Borrowing Costs: © 2008-16 Nelson Lam and Peter Lau Intermediate Financial Reporting: An IFRS Perspective (Chapter 7) - 1

Chapter 7
Borrowing Costs
© 2008-16 Nelson Lam and Peter Lau Intermediate Financial Reporting: An IFRS Perspective (Chapter 7) - 1
Agenda
1. Applicable Standard and Scope

2. Recognition
2.1 Borrowing Costs Eligible for Capitalisation
2.2 Commencement of Capitalisation
2.3 Suspension of Capitalisation
2.4 Cessation of Capitalisation
2.5 Excess of Carrying Amount
3. Disclosure
• IAS 23 specifies the accounting treatment for

borrowing costs
• An entity is required to apply IAS 23 in accounting
for borrowing costs
• What are borrowing costs?

– Interest and other costs an entity incurs in
connection with the borrowing of funds
• Borrowing costs include

– interest expense calculated using the effective
interest method
– finance charges in respect of finance leases
recognised under IAS 17 Leases
– exchange differences arising from foreign
currency borrowings to the extent that they are
regarded as an adjustment to interest costs
2. Recognition
Directly attributable
no
to the cost of
qualifying asset ?
yes
Probable to result in
no
future economic
benefits ?
yes
Can be measured no
reliably ?
yes
Capitalised Expensed
2. Recognition
• Qualifying assets are

 Assets that necessarily take a substantial period of
time to get ready for their intended use or sale
• Examples of qualifying assets
 Inventories that require a substantial period of time
to bring them to a saleable condition
 Manufacturing plants
 Power generation facilities
Qualifying Asset
 Intangible assets
 Investment properties
 Bearer plants
2. Recognition
Non-Qualifying
Asset
• Examples of items that cannot be qualifying

assets
 Financial assets, and inventories that are
manufactured, or otherwise produced, over a short
period of time
 Assets that are ready for their intended use or sale
when acquired
2.1 Borrowing Costs Eligible for
Capitalisation
Qualifying
Asset
Attributable
borrowing cost
• Borrowing costs that are directly attributable to

the acquisition, construction or production of a
qualifying asset are those costs that
 would have been avoided if the expenditure
on the qualifying asset had not been made
Capitalisation
• Borrowing costs may be incurred from two
sources in obtaining a qualifying asset
– Funds could be borrowed generally and used
for obtaining a qualifying asset
– Funds could be borrowed specifically for
obtaining a qualifying asset
Recognition Eligible
Capitalisation
• When an entity borrows funds specifically for the
purpose of obtaining a particular qualifying asset,
– the borrowing costs that directly relate to that
qualifying asset can be readily identified
• When the financing activity of an entity is co-

ordinated centrally, it may be difficult to
– identify a direct relationship between particular
borrowings and a qualifying asset and
– determine the borrowings that could otherwise
have been avoided
Capitalisation
• Difficulties also arise when a group
 uses a range of debt instruments to borrow
funds at varying rates of interest, and
 lends those funds on various bases to other
entities in the group
• Other complications arise through the use of

loans denominated in or linked to foreign
currencies
Capitalisation
Sources of Fund for Borrowing Costs
Funds borrowed Funds borrowed

generally specifically
• Capitalise • Capitalise
(Weighted average borrowing costs) (Actual borrowing costs incurred)
Multiply Less
(Capitalisation rate) (Investment income on

temporary investment)
2.1.1 Funds Borrowed Generally
• The capitalisation rate is

– the weighted average of the borrowing costs
applicable to the borrowings of the entity that are
outstanding during the period,
– other than borrowings made specifically for the
purpose of obtaining a qualifying asset
• Amount of borrowing costs capitalised during

a period should not exceed the amount of
borrowing costs it incurred during that period
Example 7.2
• Entity B constructs a scientific medical equipment for

its own use
• On 1 Jan 2016, the carrying amount of the equipment,
including borrowing costs capitalised previously, is $60
million
• Expenditures incurred for the construction of the
equipment during 2016 are as follows:
$m
1 April 2016 40
1 July 2016 100
Example 7.2
• Entity B borrows funds generally and uses them for the

purpose of constructing the equipment. Its outstanding
borrowings on 31 Dec 2016 and the related interest
expenses for the year then ended are as follows:
Outstanding Borrowings Interest
(weighted average) Expenses
$m $m
Bank overdrafts (10% per annum) 100.0 10.0
Short-term bank loan (8% per annum) 300.0 24.0
Long-term bank loan (7% per annum) 600.0 42.0
1000.0 76.0
Example 7.2
• Required:
– Determine the carrying amount of the scientific
medical equipment as at 31 December 2016 and
– Prepare the journal entry to account for the borrowing
costs capitalised in 2016
• Answers:
Capitalisation rate = Total borrowing costs for 2016/
Weighted average total borrowings
= $76 m / $1000 m
= 7.6 %
Example 7.2
Expenditures incurred during 2016
$m Weighting $ m
1 Jan 2016 60.0 1 60.0
1 April 2016 40.0 9/12 30.0
1 July 2016 100.0 6/12 50.0
200.0 140.0
Borrowing costs to be capitalised for 2016
= Weighted average borrowing costs X 7.6%
= $140 m X 7.6% = $10.64 m
Carrying amount of the equipment as at 31 Dec 2016

