Borrowing Costs

IAS – 23

(Chapter 2)
IAS 23- Borrowing Costs

IAS 23 regulates the capitalisation of borrowing costs (incurred on

money borrowed to finance the acquisition of assets)
Borrowing costs must be capitalized (as part of the cost of an asset)
if that asset is a qualifying asset

One which necessarily takes a substantial time to get ready for its intended use/sale
When to Commence and when to Cease?

Conditions for commencing capitalization of borrowing costs:

• Expenditure for the asset is being incurred
• Borrowing costs are being incurred
• Activities that are necessary to prepare the asset for its intended use/sale are
in progress.

Capitalization of borrowing costs should cease when either:

• Substantially all the activities necessary to prepare the qualifying asset are
complete, OR
• Construction is suspended, e.g. due to industrial disputes.
 Journal Entry to record borrowing costs

 When borrowing costs are capitalized:

Dr($) Cr($)
Dr- PPE XX
Cr- Interest Payable XX
SFP

 When borrowing costs are expensed:

Dr($) Cr($)
Dr- Finance Costs XX
Cr- Interest Payable XX
SPL
Which amount to Capitalise?

Capitalisation of borrowing costs

Specific Borrowings General Borrowings

Actual costs incurred Use Capitalisation Rate

Less
Income on temporary Weighted average cost of
Re-investment general borrowings
Example 1
SOLUTION
Example 2

A company had a $10 million 6% loan and a $2 million 8% loan.

What will be the amount of borrowing costs capitalized on the
purchase of an asset?

Weighted average cost of borrowing = $ 10m × 6% + $ 2m × 8%

$ 10m + $ 2m
= $ 760,000
$ 12m
= 6.33%

Amount to be capitalised = Amount spent on the asset × 6.33%

General borrowings example

• An entity uses funds from its general borrowings to build a new

production facility. Details of the entity's borrowings are shown
below:
– $10 million 6% loan
– $6 million 8% loan
• The entity used $12 million of these funds to construct the facility,
which was under construction for the entire year.How much
interest should be capitalised as part of the cost of the asset?
solution

• As general borrowings are being used, the weighted average cost of

borrowing should be used. This is calculated by working out the
interest on both loans, and then dividing by the total borrowings.
• Therefore the weighted average cost of borrowings = (($10m × 6%)
+ ($6m × 8%))/$16m = 6.75%.
• As $12m has been used, the interest to be capitalised = $12m ×
6.75% = $810,000
CESSATION OF BORROWING COSTS CAPITALIZATION
SOLUTION