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IFRS IAS 23 Borrowing costs

IFRS IAS 23 Borrowing costs: Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are included in the cost of that asset. Such borrowing costs are capitalised as part of the cost of the asset when it is probable that they will result in future economic benefits to the entity and the costs can be measured reliably. When an entity applies IAS 29 Financial Reporting in Hyper inflationary Economies, it recognises as an expense the part of borrowing costs that compensates for inflation during the same period in accordance with of that Standard.

IFRS IAS 23 Borrowing costs

IFRS IAS 23 Borrowing costs

IFRS IAS 23 Borrowing costs-

Objective IAS 23: IAS 23 prescribe accounting treatment for borrowing cost is the main objective of IAS 23 Bank overdraft and borrowing, finance charges on finance leases and exchange on foreign currency borrowings are included in Borrowing cost and these are regarded as adjustment to interest cost.

Borrowing cost may constitutes the following:

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  • Interest expense:Under IAS 39,effective interest method is calculated.
  •  IAS 17 Leases: Finance charges in respect of finance leases recognised.
  • Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

This standard does not deal with the actual or imputed cost of equity, including any preferred capital not classified as a liability pursuant to IAS 32

A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale. [IAS 23.5] That could be property, plant, and equipment and investment property during the construction period, intangible assets during the development period, or “made-to-order” inventories. [IAS 23.6]

IFRS IAS 23 Borrowing costs

Scope of IAS 23

Two types of assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:

  • qualifying assets measured at fair value, such as biological assets accounted for under IAS 41 Agriculture
  • inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis and that take a substantial period to get ready for sale (for example, maturing whisky

IFRS IAS 23 Borrowing costs

History of IAS 23

November 1982 Exposure Draft E24 Capitalisation of Borrowing Costs
March 1984 IAS 23 Capitalisation of Borrowing Costs
1 January 1986 Effective date of IAS 23 (1984)
August 1991 Exposure Draft E39 Capitalisation of Borrowing Costs
December 1993 IAS 23 (1993) Borrowing Costs (revised as part of the ‘Comparability of Financial Statements’ project)
1 January 1995 Effective date of IAS 23 (1993) Borrowing Costs
25 May 2006 Exposure Draft of proposed amendments to IAS 23
29 March 2007 IASB amends IAS 23 to require capitalisation of borrowing costs.
22 May 2008 IAS 23 amended for ‘Annual Improvements to IFRSs 2007 for components of borrowing costs
1 January 2009 Effective date of March 2007 and May 2008 amendments to IAS 23

IFRS IAS 23 Borrowing costs

Includes IFRSs with an effective date after 1 January 2012 but not the IFRSs they will replace. This extract has been prepared by IFRS Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards.

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IFRS IAS 23 Borrowing costs: Core principle Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense. Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. Recognition An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.

An entity shall recognise other borrowing costs as an expense in the period in which it incurs them. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.

IFRS IAS 23 Borrowing costs: To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation by applying a capitalisation rate to the expenditures on that asset. The capitalisation rate shall be 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. The amount of borrowing costs that an entity capitalises during a period shall not exceed the amount of borrowing costs it incurred during that period. An entity shall begin capitalising borrowing costs as part of the cost of a qualifying asset on the commencement date.

The commencement date for capitalisation is the date when the entity first meets all of the following conditions:

  1. It incurs expenditures for the asset.
  2. It incurs borrowing costs.
  3. It undertakes activities that are necessary to prepare the asset for its intended use or sale. An entity shall suspend capitalisation of borrowing costs during extended periods in which it suspends active development of a qualifying asset.

An entity shall cease capitalising borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Disclosure An entity shall disclose:

  1. The amount of borrowing costs capitalised during the period.
  2. The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.

IFRS IAS 23 Borrowing costs

Commencement of capitalisation: Berief

An entity shall begin capitalising borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalisation is the date when the entity first meets all of the following conditions:

(a) It incurs expenditures for the asset.

(b) It incurs borrowing costs.

(c) It undertakes activities that are necessary to prepare the asset for its intended use or sale.

IFRS IAS 23 Borrowing costs

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