= $200 m + $10.64 m = $210.64 m
Example 7.2
Journal entry to account for the borrowing costs

capitalised in 2016:
$m $m
Dr. Equipment under construction 10.64
Cr. Interest expenses 10.64
2.1.2 Funds Borrowed Specifically
Example 7.3
• On 1 Jan 2016, Lam borrowed $150 million to finance

the construction of a property, which was expected to
take 2 years to build
• Construction work was commenced on 1 Jan 2016
• Interest of the loan was fixed at 10% per annum
Example 7.3
• Lam drew down the loan facilities in 2 parts in the amounts of $50
million and $100 million on 1 January 2016 and 1 July 2016
respectively. Funds used for expenditures on the construction of
the property were as follows:
1 Jan 2016 $50m
1 July 2016 $100m
• Required:
– Determine the borrowing costs eligible for capitalisation for the
year ended 31 Dec 2016 and consequently the cost of the
property as at 31 Dec 2016
– Prepare the journal entry to account for the borrowing costs
capitalised in 2016
Example 7.3
• Answers
$m
Borrowing costs:
1 Jan to 30 June 2016 ($50 m x 10% x 6/12) 2.5
1 July to 31 Dec 2016 ($150 m x 10% x 6/12) 7.5
10.0
Cost of assets:
Expenditure incurred 150.0
Borrowing costs capitalised 10.0
Carrying amount as at 31 Dec 2016 160.0
Example 7.3
• Answers
Journal entry to account for the borrowing costs capitalised

in 2016:
Dr. Property under construction $10m

Cr. Interest expenses $10m
Example 7.4
• Same information as in Example 7.3, except that Lam

drew down the loan facilities of $150 million on 1 Jan
2016
• Assume the unutilized funds were temporarily invested
with a return of 6% per annum
• Required:
– Determine the borrowing costs eligible for
capitalisation for the year ended 31 Dec 2016 and
consequently the cost of the property as at 31 Dec
2016
– Prepare the journal entry to account for the
borrowing costs capitalised in 2016
Example 7.4
• Answers
$m
Borrowing costs:
1 Jan to 31 December 2012 ($150 m x 10%) 15.0
Less: investment income
1 Jan to 30 June 2012 ($100 m x 6% x 6/12) (3.0)
12.0
Cost of assets:
Carrying amount as at 31 December 2012 162.0
Example 7.4
• Answers


Example 7.6
• Same information as in Example 7.4

• Lam borrowed $150 million to finance the
construction of a property on 1 January 2016, which
was expected to take 2 years to build
• Lam drew down the loan facilities of $150 million on 1
January 2016. Interest of the loan was fixed at 10%
per annum
• Construction work of this qualifying asset was
commenced on 1 January 2016
• Funds used for expenditures on the construction of
the property were $50 million on 1 January 2016 and
$100 million on 1 July 2016.
Example 7.6
• The unutilized funds were temporarily invested with a

return of 6% per annum
• Required:
– Assume Lam adopts the "to the extent" approach of
asset expenditure commencement, determine the
borrowing costs eligible for capitalisation for the
year ended 31 Dec 2016 and consequently the cost
of the property as at 31 Dec 2016
borrowing costs capitalised in 2016
Example 7.6
• Answers
$m
Borrowing costs for the first half year:
1 Jan to 30 June 2016 ($150 m x 10% x 6/12) 7.5
Less: investment income
1 Jan to 30 June 2016 ($100 m x 6% x 6/12) (3.0)
4.5
Portion qualified for capitalisation ($50m / $150m) ÷ 3
Qualified for capitalisation 1.5
Borrowing costs for the second half year:
1 July to 31 Dec 2016 ($150 m x 10% x 6/12) 7.5
9.0
Example 7.6
Cost of assets:

Incurs expenditures for

the qualifying asset No
yes
Incurs borrowing costs
No
yes
Undertake activities necessary
to prepare the qualifying asset
No
for its intended use or sales
yes
Commencement of capitalisation Do not commence
capitalisation
Cease capitalisation when

Suspend capitalisation for
substantially all the above
extended inactive
necessary activities are
development (Section 2.3)
complete (Section 2.4)
• Expenditures on a qualifying asset

