Table of Contents

Chapter 1

1.0 Abstract…………………………………………………………………………..........….2

1.1 Definition of terms……………………………………………………………………..…2

1.1.1 Borrowing costs………………………………………………………………..…….2

1.1.2 Qualifying asset………………………………………………………………….…..2

1.2 Recognition of borrowing………………………………………………………………...2

1.3 Borrowing costs eligible for capitalisation…………………………………………...….2

1.3.1 Specific borrowings……………………………………………………………...…..2

1.3.2 General borrowings…………………………………………………………………..2

1.4 Commencement, suspension and cessation……………………………………………...3

1.5 Practical example on capitalisation of borrowing costs………………………………..3

1.5.1 Question 1: Specific loans………………………………………………….….……..3

1.5.2 Answer to question 1…………………………………………………………..……..3

1.5.3 Journal Entries………………………………………………………….……………4

1.6 Relationship with other standards……………………………………………………….5

1.6.1 IAS 23 relationship with IAS 36 and IAS 2……………………………………….…5

1.6.2 IAS 23 relationship with IFRS 9……………………………………………………..5

1.6.3 IAS 23 relationship with IAS 16 and IAS 38……………………………….…….….5

1.6.4 IAS 23 relationship with IAS 12………………………………………………….…5

1.6.5 IAS 23 relationship with IAS 21………………………………………………….…5

1.6.6 IAS 23 relationship with IAS 27 and IFRS 10……………………………….………6

1.7 Conclusion………………………………………………………………………………...6

1.8 References…………………………………………………………………………………7

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Felistas S. Moyo (N0183052A)
Abstract

Borrowing costs are finance charges that are directly attributable to the acquisition,
construction or production of a qualifying asset that forms part of the cost of that asset, i.e. such
costs are capitalised. All other borrowing costs are recognised as an expense in accordance to
IAS 23.

Definition of terms

Borrowing costs is interest and other costs incurred by an entity in connection with the
borrowing of funds examples include, Interest expenses calculated using the effective interest
rate in accordance IFRS 9, Finance charges in respect of finance leases recognised in
accordance with IFRS 16 and Exchange differences arising from foreign currency borrowing
to the extend that they are considered as an adjustment to interest costs

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready
for its intended use or sale examples include inventories, manufacturing plants, intangible
assets, investment property and power generating plants.

Recognition of borrowing costs

An entity shall capitalise borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset as part of the cost of that asset. An entity shall
recognise other borrowing costs as an expense in the period in which it is incurred.

Borrowing costs eligible for capitalisation

Specific Borrowings: To the extend that an entity borrows funds specifically for the purposes
of obtaining a qualifying asset, the entity shall determine the amount of the borrowing costs
eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the
period less any investment income on the temporary investment of the borrowings.

General Borrowings: the extend that an entity borrows funds specifically for the purpose of
obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible
for capitalisation by applying a capitalisation rate to the expenditure on that asset. The
capitalisation rate shall be the weighted average of the borrowing costs applicable to the
borrowings of the entity that are outstanding during the period, other than the borrowings made
specifically for the purpose of obtaining a qualifying asset.

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Commencement, suspension and cessation

Capitalisation of borrowing costs commences when the entity meets all the following
conditions: It incurs expenditures for the asset; and It incurs borrowing costs; and It undertakes
activities that are necessary to prepare the asset for its intended use or sale.

An entity shall suspend capitalisation of borrowing costs during extended periods in which it
suspends active development of a qualifying asset, an entity shall not suspend capitalisation of
borrowing costs when a temporary delay is necessary part of the process of getting an asset
ready for its intended use.

An entity shall cease capitalisation of borrowing costs when all substantially all activities
necessary to prepare the qualifying asset for its intended use or sale are complete.

Practical example on Capitalisation of borrowing costs

Question 1: Specific loans

On 1st May 2001, Mr Midzi took a loan of RTGS 1 000 000 from a bank at the annual interest
rate of 5%. The purpose of this loan was to finance a construction of a production hall. The
construction started on 1 June 2001. Mr Midzi temporarily invested RTGS 800 000 borrowed
money during the months of June and July 2001 at the rate of 2% p.a.

What borrowing cost can be capitalized in 2001?

Answer:

Although the funds were withdrawn on 1st May, the capitalization can start only on 1st June
2001 when all criteria were met (the construction had not started until 1st June).

