Chapter 2 - Borrowing Costs Flashcards
Which standard covers borrowing costs?
IAS 23
What is the definition of borrowing costs according to IAS 23?
Interest and other costs incurred by an entity in borrowing funds
What is the definition of qualifying asset according to IAS 23?
An asset that necessarily takes a substantial period of time to get ready for its intended use or sale
What are examples of qualifying assets?
Construction of manufacturing plants and power generating facilities
Should borrowing costs under IAS 23 be capitalised?
Yes.
Unless:
-it is a qualifying asset measured at fair value (e.g. biological asset)
- inventories produced in large quantities on a regular basis
Under IAS 23, which borrowing costs can be capitalised?
If funds are borrowed specifically for obtaining a qualifying asset, then amount capitalised = incurred during the period less any investment income on temporary investment of those borrowings.
If funds are borrowed generally and used for the purposes of obtaining a qualifying asset, how should the borrowing costs be treated under IAS 23?
Amount for capitalisation should be determined by applying a capitalisation rate on expenditures of the asset (IAS 23.14).
How is the capitalisation rate determined for general borrowing costs under IAS 23?
Calculating a weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period.
How are specific borrowings that are outstanding after an asset is completed, treated?
Any outstanding borrowings after the asset is ready for use are included in general borrowings.
Under IAS 23, when should capitalisation of borrowing costs commence?
When all of the below:
(a) Expenditure for asset is being incurred
(b) borrowing costs are being incurred
(c) activities to prepare the asset for sale or use are in progress
When do capitalisation of borrowing costs cease?
All the activities necessary to prepare the asset for sale or use are complete
If the development of an asset is temporarily suspended, how are borrowing costs treated under IAS 23?
During such inactive periods, capitalisation of borrowing costs should be discontinued and recognised during this time through the profit and loss.
In some cases, where maturity of an asset is dependent on non-activity (e.g. high tides or geological features), the borrowing costs can continue to be capitalised.
Where an asset is completed in parts, how are borrowing costs treated under IAS 23?
Where each part is capable of being used separately while other parts continue to be constructed, the cessation of capitalising borrowing costs should be assess on substantial completion of each part.
What disclosures are required under IAS 23?
- The amount of borrowing costs capitalised during the period
- The capitalisation rate used to determine the amount of borrowing costs eligble for capitalisation.
