Borrowing Costs

LKAS 23

ACC 3112
Financial Reporting
Learning outcomes
• Identify borrowing costs;
• Identify qualifying assets;
• Distinguish between the borrowing cost to be
capitalized and expensed;
• Account for borrowing cost to be capitalized; and
• Apply the disclosure requirements of LKAS 23-
Borrowing costs.
Definitions
Borrowing costs are interest and other costs incurred by
an entity in connection with the borrowing of funds.

Borrowing costs may include:

 Interest expenses calculated using the effective
interest method (LKAS 39)
 Finance charges in respect of financial lease (LKAS 17)
 Exchange differences arising from foreign currency
borrowings
 Amortization of loan issue costs
Scope
• This standard shall be applied in accounting for
borrowing costs.
• LKAS 23 does not deal with the actual or
imputed cost of equity, including preferred
capital
• Not applicable for borrowing costs directly
attributable to the acquisition, construction or
production of the following assets:
 Biological assets
 Inventories that are manufactured, or
otherwise produced, in large quantities on a
repetitive basis.
 Recognition
• Borrowing costs that are directly attributable to the
acquisition, construction or production of a
qualifying asset should be capitalized as part of the
cost of that asset.

• Other borrowing costs should be expense in the

period in which it incurs them.
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.

Depending on the circumstances, any of the following

may be qualifying assets:

Inventories, Manufacturing plant, Power generation

facilities, Intangible assets, Investment properties
 Non Qualifying Assets

• Financial assets, and inventories that are

manufactured or otherwise produced over a
short period of time, are not qualifying assets.

• Assets are ready for their intended use or sale

when acquired also are not qualifying assets.
Examples
1. Power plant being under the process
of manufacture. Qualifying Assets
2. Inventories routinely manufactured.
3. Assets ready to use.
4. Inventories requiring a substantial
period for the manufacturing. Not Qualifying Assets
5. Special order for a special inventory Not Qualifying Assets
that will be manufactured in five Qualifying Assets
months.

Qualifying Assets
Borrowing of an enterprise
Eligible Borrowing Costs
a) Where funds are borrowed specifically for the
purpose of obtaining a qualifying asset.

Borrowing costs eligible for capitalization are the

actual costs incurred less any income earned on
the temporary investment of such borrowings
 Generally Borrowed Funds
b) Where funds are borrowed generally and some of
those funds use them for the purpose of obtaining a
qualifying asset.
• The eligible amount of borrowing cost for
capitalization is determined by applying a
capitalization rate to the expenditure on that asset.
The capitalization rate is the weighted average of the
borrowing costs applicable to the general pool of
funds that are outstanding during the period
Commencement of Capitalization

• Borrowing costs in respect of a qualifying asset are

capitalised when:

(a) Expenditure on the asset is being incurred

(b) Borrowing costs are being incurred
(c) Activities necessary to prepare the asset for
intended use or sale are being incurred
Suspension of Capitalization

• The capitalisation of borrowing costs is suspended when the active

development of an asset is unexpectedly suspended for an extended period,
eg due to strike action.
Cessation of Capitalization

• The capitalisation of borrowing costs ceases when

substantially all of the activities necessary to
prepare an asset for intended use or sale are
complete.
• This is usually when physical construction of the
asset is complete.
Disclosures

• The accounting policy adopted

• Amount of borrowing cost capitalized during
the period
• Capitalization rate used
The End

Thank You