUBSTANTIAL period of time to get ready for intended use or sale.

BENCHMARK TREATMENT

5.     RECOGNITION OF BC     BC shall be recognised as an Expense in the period in which they are incurred. (~ regardless of how they are incurred. )

6.     DISCLOSURE         Accounting Policy adopted for Borrowing Costs.

 

ALLOWED ALTERNATIVE TREATMENT

5.     RECOGNITION OF BC         BC shall be recognised as an Expense in the period in which they are incurred. EXCEPT to the extent they are CAPITALISED.

CAPITALISATION OF BC     BC DIRECTLY attributable to the Acquisition, Construction or Production of QA shall be CAPITALISED as part of the cost of the asset.

AMOUNT OF BC ELIGIBLE FOR CAPITALISATION

Funds are borrowed SPECIFICALLY for the purpose of obtaining a QA

Funds are borrowed GENERALLY and used for the purpose of obtaining a QA

ACTUAL BC incurred on that borrowing during the period LESS any income on temporary investment of those borrowings

BC shall be determined using a CAPITALISATION RATE to the expenditure on that asset.

 

Capitalisation Rate is the WEIGHTED AVERAGE of the BC of the entity that are outstanding during the period – OTHER than Borrowings made SPECIFICALLY for the purpose of obtaining a QA.

Amount of BC Capitalised during a period shall NOT EXCEED the ACTUAL amount of BC incurred during the year.

 

IMPAIRMENT     If the Carrying Amount or Expected ultimate cost of QA EXCEEDS its Recoverable Amount of Net Realisable Value (NRV) – THEN Carrying Amount is WRITTEN DOWN- as per IAS on Impairment of Assets.

 

COMMENCEMENT, SUSPENSION AND CESSATION OF CAPITALISATION

COMMENCEMENT

SUSPENSION

CESSATION

(a)  Expenditure for the asset are being incurred;

(b)  BC are incurred;

(c)  Active Development i.e., activities that are necessary to prepare the asset for its intended use or sale are in progress.

During Extended periods in which Active Development is INTERRUPTED.

Read ABNORMAL DELAYS.

Substantially all the activities necessary to prepare the asset for its intended use or sale are in progress.

 

DISCLOSURE             The Financial Statements shall disclose:

(a)      the Accounting Policy adopted for Borrowing Costs;

(b)      the amount of Borrowing Costs capitalised during the period;

(c)      Capitalisation Rate.

2 thoughts on “IAS 23 BORROWING COSTS

  1. When should Interest capitalization cease in the following case ?

    The client is constructing a motel in an OIL field area where the contractors working in the rigs can stay.The construction of the Motel is funded by Bank Term Loan.The loan is to be repaid in 25 years.
    The Construction is complete on August 2010 (800 Rooms/Common Kitchen/Common Dining/Common Recreation facilities)
    The local authority who had to provide the basic amenities like ,electricity supply,sewage and water connection on the scheduled completion date of the project has not yet provided the same and will take another 4-5 months to provide it as the Electricity over head cabling in the remote oil field area is not yet complete.

    As per IAS 23 “Capitalization ceases when the activities necessary to prepare the asset for its intended use or sale are substantially complete.

    Query is
    Should Interest on borrowing be capitalized till the basic amenities to run the motel are provided by the local authorities (as basic amenities is a necessity for the client to prepare the asset for its intended use.Without these amenities the MOTEL cannot be operational ie available for intended use)
    or
    Should interest on borrowing be capitalized only till the date of the completion of the Construction of the Project

    In short the client wants to capitalize the interest on borrowings for another 5 months when the amenities will be provided by the responsible local authority.

    Is the treatment of capitalization of interest till the date of providing of the basic amenities(which is the lifeline to run the motel) in agreement with IAS 23

    • The Borrowing Costs are capitalised only when – the following three conditions are satisfied :
      (a) Expenditure for the asset are being incurred;
      (b) Borrowing Costs are incurred;
      (c) Active Development i.e., activities that are necessary to prepare the asset for its intended use or sale are in progress.

      In the instant case – expenditure for the asset are not being incurred in the intervening period till the provision of basic amenities by the local authority. Further, Active development – i.e., activities that are necessary to prepare the asset for its intended use or sale are not in progress.

      Accordingly, Borrowing costs should not be capitalised after the completion of the construction.

      However, if expenditure is incurred in future and active development is resumed, then this will be a case of suspension of Capitalisation of Borrowing Costs in the intervening period. During the extended period in which Active Development is interrupted, Borrowing Costs are not capitalised for that period. However, Capitalisation of Borrowing Costs will resume after active development is restarted.

      In short, the capitalisation of borrowing costs, during the period when Active development of the asset is Interrupted or no expenditure is being incurred for development of the asset, is not correct. If active development resumes after this period, then capitalisation of borrowing costs can be resumed, else it will end on the date of completion of active development.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s