IAS 23

BORROWING COSTS

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 Learning Objectives
At the completion of studying this chapter, you will be
able to:
Define qualifying assets
Identify what borrowing costs are
Identify pre-conditions for the capitalisation of
borrowing costs
distinguish between the accounting treatment of
borrowing costs under US GAAP and IFRS

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 List of Applicable IFRS

Topic List Standards

Borrowing Costs IAS 23
Property, Plant and Equipment IAS 16
Investment Property IAS 40
Inventories IAS 2
Intangible Assets IAS 38

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 The objective of IAS 38

• The objective of IAS 38 is to prescribe the criteria for

determining whether borrowing costs can be
capitalized

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 QUALIFYING ASSETS

• A qualifying asset is ‘an asset that necessarily takes a

substantial period of time to get ready for its
intended use or sale’.
Assets that are ready for their intended use or
sale when acquired are NOT qualifying assets.
IAS 23 does not define ‘substantial period of
time’.
However, an asset that normally takes twelve
months or more to be ready for its intended
use will usually be a qualifying asset.

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 ELEMENTS OF BORROWING COSTS
• Borrowing costs, as understood generally, refer to interest
costs.
• Rather, borrowing costs also include other related costs, such
as:
 Exchange differences arising from foreign currency
borrowings to the extent they are regarded as an
adjustment to interest costs
 Finance charges in respect of finance leases recognized in
accordance with IFRS 16, Leases

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 Borrowing Costs..ctd

• IAS 23 does NOT deal with the actual or imputed cost

of equity, including preferred capital not classified as
a liability.

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 COMMENCEMENT OF CAPITALIZATION

• Capitalization of borrowing costs shall commence

when
– Expenditures for the asset are being incurred;
– Borrowing costs are being incurred; and
– Activities necessary to prepare the asset for its
intended use or sale are in progress.

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 SUSPENSION OF CAPITALIZATION

• Capitalization shall be suspended during extended

periods in which active development is interrupted
• Question:
– should capitalization be suspended during an
interruption to the construction of a bridge during
very high water levels?

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 CESSATION OF CAPITALIZATION

• Capitalization of borrowing costs ceases when

substantially all the activities are complete.

• The asset is considered to be substantially complete

if all that is left are minor modifications.

• When parts of a qualifying asset become ready for

use in stages, capitalization ceases on those parts
that are ready for use.
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 CASE STUDY I &II

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 Case Study

• A socially responsible multinational corporation (MNC)

decided to construct a tunnel that will link two sides of the
village that were separated by a natural disaster years ago.
• Realizing its role as a good corporate citizen, the MNC has
been in this village for a couple of years exploring oil and gas
in the nearby offshore area.
• The tunnel would take two years to build and the total capital
outlay needed for the construction would be not less than
ETB20 million.
• To allow itself a margin of safety, the MNC borrowed ETB22
million from three sources and used the extra ETB2 million for
its working capital purposes.

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 Case Study…ctd

• Financing was arranged in this way:

 Bank term loans: ETB5 million at 7% per annum
 Institutional borrowings: ETB7 million at 8% per annum
 Corporate bonds: ETB10 million at 9% per annum
• In the first phase of the construction of the tunnel, there
were idle funds of ETB10 million, which the MNC invested for
a period of six months.
• Income from this investment was ETB500,000.

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 Case Study…ctd

• Required : If the MNC applies IAS 23:

• How would it treat the borrowing costs?
• How would it capitalize the borrowing costs, and what would
it do with the investment income?

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Solution

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Similarities and Difference between IFRS and US
GAAP
• Similarities
– Both capitalize borrowing costs (e.g., interest costs)
directly attributable to the acquisition, construction or
production of a qualifying asset.
– Besides, qualifying assets are generally defined similarly
under both accounting models.

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 Similarities and Difference …. ctd

• Significant Differences
Item of US GAAP IFRS
Difference
Measureme borrowing costs DO NOT borrowing costs include
nt of include exchange rate exchange rate
borrowing differences. differences
costs

Interest income cannot capitalized borrowing

offset interest costs costs are offset by
investment income
earned
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 THANK YOU

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