FR - Accounting for transactions in financial

statements
Borrowing Costs - IAS23

INTRODUCTION:

Borrowing costs are the costs associated with borrowing money to finance the construction of the asset.

Key rule: IAS 23 requires borrowing costs to be capitalised, that is included in the book value of an asset, as
opposed to being expensed to profit or loss, if they are directly attributable to the acquisition, construction or
production of a qualifying asset.

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended
use or sale. An asset which normally takes one year or longer to get ready for its intended use will typically be
considered qualifying.

Assets which are often capable of meeting the definition of a qualifying asset may include:

- Manufacturing plants;
- Power generation facilities;
- Inventories, however, as long as they meet the definition of a qualifying asset, i.e. they require a substantial
period of time to bring them to a saleable condition;
- Investment properties;
- Intangible assets;
- Bearer plants - those plants which are expected to bear fruit for more than one period.

Note: Companies are not required to capitalise borrowing costs in relation to those items of inventory which are
manufactured routinely or otherwise produced in large quantities on a repetitive basis even if they take a
substantial time to get ready for sale.

Remember: If an asset is ready for its intended use or sale at the time when it is acquired, it will not be a
qualifying asset from an IAS 23 perspective.

Borrowing costs are represented by interest and other costs incurred by an entity in connection with the
borrowing of funds and include:
- Interest expenses;
- Finance charges in respect of finance leases;
- Exchange differences arising on borrowings in foreign currencies, to the extent that they adjust interest
costs.

RULES FOR CAPITALISATION:

The above costs are eligible for capitalisation if they are directly attributable to the acquisition, construction or
production of a qualifying asset.

Directly attributable costs are those costs which would have been avoided if the expenditure on the qualifying
asset had not been made:

- When funds are borrowed specifically to obtain a qualifying asset, identifying the borrowing costs that are
directly attributable is straightforward. They are the actual borrowing costs incurred;
- A company may finance the acquisition or construction of a qualifying asset using funds which have been
borrowed for general purposes. In this case, identifying the borrowing costs which are directly attributable
will require a degree of judgement.

IAS 23 states that borrowing costs should be capitalised using a capitalisation rate. This rate is applied to the
expenditure on the qualifying asset incurred over a given period.

Capitalisation rate is a rate that reflects the weighted average of the borrowing costs applicable to the
borrowings of the company that are outstanding during the period, other than borrowings made for specific
purposes.

COMMENCEMENT AND CESSATION:

IAS 23 requires that capitalisation of borrowing costs should commence when:

- Expenditure for the asset are being incurred;

- Borrowing costs are being incurred;
- Activities that are necessary to prepare the asset for its intended use or sale are in progress.

Capitalisation will need to be suspended during extended periods in which active development is interrupted:

a) Where there are extended periods of genuine interruption (e.g. lack of funding or a strategic decision),
capitalisation will naturally need to be halted, and any borrowing costs incurred during periods of such
inactivity will have to be expensed as incurred;
b) Instances of temporary interruptions, such as those caused by adverse weather will typically not require
capitalisation to be suspended.

The capitalisation of borrowing costs must be ceased when substantially all the activities necessary to prepare
the qualifying asset for its intended use or sale are complete.