Interest expense: RTGS 1 000 000 x 5% x 7/12 = RTGS 29 167

Less investment income: RTGS 800 000 x 2% x 2/12 = RTGS 2 667

Total borrowing cost to capitalize in 2001: RTGS 26 500.

Borrowing costs incurred before capitalisation criteria met: RTGS 4,166.67, the borrowing
costs incurred in the month of May before construction began shall be expensed in the profit
and loss as illustrated in the journals below.

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Journal Entries

Interest expenses not eligible for capitalisation:

Date Description DR CR
31 May 2001 Interest expense-Profit &loss 4,166.67
31 May 2001 Bank 4166.67
Being interest expenses not eligible for capitalisation written off against profit and loss.

Capitalisation of borrowing costs that have met the criteria for capitalisation:

Date Description DR CR
31 Dec 2001 Qualifying asset-borrowing costs 29,167.00
31 Dec 2001 Bank 29,167.00
Being borrowing costs capitalised after meeting the capitalisation criteria (IAS 23)

Investment Income written off against the capitalised borrowing costs -specific loan

Date Description DR CR
31 Dec 2001 Bank 2,667.00
31 Dec 2001 Qualifying asset 2.667.00
Being investment income written off against the borrowing costs capitalised -specific loan

Recognition of investment income before capitalisation phase

Date Description DR CR
31 May 2001 Bank 2.667.00
31 May 2001 Investment income- profit &loss 2,667.00
Being Investment income recognised before the capitalisation criteria met

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Felistas S. Moyo (N0183052A)
Relationship with other standards

IAS 23 relationship with IAS 36 and IAS 2

The standard relates to IAS 36 impairment of assets and IAS 2 inventory with regards to excess
of the carrying amount of a qualifying asset over the recoverable amount or net realisable value.
The excess of the carrying amount shall be written down or written off in accordance with the
requirements of the IAS 36 or IAS 2.

IAS 23 relationship with IFRS 9

The standard relates to IFRS 9 with regards to the effective interest rate used on computation
of borrowing costs to be capitalised, this effective interest rate is prepared in accordance to
IFRS 9 (financial instruments).

IAS 23 relationship with IAS 16 and IAS 38

The standard relates to IAS 16 and IAS 38 with regards to the total costs of the asset that is
cost determined in accordance to IAS 16 or IAS 38 plus the cost of an asset resulting from the
borrowing costs capitalised in accordance to IAS 23. That costs shall be depreciated or
amortised and included as part of the costs in the PPE note in accordance with IAS 16.

IAS 23 relationship with IAS 12

The standard relates to IAS 12 (income tax) with regards to the temporary difference that arises
from borrowing costs capitalised which are not considered as costs of asset for tax purposes.
These capitalised borrowing costs results in the carrying amount of assets being higher than
the tax base which result in deferred tax liability as per IAS 12.

IAS 23 relationship with IAS 21

The standard relates to IAS 21 (the effects of exchange rates on foreign transactions) with
regards to the capitalisation of foreign exchange losses for specifically borrowed money in
foreign currency. IAS 23 says that exchange differences on foreign currency borrowings are a
borrowing cost to the extent that they are regarded as an adjustment of interest cost. The entity
shall on capitalize the difference between the interest on the foreign currency loan and the
hypothetical interest expense in your own (functional currency), because that’s regarded as
borrowing cost. Therefore, the conversion into functional currency for the calculation of
Hypothetical interest expense is guided by with reference to IAS 21.

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IAS 23 relationship with IAS 27 and IFRS 10

The standard relates to IAS 27 (Separate financial statements) with regards to the
Capitalisation of intercompany interest costs for the separate financial statements of the
subsidiary or the parent resulting from funds borrowed within the same group for the
construction of a qualifying asset, the intercompany borrowing costs will have to be eliminated
during consolidation of the group in order to comply with IFRS 10 (consolidation). The loans
offered withing the same group are usually interest free therefore on capitalisation of such
interest costs the IAS 23 shall be guided by IFRS 13 to determine the fair value of the money
in order to calculate the interest costs using IFRS 9 effective interest rate based on fair value
not the nominal amounts.

Conclusion

The standard requires that the entity shall disclose the amount of borrowing costs capitalised
during the period and also the capitalisation rate used to determine the amount of borrowing
costs to capitalised during the period

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References

i) Descriptive Accounting IFRS focus (19th edition)

ii) IAS 23 publication by IASB
iii) PKF publication in May 2017
iv) www.IFRSbox.com

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