Summary of IAS 23
This blog is written by Mr. Adnan Khan, Associate Audit and Assurance Services. Please read this blog and provide your valued comments.
Summary of IAS 23
Borrowing costs are interest and other costs incurred by an entity in connection with the borrowing of funds
- Borrowing costs may include:
- Interest on bank overdrafts and short-term and long-term borrowings (including intercompany borrowings)
- Amortization of discounts or premiums relating to borrowings
- Amortization of ancillary costs incurred in connection with the arrangement of borrowings
- Finance charges in respect of finance leases
- Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an Adjustment to interest costs.
A qualifying asset:
Qualifying Asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale
- Inventories (that are not produced over a short period of time)
- Manufacturing plants
- Power generation facilities
- Intangible assets
- Investment properties.
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are required to be capitalized as part of the cost of that asset
- Other borrowing costs are recognised as an expense when incurred
- If funds are borrowed specifically, the amount of borrowing costs eligible for capitalization are the actual borrowing costs incurred on that borrowing less any investment income on the temporary investment of any excess borrowings not yet used.
- If funds are borrowed generally, the amount of borrowing costs eligible for capitalization are determined by applying a capitalization rate (weighted average of borrowing costs applicable to the general borrowings) to the expenditures on that asset
- The amount of the borrowing costs capitalized during the period cannot exceed the amount of borrowing costs incurred during the period.
Capitalization commences when:
- Expenditures for the asset are being incurred
- Borrowing costs are being incurred
- Activities that are necessary to prepare the asset for its intended use or sale are in progress.
Capitalization is suspended during extended periods in which active development is interrupted.
- Capitalization ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
- When the construction of a qualifying asset is completed in parts and each part is capable of being used while construction continues on other parts, capitalization of borrowing costs ceases when substantially all the activities necessary to prepare that part for its intended use or sale are completed.
When application of the revised IAS 23 constitutes a change in accounting policy, IAS 23 is applied to
qualifying assets for which commencement date for capitalization is on or after the effective date of the
Standard. Entities may designate any date prior to the effective date to apply the revised IAS 23 relating to all qualifying assets for which commencement date is on or after that date.
- Amount of borrowing cost capitalized during the period
- Capitalization rate used.