– include only those expenditures that have
resulted in payments of cash, transfers of other
assets or the assumption of interest-bearing
liabilities
– reduced by any progress payments received
and grants received in connection with the asset
Recognition Eligible Commencement
• The activities necessary to prepare the asset for its

intended use or sale include:
the physical construction of the asset
and
technical and administrative work prior to the
commencement of physical construction.
• An entity suspends capitalisation of borrowing

costs during extended periods in which it suspends
active development
• Borrowing costs incurred during this period are

costs of holding partially completed assets and do
not qualify for capitalization
Recognition Commencement Suspension
Example 7.9
• Lam borrowed $150 million to finance the

construction of a property on 1 Jan 2016, which was
expected to take 2 years to build
• Interest of the loan was fixed at 10% per annum
• Construction work of this qualifying asset was
commenced on 1 Jan 2016
• Funds used for expenditures on the construction of
the property were $50 million on 1 Jan 2016 and $100
million on 1 July 2016
• Construction work was stopped for 3 months from 1
September to 30 November 2016 due to damage
caused by a typhoon occurred on 1 September 2016
Example 7.9
• Required:
– Determine the borrowing costs eligible for
capitalisation for the year ended 31 December 2016
and consequently the cost of the property as at 31
December 2016
borrowing costs
Example 7.9
$m
• Borrowing costs:
1 Jan to 30 June 2016 ($50 m x 10% x 6/12) 2.50
1 July to 31 August 2016 ($150 m x 10% x 2/12) 2.50
1 Dec to 31 Dec 2016 ($150 m x 10% x 1/12) 1.25
6.25
• Cost of assets:
Example 7.9
• Lam suspended capitalisation of borrowing costs

from 1 September to 30 November 2016 in which it
suspended active development (i.e. construction of
the property) due to damage caused by a typhoon
occurred on 1 September 2016.
• In this case, the suspension of work would unlikely
be considered to be a necessary part of the
process of getting the property ready for its
intended use
Example 7.9
• Journal entry to account for the borrowing costs

$m $m
Dr. Property under construction 6.25
Cr. Interest expenses 6.25
• Capitalisation of borrowing costs is not normally

suspended:
during a period when substantial technical and
administrative work is being carried out
when a temporary delay is a necessary part of
the process of getting an asset ready for its
intended use or sale, for examples
• during the extended period needed for inventories to mature
• the extended period during which high water levels delay
construction of a bridge, if such high water levels are common
during the construction period in the geographic region involved
2.4 Cessation of Capitalisation
• An entity ceases capitalising borrowing costs when

substantially all the activities necessary to prepare
the qualifying asset for its intended use or sale are
complete
• An asset is normally ready for its intended use or
sale when the physical construction of the asset is
complete even though routine administrative work
might still continue
Recognition Commencement Cessation
2.5 Excess of Carrying Amount
• When the carrying amount or the expected ultimate

cost of the qualifying asset exceeds its recoverable
amount or net realisable value, the carrying amount
is written down or written off
• In certain circumstances, the amount of the write-

down or write-off is written back
3. Disclosure
• IAS 23 requires an entity to disclose:

the amount of borrowing costs capitalised
during the period
the capitalisation rate used to determine the
amount of borrowing costs eligible for
capitalisation
Chapter 7
Borrowing Costs

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Chapter 7

1. Applicable Standard and Scope

• IAS 23 specifies the accounting treatment for

• What are borrowing costs?

• Borrowing costs include

• Qualifying assets are

• Examples of items that cannot be qualifying

• Borrowing costs that are directly attributable to

• When the financing activity of an entity is co-

• Other complications arise through the use of

Sources of Fund for Borrowing Costs

Funds borrowed Funds borrowed

(Weighted average borrowing costs) (Actual borrowing costs incurred)

(Capitalisation rate) (Investment income on

• The capitalisation rate is

• Amount of borrowing costs capitalised during

• Entity B constructs a scientific medical equipment for

• Entity B borrows funds generally and uses them for the

Carrying amount of the equipment as at 31 Dec 2016

Journal entry to account for the borrowing costs

• On 1 Jan 2016, Lam borrowed $150 million to finance

• Construction work was commenced on 1 Jan 2016

• Interest of the loan was fixed at 10% per annum

1 July 2016 $100m

Journal entry to account for the borrowing costs capitalised

Dr. Property under construction $10m

• Same information as in Example 7.3, except that Lam

Journal entry to account for the borrowing costs

Dr. Property under construction $12m

• Same information as in Example 7.4

• The unutilized funds were temporarily invested with a

Journal entry to account for the borrowing costs

Incurs expenditures for

Cease capitalisation when

• Expenditures on a qualifying asset

Recognition Eligible Commencement

• The activities necessary to prepare the asset for its

• An entity suspends capitalisation of borrowing

• Borrowing costs incurred during this period are

Recognition Commencement Suspension

• Lam borrowed $150 million to finance the

• Lam suspended capitalisation of borrowing costs

• Journal entry to account for the borrowing costs

• Capitalisation of borrowing costs is not normally

• An entity ceases capitalising borrowing costs when

• When the carrying amount or the expected ultimate

• In certain circumstances, the amount of the write-

• IAS 23 requires an entity to disclose:

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