IAS 23 - Borrowing Costs Flashcards
Which types of borrowing costs form part of the cost of the asset?
Borrowing costs that are directly attributable to the acquisition, construction or production of an qualifying asset form part of the cost of the asset.
Other borrowing costs are recognised as an expense.
What is the definition of borrowing costs?
Borrowing costs are interest & other costs that an entity incurs in connection with the borrowing of funds.
What is the definition of a qualifying asset?
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for it intended use or sale.
Examples include : - PP&E, Investment properties under construction etc
How is the amount of borrowing costs to be capitalised calculated where SPECIFIC FUNDS are raised?
If the specific funds raised are not all required immediately and some are invested, the borrowing costs capitalised should be reduced by the investment income received on the excess funds.
EXAMPLE : - Borrowed £1m @ 7.5% to finance construction of a new building which will take 12 months. Stage payments are made on construction with surplus invested gaining interest of £35,000.
Borrowing cost to be capitalised = (£1,000,000 @ 7.5%) = £75,000 - £35,000 = £40,000
How is the amount of borrowing costs to be capitalised calculated where GENERAL FUNDS are raised?
The amount of borrowing costs to be capitalised should be calculated by reference to the weighted average cost of the general borrowings.
EXAMPLE : - An entity has the following loans in place
£1m of 6% loan finance
£2m of 8% loan finance
Entity constructed a new factory at a cost of £600,000 and took 8 months to complete.
Weighted average cost of loans = (1m x 6%) + (2m x 8%)/3m = 7.33%
Borrowing costs to be capitalised = £600,000 x 7.33% x8/12 = £29,320
When should capitalisation of borrowing costs commence?
Capitalisation should commence when the entity meets ALL of the following three 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 (i.e construction, drawing up plans, obtaining planning permission)
When should suspension of capitalisation of borrowing costs occur?
If the entity suspends active development of a qualifying asset for an extended period the capitalisation of borrowing costs should be suspended and recognised as an expenses in the p&l
When should the cessation of capitalisation on borrowing costs take place?
The entity should cease capitalising borrowing costs when substantially all the activities necessary to get the asset ready for its intended use or sale are complete.
Minor activities such as decoration of an investment property do not form part of substantial activity.
What disclosures should be made under IAS 23?
The entity should disclose : -
1) The borrowing costs which have been capitalised in the current period
2) The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation
What judgements are required in relation to IAS 23?
Judgements are required due to the vague definitions of the following : -
> ‘a substantial period of time to get ready’ which is a central part of the definition of a qualifying asset.
> The borrowing costs which are ‘directly attributable’ to work on the qualifying asset.
> ‘Activities necessary to prepare the qualifying asset’
> ‘An extended period’ where active development has been suspended
> When ‘substantially all the necessary activities are complete’
What are the comparisons for IAS 23 & FRS 15 under UK GAAP?
UNDER FRS 15 : -
Entities are allowed the choice of whether to capitalise borrowing costs or to recognise them as an expense as incurred
UNDER IAS 23 : -
Capitalisation is required
UNDER FRS 15 : -
The amount capitalised is limited to the finance costs incurred on the EXPENDITURE incurred.
UNDER IAS 23 : -
The amount capitalised is limited to the BORROWING costs on the total related funds less the investment income from any temporary investment.
