BORROWING COSTS,

INVESTMENT PROPERTIES
PENSIONS
IAS 23 BORROWING COSTS
Refer to text for questions
29.1 Introduction
 Capitalisation means that a cost is included in the cost of an asset
rather than being expensed as finance to the statement of profit or
loss when the cost is incurred.

 The journal entry to capitalise borrowing costs is:

€/£ €/£

Asset – Cost Account X

Bank / Accrual X
29.2 What Costs are Included in
Borrowing Costs?
Borrowing costs include both interest costs and other costs
that are incurred in relation to loans obtained by an entity.
These costs include:
 interest costs at the nominal rate of interest;
 interest costs at the effective interest rate;
 finance cost on leases; and
 exchange differences arising on foreign currency
borrowings.
29.2 What Costs are Included in
Borrowing Costs?
Borrowing costs must be directly attributable to
the acquisition, construction or production of
qualifying asset.

A ‘directly attributable cost’ is one that would not

have been incurred if the asset had not been
acquired, constructed or produced.
29.3 Accounting Policy in Relation to
Borrowing Costs
The accounting policy under IAS 23 Borrowing Costs is that
qualifying borrowing costs must be capitalised when the asset is
a qualifying asset and the capitalisation rules are met.

Assets that qualify for capitalisation of borrowing costs

include:
 inventories;
 manufacturing plant;
 power-generating facilities;
 intangible assets; and
 investment properties.
29.3 Accounting Policy in Relation to
Borrowing Costs
Qualifying assets do not include:

 inventories manufactured or produced over a

short period of time;
 financial assets;
 assets that are ready for their intended use or for
sale when purchased.
29.3 Accounting Policy in Relation to
Borrowing Costs

Capitalisation can only occur when all of

the following conditions are met:

 funds have been borrowed;

 work on the asset has commenced; and
 expenditure on the asset is being incurred.
Exercise 1

Tumble plc borrowed €/£5m to fund the

construction of an asset. The funds were
drawn down on 1 February 2015. Work began
and expenditure incurred as and from 1
March 2015.

At what date does capitalisation of the

borrowing costs begin?
Solution to Exercise 1
 Capitalisation begins on 1 March 2015.

 As and from 1 March:

• interest costs are being incurred;
• work has begun; and
• expenditure has been incurred.
Solution to Exercise 1
• Between 1 February and 1 March, only
the interest costs are being incurred;
the other conditions are not met.

• Interest costs incurred in February

2015 are expensed to SPLOCI.
29.3 Accounting Policy in Relation to
Borrowing Costs

Capitalisation ceases when:

 allactivities necessary to prepare the asset
for its intended use have been completed.

Borrowing costs that are not capitalised are

expensed to SPLOCI as finance costs.
Exercise 2
Mushroom plc borrowed €/£10m to fund the
construction of an asset on 1 March 2015.
Construction work began on 15 March 2015.

All work was completed on 10 January 2016 and

brought into use on 4 March 2016. The loan balance is
still outstanding as at 4 March 2016.

At what date does the capitalisation of borrowing

costs cease?
Solution to Exercise 2

 Capitalisation of borrowing costs ceases on 10

January 2016 as the work is complete and it is
capable of being used for its intended purpose.

• Borrowing costs incurred after 10 January 2016

are expensed to SPLOCI.
29.3 Accounting Policy in Relation to
Borrowing Costs
Other rules in relation to capitalisation of borrowing costs:
 If work is suspended for a period of time for any reason, then
any borrowing costs incurred in this period are not capitalised
but expensed to SPLOCI.

 If funds are borrowed at a specific interest rate, then this rate

is used to capitalise borrowing costs.

 If borrowings are from general borrowings, then a weighted

average cost is used to capitalise borrowing costs.
Exercise 3
Thompson plc has incurred costs in relation to the
construction of an asset. The funding of this project is from
its general borrowings, which are:
3% Loan €/£9,000,000
7% Loan €/£3,000,000

The costs in relation to the construction of the asset

amount to €/£3,000,000.

