8.1 IAS 23 Borrowing costs

Question 1

Why is IAS 23 Borrowing Costs needed

Answer 1

• Directors want to capitalise as much to do with a purchase of as possible
• This is because it then shows up as an asset on the balance sheet and not an expense on the P&L
• Performance targets are often tied to profit and asset growth
• However, it will land on the P&L eventually as the asset is deprecated

Question 2

What is the core principle of IAS 23 Borrowing Costs

Answer 2

The core principle within IAS 23 is that where borrowing costs are directly attributable to the acquisition, construction, or production of a qualifying asset, they do form part of the cost of the asset

Question 3

What are borrowing costs

Answer 3

Interest and other costs relating to borrowing

Question 4

What are qualifying assets

Answer 4

One that requires a ‘substantial period of time to get ready for its intended use or sale’

Question 5

What are the exclusions of IAS 23 Borrowing Costs

Answer 5

• Assets measured at fair value
• Inventory manufactured in large quantities on a repetitive basis

Question 6

When can capitalisation start under IAS 23 Borrowing Costs

Answer 6

Capitalisation of borrowing costs should commence when all conditions are met:
* Expenditure for the asset is being incurred
* Borrowing costs are being incurred
* Activities necessary to prepare the asset for its intended use or sale are in progress.

Question 7

When is capitalisation suspended under IAS 23 Borrowing Costs

Answer 7

If there are any extended periods of time when active development of the asset is not taking place, then capitalisation of borrowing costs should be suspended during such periods.
* e.g., during industrial disputes.

Question 8

When is capitalisation caseated under IAS 23 Borrowing Costs

Answer 8

• Capitalisation of borrowing costs should cease when substantially all of the activities necessary to prepare the qualifying asset for its intended use or sale are complete
• Note this is when complete not when they are brought into use
• Prevents directors fiddling with numbers

Question 9

How does IAS 23 Borrowing Costs deal with part by part construction

Answer 9

If a qualifying asset is constructed in parts and the parts can be used while construction continues on other parts, then cessation of capitalisation of borrowing costs should be implemented on a stage by stage basis as substantially all of the activities necessary to prepare a particular part for its intended use or sale are completed.

Question 10

How do you calculate borrowing costs

Answer 10

• Borrowing costs to be incurred are the actual borrowing costs incurred less any investment income that may have arisen from temporary investment of the funds.
• If funds are deemed to have been taken from general borrowings, then the weighted average cost of borrowings should be used to determine the amount of borrowing costs to be capitalised.

Question 11

What disclosures are required under IAS 23 Borrowing Costs

Answer 11

• The amount of borrowing costs capitalised during the period.
• The capitalisation rate to be used to determine the amount of borrowing costs to be capitalised