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Ias 23 - Borrowing Cost

Ias 23 - Borrowing Cost

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Published by: Mohammad Faizan Farooq Qadri Attari on Jan 11, 2011
Copyright:Attribution Non-commercial


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IAS 23
Objective of IAS 23
The objective of IAS 23 is to prescribe the accounting treatmentfor borrowing costs. Borrowing costs include interest on bankoverdrafts and borrowings, amortisation of discounts orpremiums on borrowings, finance charges on finance leases andexchange differences on foreign currency borrowings where theyare regarded as an adjustment to interest costs.
Key Definitions
Borrowing cost may include:
interest expense calculated by the effective interest methodunder IAS 39,
finance charges in respect of finance leases recognised inaccordance with IAS 17 Leases, and
exchange differences arising from foreign currencyborrowings to the extent that they are regarded as anadjustment to interest costsThis standard does not deal with the actual or imputed cost ofequity, including any preferred capital not classified as a liabilitypursuant toIAS 32.A qualifying asset is an asset that takes a substantial period oftime to get ready for its intended use or sale. [IAS 23.5] Thatcould be property, plant, and equipment and investment propertyduring the construction period, intangible assets during thedevelopment period, or "made-to-order" inventories.Two types of assets that would otherwise be qualifying assetsare excluded from the scope of IAS 23:
qualifying assets measured at fair value, such as biologicalassets accounted for under IAS 41 Agriculture
inventories that are manufactured, or otherwise produced,in large quantities on a repetitive basis and that take asubstantial period to get ready for sale (for example,maturing whisky)
Accounting TreatmentRecognition
Borrowing costs that are directly attributable to the acquisition,construction or production of a qualifying asset form part of thecost of that asset and, therefore, should be capitalised. Otherborrowing costs are recognised as an expense.The foregoing reflects revisions to IAS 23 adopted by the IASB inMarch 2007 that prohibit immediate expensing of borrowingcosts. Those revisions are effective for borrowing costs relatingto qualifying assets for which the commencement date forcapitalisation is on or after 1 January 2009. Earlier application ispermitted.Until that revision was effective, an entity could apply theprevious version of IAS 23, which permitted, as an accountingpolicy option, the 'immediate expensing model'. Under thatmodel, all borrowing costs should be expensed in the period inwhich they are incurred.
Where funds are borrowed specifically, costs eligible forcapitalisation are the actual costs incurred less any incomeearned on the temporary investment of such borrowings Wherefunds are part of a general pool, the eligible amount isdetermined by applying a capitalisation rate to the expenditureon that asset. The capitalisation rate will be the weightedaverage of the borrowing costs applicable to the general pool.Capitalisation should commence when expenditures are beingincurred, borrowing costs are being incurred and activities thatare necessary to prepare the asset for its intended use or saleare in progress (may include some activities prior tocommencement of physical production). [IAS 23.17-18]Capitalisation should be suspended during periods in whichactive development is interrupted. [IAS 23.20] Capitalisationshould cease when substantially all of the activities necessary toprepare the asset for its intended use or sale are complete. If

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