What is the weighted average rate of interest to be used

to capitalise borrowing costs?
Solution to Exercise 3

Loan Interest Rate Loan Amount % of Total Weighted

Loans Average
3% Loan 3% 9,000,000 75 2.25%
(9m / 12m) (3% X 75%)

7% Loan 7% 3,000,000 25 1.75%

(3m / 12m) (7% X 25%)

12,000,000 Weighted 4.00%

Average ➔
29.4 Interest Rate to be Used for
Capitalisation
Interest Earned
 Interest earned during the period that borrowing
costs are capitalised reduces the amount capitalised.
It is not presented as finance income in the SPLOCI.

 Interest earned when borrowing costs are being

expensed to SPLOCI are recognised as finance income
in the SPLOCI.
29.5 Disclosure

The following shall be disclosed in the financial

statements in relation to the capitalisation of
borrowing costs:

 the amount of the borrowing costs capitalised

during the year; and

 the capitalisation rate used to determine the

amount to be capitalised.
29.6 IAS 23 Compared with FRS 102

 UnderIAS 23, eligible borrowing costs must

be capitalised.

 Under FRS 102, there is a choice to either

capitalise or expense to SPLOCI; this is an
accounting policy and must be applied
consistently from one period to the next.
 IAS 40 Investment
Property
Refer to text for questions
Investment property (IAS40)
Investment property is property (land and
buildings) which is "held ... to earn rentals or for
capital appreciation or both, rather than:
(a) for use in the production or supply of goods or
services;
(b) for administrative purposes, or
(c) for sale in the ordinary course of business".
Measurement of investment property
Initial measurement is at cost. Subsequently,
investment property may be measured using either:
 The fair value model; the property is carried
at fair value; gains and losses on adjusting fair
value are recognised in the calculation of
profit or loss.
 The cost model; the property is carried at
cost less any accumulated depreciation and
less any accumulated impairment losses.
 IAS 19 PENSIONS
Refer to text for questions
Overview
 Categories of employee benefits
 Short-term employee benefits
 Post-employment benefits
 Accounting for defined contribution pension plans
 Accounting for defined benefit pension plans:
 terminology
 the defined benefit expense
 the defined benefit liability
 Disclosures relating to defined benefit plans
 Other long-term employee benefits
 Termination benefits
 Share-based payment
Categories of employee benefits
IAS19 specifies four main categories of
employee benefits. These are:
• short-term employee benefits
• post-employment benefits (e.g. pensions)
• other long-term employee benefits
• termination benefits.

