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IAS 23
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Overview and Core Principle
[edit]International Accounting Standard 23: Borrowing Costs (IAS 23) is an international financial reporting standard adopted by the International Accounting Standards Board (IASB).[1] Borrowing costs refer to the interest and other costs that an entity incurs in connection with the borrowing of funds.[2] IAS 23 provides guidance on how to measure borrowing costs, particularly when the costs of acquisition, construction or production are funded by an entity’s general borrowings.[3] The standard mandates that borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset must be capitalized as part of the cost of that asset.[4] Other borrowing costs are recognized as an expense in the period in which they are incurred.[5]
Definitions
[edit]Borrowing costs may include interest expense calculated using the effective interest method as described in IFRS 9.[6] They also include interest in respect of lease liabilities recognized in accordance with IFRS 16.[7] Exchange differences arising from foreign currency borrowings are included to the extent that they are regarded as an adjustment to interest costs.[8]
Depending on the circumstances, qualifying assets may include inventories that require a substantial period to get ready for their intended use or sale.[9] Manufacturing plants, power generation facilities, and intangible assets can also meet the definition of a qualifying asset.[10] Furthermore, investment properties and bearer plants may be classified as qualifying assets under the standard.[11]
Recognition and Measurement
[edit]An entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.[12] Where funds are borrowed specifically, costs eligible for capitalization are the actual costs incurred less any investment income earned on the temporary investment of those borrowings.[13] Where funds are part of a general pool, the eligible amount is determined by applying a capitalization rate to the expenditures on that asset.[14] The capitalization rate should be the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period.[15]
Commencement and Suspension
[edit]The capitalization of borrowing costs begins when the entity first incurs expenditures for the asset and incurs borrowing costs.[16] Capitalization also requires that the entity undertakes activities necessary to prepare the asset for its intended use or sale.[17] An entity shall suspend capitalization during extended periods in which it suspends active development of a qualifying asset.[18]
Cessation
[edit]An entity shall cease capitalizing borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.[19] When an entity completes the construction of a qualifying asset in parts, it shall cease capitalizing borrowing costs on a part when that part is completed.[20]
Disclosure Requirements
[edit]An entity is required to disclose the amount of borrowing costs capitalized during the reporting period.[21] Additionally, the entity must disclose the capitalization rate used to determine the amount of borrowing costs eligible for capitalization.[22]
Accounting Examples for IAS 23
[edit]The following examples illustrate the journal entries required for borrowing costs under the specific and general borrowing treatments of IAS 23.
1. Specific Borrowings
[edit]When an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the amount to be capitalized is the actual borrowing costs incurred less any investment income on temporary investments.[23]
Scenario: A company borrows $1,000,000 at 5% interest specifically to build a factory. During the year, it earns $5,000 by temporarily investing part of the loan before it was spent on construction.
| Event | Debit | Credit | Rationale |
|---|---|---|---|
| Recognition of interest incurred | Asset under construction (SoFP) | Cash / Interest Payable | Capitalization of borrowing costs directly attributable to the asset.[24] |
| Recognition of investment income | Cash / Bank | Asset under construction (SoFP) | Reduction of capitalized cost by income earned on temporary investment of specific funds.[25] |
2. General Borrowings
[edit]If an entity uses a general pool of debt to fund a qualifying asset, it must determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset.[26]
Scenario: A company has general loans of $2,000,000 at 6% and $3,000,000 at 8%. It spends $500,000 of these general funds on a new project. The weighted average capitalization rate is 7.2%.
| Event | Debit | Credit | Rationale |
|---|---|---|---|
| Annual interest on general debt | Interest Expense (P&L) | Cash / Interest Payable | Initial recognition of all interest on general borrowings as an expense.[27] |
| Capitalization adjustment | Asset under construction (SoFP) | Interest Expense (P&L) | Reclassification of the portion of general interest attributable to the qualifying asset.[28] |
3. Cessation of Capitalization
[edit]Capitalization must cease when substantially all activities necessary to prepare the qualifying asset for its intended use or sale are complete.[29]
| Event | Debit | Credit | Rationale |
|---|---|---|---|
| Completion of asset | Finished Asset (e.g., PPE) | Asset under construction (SoFP) | Transfer of the total capitalized cost (including borrowing costs) to the final asset category.[30] |
| Post-completion interest | Interest Expense (P&L) | Cash / Interest Payable | Interest incurred after the asset is ready must be expensed and cannot be capitalized.[31] |
Disclosure Requirements (IAS 23)
[edit]IAS 23 requires an entity to disclose information regarding the borrowing costs capitalized during the period to ensure transparency regarding the cost of "qualifying assets."[32]
| Paragraph | Category | Disclosure Requirement | Description / Examples |
|---|---|---|---|
| IAS 23.26(a) | Capitalized Amounts | Costs Capitalized in Period | The amount of borrowing costs capitalized during the period (i.e., the interest and other costs added to the carrying amount of qualifying assets). |
| IAS 23.26(b) | Capitalization Rate | Weighted Average Rate | The capitalization rate used to determine the amount of borrowing costs eligible for capitalization (usually the weighted average of the borrowing costs applicable to general borrowings). |
| IAS 23.IN1 | Accounting Policy | Policy Note | Although not explicitly in paragraph 26, IAS 1 requires the disclosure of the accounting policy for borrowing costs (noting that capitalization is mandatory for qualifying assets). |
References
[edit]- ^ IASB. IAS 23, Paragraph IN1.
- ^ IASB. IAS 23, Paragraph 5.
- ^ Deloitte. IAS 23 — Summary of Borrowing Costs.
- ^ IASB. IAS 23, Paragraph 1.
- ^ IASB. IAS 23, Paragraph 8.
- ^ IASB. IAS 23, Paragraph 6(a).
- ^ Deloitte. IAS 23 — Definitions of borrowing costs.
- ^ IASB. IAS 23, Paragraph 6(e).
- ^ IASB. IAS 23, Paragraph 7.
- ^ Deloitte. IAS 23 — Examples of qualifying assets.
- ^ IASB. IAS 23, Paragraph 7.
- ^ IASB. IAS 23, Paragraph 8.
- ^ IASB. IAS 23, Paragraph 12.
- ^ Deloitte. IAS 23 — General borrowings and capitalization rates.
- ^ IASB. IAS 23, Paragraph 14.
- ^ IASB. IAS 23, Paragraph 17(a)-(b).
- ^ Deloitte. IAS 23 — Conditions for commencement.
- ^ IASB. IAS 23, Paragraph 20.
- ^ IASB. IAS 23, Paragraph 22.
- ^ Deloitte. IAS 23 — Cessation of capitalization.
- ^ IASB. IAS 23, Paragraph 26(a).
- ^ IASB. IAS 23, Paragraph 26(b).
- ^ IASB. IAS 23, Paragraph 12.
- ^ Deloitte. IAS 23 — Summary of specific borrowings.
- ^ IASB. IAS 23, Paragraph 12.
- ^ IASB. IAS 23, Paragraph 14.
- ^ Deloitte. IAS 23 — Treatment of general borrowings.
- ^ IASB. IAS 23, Paragraph 14.
- ^ IASB. IAS 23, Paragraph 22.
- ^ Deloitte. IAS 23 — Cessation criteria.
- ^ IASB. IAS 23, Paragraph 25.
- ^ IASB. IAS 23, Paragraph 26.