ACCOUNTING 3AB

UNIT 11 IAS 23 BORROWING COSTS

BORROWING COSTS OVERVIEW

• IAS 23 provides for the capitalisation of borrowing costs of qualifying

assets
 What are qualifying assets?
 What are borrowing costs?
• Include
• Exclude
• When allowed to be capitalised
• Measurement of borrowing costs
• Tax Consequences
 Initial recognition
 Subsequent recognition

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QUALIFYING ASSETS
IAS23 par. 5 “A qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale.”

The following may be qualifying assets:

a) inventories
b) manufacturing plants
c) inventories produced under construction
d) intangible assets
e) investment properties
f) bearer plants

BORROWING COSTS
IAS23 par. 5 “Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds.”
Include
• Interest on bank overdrafts, short term loans
• Cost of raising debts
• Finance charges on finance leases
• Exchange differences arising from foreign operations
Exclude
• Actual or imputed cost of equity
(i.e. for pref shares that has both “equity” and “liability” portions, only the dividends from “liability” portion may be capitalised, since these are in substance
“finance costs”)

2
BORROWING COSTS CONT…
 When allowed to be capitalised
• All of the following criteria must be met for capitalising borrowing costs as
part of a qualifying asset to begin:
 expenditures are being incurred on the qualifying asset
 borrowing costs are being incurred
 activities to prepare for asset have begun (may include administration
activities, but not the act of merely holding the asset.)

BORROWING COSTS CONT…

 Measurement of borrowing costs
• Specific Loans
 capitalise all costs attached to the funds
 reduced by earnings from the investment of the funds
• General Funds (will not be assessed in Accounting 3)
 Capitalise all borrowing costs using a weighted average capitalisation rate.
 Amount capitalised cannot exceed actual borrowing costs for the period.

3
PRACTICAL EXAMPLE 1

Qualifying asset R250 000 (Opening balance)

Additional costs incurred on
• 30 March R50 000
• 30 June R75 000
• 31 December R25 000
QA to be completed on 31 December. Financing resource(s) to fund the additional costs is through
specific loan of R150 000 @ 10% (01 March application for loan & funds rcvd by entity on 30 March)
and surplus funds invested @ 6%.
Required:
a) Calculate borrowing costs to be capitalized
b) Calculate value of qualifying asset on 31 Dec.

PRACTICAL EXAMPLE 1 CONT.. specific loan of R150 000 @

10%. 9 months calculated as
from date funds rcvd by entity
Solution on 30 March to 31 Dec.

a) Borrowing cost to be capitalised:

From 31/03
• Borrowing cost (150 000 X 10% X 9/12) 11 250 surplus funds invested
@ 6%
• Less Interest received (2 250) R150,000
30 Mar (R50,000)
1. (150 – 50) (100 000 X 6% X 3/12)=(1 500) surplus R100,000
30 Jun (R75,000)
2. (100 – 75) (25 000 X 6% X 6/12) = (750) surplus R25,000
31 Dec (R25,000)
• Borrowing costs capitalised 9 000 surplus R0

b) Value of asset
• 250 + 50 + 75 + 25 + 9 = 409 000

4
PRACTICAL EXAMPLE 2
Qualifying asset R250 000 (Opening balance)
Additional costs incurred on
• 30 March R50 000
• 30 June R75 000
• 31 December R25 000

QA to be completed on 31 December. Financing resource(s) (i.e. how the additional costs will be funded)
• R600 000 existing cash investment earning 7.5% interest

Required:
a) Calculate borrowing costs to be capitalized.
b) Calculate value of qualifying asset on 31 Dec.

PRACTICAL EXAMPLE 2 CONT…

Solution:
a) Borrowing cost to be capitalised:
none – no funds were borrowed to fund the QA
b) Value of asset
250 + 50 + 75 + 25 = 400 000

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5
TAX CONSEQUENCES

Deferred Tax
Initial Recognition
Subsequent recognition
• Carrying Amount (capital amount + interest capitalised)
• Tax Base (expenditure capitalised (no interest))
• Carrying Amount (depreciable amount – depreciation)
• Tax Base (expenditure capitalised – wear & tear)

Both initial and subsequent recognition give rise to temporary differences (taxable and deductible)
and thus lead to the creation of a corresponding deferred tax liability or asset.

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