IAS19 prescribes the accounting treatment for

each class of employee benefits.
Short-term employee benefits
IAS19 defines short-term employee benefits as "employee
benefits … that are expected to be settled wholly before
twelve months after the end of the … period in which the
employees render the related service". These include:
• wages, salaries and employer's social security
contributions
• short-term holiday pay and sick pay
• bonuses payable within 12 months of the end of the
period in which the related services are performed
• non-monetary benefits for current employees.
Financial statements should recognise as an expense the
short-term benefits due to employees for services rendered
during the accounting period.
Post-employment benefits
Post-employment benefits consist mainly of retirement
benefits, such as pensions. IAS19 distinguishes between
two types of pension scheme or "plan":
• Defined contribution plans. The employer's
contributions are fixed. The employer is not obliged
to make any further contributions. The risk that the
fund's assets will be insufficient to pay the expected
level of benefits falls upon the employees.
• Defined benefit plans. The employer is obliged to
make sufficient contributions to the pension fund to
ensure that an agreed level of employee benefits can
be paid. The risk that these contributions will need to
be increased (e.g. if the fund's investments perform
badly) falls upon the employer.
Accounting for defined contribution
pension plans
In general, if employees have rendered services to an
employer during an accounting period, the employer's
financial statements for that period should recognise:
(a) an expense equal to the amount of the contributions
payable by the employer into the defined
contribution plan in exchange for those services, and
(b) a liability (accrued expense) equal to any part of this
expense that has not been paid by the end of the
period.
If the contributions paid by the employer during the period
exceed the amount due, the excess should normally be
recognised as a prepaid expense.
Accounting for defined benefit
pension plans
In general, if employees have rendered services to an
employer during an accounting period, the employer's
financial statements for that period should recognise:
(a) an expense equal to the cost of the retirement
benefits that will eventually be paid to the
employees as a result of the services provided during
that period
(b) a liability (or asset) equal to the difference between
the plan total assets and the employer's total
accumulated obligations under the plan.
The calculation of these figures will involve factors such as
expected employee mortality rates and expected returns on
investments.
Defined benefit plans:
Terminology (1)
The defined benefit obligation is the amount of the
accumulated benefits which past and present employees
have earned in return for their services to date.
The current service cost is the extra amount of such
benefits that employees have earned in return for their
services during the current period.
The interest cost is the increase during the current period
in the present value of the defined benefit obligation which
was calculated at the end of the previous period.
Actuarial gains and losses arise from the effects of
changes in actuarial assumptions.
Defined benefit plans:
Terminology (2)
The interest income for a period is the amount obtained by
multiplying the fair value of the plan assets at the start of
the period by the interest rate that was used when
calculating interest cost (but taking account of changes in
plan assets during the period).
The return on plan assets consists of income, dividends
etc. derived from the plan assets, together with gains or
losses (e.g. on the disposal of assets), less the interest
income for the period.
 The defined benefit expense
The defined benefit expense which is recognised when
calculating the entity's profit or loss for the accounting
period is arrived at by adding:
(a) the present value of the current service cost for the
period
(b) the interest cost for the period
and then subtracting:
(c) employee contributions in the period
(d) interest income for the period.

Actuarial gains and losses and the return on plan assets are
shown in other comprehensive income.
The defined benefit liability
The defined benefit liability which is recognised in
the statement of financial position at the end of an
accounting period is equal to the present value of
the defined benefit obligation at the end of the
period, less the fair value of the plan assets at the
end of the period.
If the result of this calculation is negative, it is
recognised as an asset.
Disclosures relating to defined
benefit plans
The main disclosures required by IAS19 with regard to
defined benefit plans are:
• a general description of the type of plan and any risks
to which the entity is exposed because of the plan
• a reconciliation of opening and closing balances for
the defined benefit obligation and for the plan assets
• the significant actuarial assumptions used to
determine the present value of the defined benefit
obligation
• information which describes how the entity's defined
benefit plan may affect its future cash flows.
Other long-term employee
benefits
Other long-term employee benefits include:
(a) long-term paid absences such as long-service leave
and sabbatical leave
(b) long-term disability benefits
(c) profit-sharing and bonus payments

as long as these are not expected to be settled wholly

before twelve months after the end of the period in which
the employees render the related services.
The accounting treatment of these benefits is similar to
the treatment required for defined benefit post-
employment plans.
Termination benefits
Termination benefits generally consist of payments or
other benefits provided to employees in exchange for
terminating their employment (e.g. redundancy pay or
compensation for loss of office).
Termination benefits should be recognised as a liability
and an expense at the earlier of the following dates:
(a) when the entity can no longer withdraw the offer of
those benefits
(b) when the entity recognises restructuring costs which
involve the payment of employment benefits.
Share-based payment
IFRS2 prescribes the accounting treatment of payments made
in the form of shares (including share options) or in cash, where
the amount of cash payable depends upon the company's own
share price.
• Equity-settled payments. The fair value of the shares (or
options) involved is measured at the grant date and is then
written off as an expense over the vesting period. Changes
in the estimated number of shares or options to be issued
on the vesting date are accounted for prospectively.
• Cash-settled payments. The fair value of the liability for
such payments is re-measured at each reporting date
during the vesting period. The estimated cost of providing
cash-settled payments is written off as an expense over the
vesting period.