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IAS # 23

Borrowing cost
Objective of IAS 23

 Cost principle: B.C. are directly


attributable to the acquisition,
construction or production of a
qualifying assets form a part of the
cost of that assets.
Scope

 IAS 23 applies to accounting for


borrowing cost for qualifying
assets.
 qualifying asset is an asset that
necessarily takes a substantial
period of time to get ready for its
intended use or sale.
Cont….
 Borrowing cost may include:
1) Interest on bank O/D or short term or
long term borrowings
2) Amortization of discount or premium
relating to borrowings
3) Finance charge in respect of finance
lease
4) Exchange differences arising from
foreign currency borrowings
 The Standard applies only to
borrowing costs relating to
external borrowings and not to
equity.
 Therefore, the Standard does not
deal with the imputed or actual
cost of equity, including preferred
capital not classified as equity.
 On December 1, 20X4, Compassionate Inc. began
construction of homes for those families that were hit
by the tsunami disaster and were homeless. The
construction is expected to take 3.5 years. It is being
financed by issuance of bonds for $7 million at 12% per
annum. The bonds were issued at the beginning of the
construction. The bonds carry a 1.5% issuance cost.
The project is also financed by issuance of share capital
with a 14% cost of capital. Compassionate Inc. has
opted under IAS 23 to capitalize borrowing costs.
 Required
 Compute the borrowing costs that need to be capitalized
under IAS 23.
 Since these homes are “qualifying
assets,” borrowing costs can be
capitalized and are computed thus:
a. Interest on $7 million bond =
$7,000,000 ×12% = $840,000
b. Amortization of issuance costs of the
bond (using the straight-line method)=
[(0.015 × $7,000,000 ) / 3.5 years]
=$30,000
 Total borrowing to be capitalized =
$840,000 + $30,000 = $870,000
qualifying assets
 Assets that are ready for their
intended use or sale when
acquired are not qualifying assets
as envisioned by this Standard.
Qualifying assets, for the purposes
of this Standard, are assets that
take a substantial period of time to
get ready for their intended use.
 Examples of qualifying assets include
 A toll bridge that takes a couple of
years to construct before it is ready for
use and is opened to the public
 A power plant that takes a substantial
period of time to get ready for its
intended use
 A hydroelectric dam that services the
needs of a village and takes a
considerable period of time to construct
 Inventories that are routinely
manufactured or are produced on a
repetitive basis over a short period of
time are obviously not qualifying
assets. However, inventories that
require a substantial period of time to
bring to a salable condition can be
regarded as qualifying assets for the
purposes of this Standard.
Cont….
Any of the following may be
qualifying assets:
a) Inventory
b) Manufacturing plants
c) Power generation facilities
d) Intangibles
e) Investment properties
Recognition
Benchmark Treatment Under the benchmark treatment,
borrowing costs shall be recognized as an expense in the
period in which they are incurred. When the benchmark
treatment for recognizing borrowing costs is used, these costs
are expensed regardless of how they are applied.
Allowed Alternative Treatment Under the allowed alternative
treatment, borrowing costs that are directly attributable to the
acquisition, construction, or production of a qualifying asset
shall be capitalized as part of the cost of that asset.
Capitalization of borrowing costs that are directly attributable
to the acquisition, construction, or production of a qualifying
asset as part of the cost of the asset is possible only if both
these conditions are met:
It is probable that they will result in future economic benefits to
the entity.
The costs can be measured reliably. (If borrowing costs do not
meet these criteria, then they are expensed
Recognition
 Amendments to IAS 23 Effective January 1,
2009
 During March 2007, the IASB issued amendments to
IAS 23. These amendments eliminate the option
available under the existing standard to recognize
borrowing costs as an expense. Under the revised
standard, to the extent that borrowing costs relate to
the acquisition, construction or production of a
“qualifying asset,” they should be capitalized as part
of the cost of the asset. All other borrowing costs
should be expensed as incurred.
 The revised standard is effective for annual periods
beginning on or after January 1, 2009. Early
application is permitted but retrospective application
is not permitted.
Borrowing cost eligible or
capitalization
-cost that would have been avoided
if expenditure of qualifying assets
have not been made
-any investment income from the
temporary investment of that fund
should be deducted from B.C.
Capitalizations rate
Capitalization rate should be the
weighted average of the borrowing
cost applicable to the borrowings
Commencement of capitalization

 At commencement date is the


date when an entity first meet all
of the followings:
1. It incurs expenditure
2. In incurs borrowings
3. It undertakes activity to prepare
the assets
Cessation of capitalization
 When substantially all of the
activities necessary to prepare the
qualifying assets for its intended
use or sale are complete.
Disclosures
 An entity shall disclose :
 its accounting policy for the recognition
of borrowing costs,
 the amount of borrowing costs
capitalized during the period,
 and the capitalization rate used to
determine the amount of borrowing
costs eligible for capitalization

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