IAS 23 : Borrowing Costs

Question 1

Scope 1

An entity should apply IAS 23 in accounting for borrowing costs. [IAS 23.2].
IAS 23 deals with the treatment of borrowing costs in general, rather than solely focusing on capitalising borrowing costs as part of the carrying value of assets.

Answer 1

An entity should apply IAS 23 in accounting for borrowing costs. [IAS 23.2].
IAS 23 deals with the treatment of borrowing costs in general, rather than solely focusing on capitalising borrowing costs as part of the carrying value of assets.

Question 2

Scope 2

The standard does not deal with the actual or imputed costs of equity used to fund the
acquisition or construction of an asset. [IAS 23.3].
This means that any distributions or other payments made in respect of equity instruments, as defined by IAS 32 – Financial Instruments: Presentation, are not within the scope of IAS 23.
Conversely, interest and dividends payable on instruments classified as financial liabilities appear to be within the scope of the standard

Answer 2

The standard does not deal with the actual or imputed costs of equity used to fund the
acquisition or construction of an asset. [IAS 23.3].
This means that any distributions or other payments made in respect of equity instruments, as defined by IAS 32 – Financial Instruments: Presentation, are not within the scope of IAS 23.
Conversely, interest and dividends payable on instruments classified as financial liabilities appear to be within the scope of the standard

Question 3

Scope 3

An entity is not required to apply the standard (i.e. application is optional) to borrowing costs directly attributable to the acquisition, construction or production of:

• a qualifying asset measured at fair value (see 3.2 below); or
• inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis (see 3.1 below). [IAS 23.4].

Answer 3

An entity is not required to apply the standard (i.e. application is optional) to borrowing costs directly attributable to the acquisition, construction or production of:

• a qualifying asset measured at fair value (see 3.2 below); or
• inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis (see 3.1 below). [IAS 23.4].

Question 4

Qualifying Assets

IAS 23 defines a qualifying asset as ‘an asset that necessarily takes a substantial period of time to get ready for its intended use or sale’. [IAS 23.5].

Assets that are ready for their intended use or sale when acquired are not qualifying assets. [IAS 23.7].

Answer 4

IAS 23 defines a qualifying asset as ‘an asset that necessarily takes a substantial period of time to get ready for its intended use or sale’. [IAS 23.5].

Assets that are ready for their intended use or sale when acquired are not qualifying assets. [IAS 23.7].

Question 5

Qualifying Assets

IAS 23 does not define ‘substantial period of time’ and this will therefore require the exercise of judgement after considering the specific facts and circumstances. In practice, an asset that normally takes twelve months or more to be ready for its intended use will usually be a qualifying asset.

Answer 5

IAS 23 does not define ‘substantial period of time’ and this will therefore require the exercise of judgement after considering the specific facts and circumstances. In practice, an asset that normally takes twelve months or more to be ready for its intended use will usually be a qualifying asset.

Question 6

Qualifying Assets

The standard indicates that, depending on the circumstances, the following may be qualifying assets: manufacturing plants, power generation facilities, investment properties, inventories, intangible assets and bearer plants. [IAS 23.7].

Answer 6

The standard indicates that, depending on the circumstances, the following may be qualifying assets: manufacturing plants, power generation facilities, investment properties, inventories, intangible assets and bearer plants. [IAS 23.7].

Question 7

Qualifying Assets : Inventories 1

Inventories are within the scope of IAS 23 as long as they meet the definition of a qualifying asset and require a substantial period of time to bring them to a saleable condition.
This means inventories that are manufactured, or otherwise produced, over a short period of time are not qualifying assets and are out of scope of IAS 23.

Answer 7

Inventories are within the scope of IAS 23 as long as they meet the definition of a qualifying asset and require a substantial period of time to bring them to a saleable condition.
This means inventories that are manufactured, or otherwise produced, over a short period of time are not qualifying assets and are out of scope of IAS 23.

Question 8

Qualifying Assets : Inventories 2

However, even if inventories meet the definition of a qualifying asset and take a substantial period of time to get ready for sale, an entity is not required to apply the standard to borrowing costs directly attributable
to the acquisition, construction or production of inventories if these are routinely manufactured or otherwise produced in large quantities on a repetitive basis. [IAS 23.4(b), BC6].

Answer 8

However, even if inventories meet the definition of a qualifying asset and take a substantial period of time to get ready for sale, an entity is not required to apply the standard to borrowing costs directly attributable
to the acquisition, construction or production of inventories if these are routinely manufactured or otherwise produced in large quantities on a repetitive basis. [IAS 23.4(b), BC6].

Question 9

Qualifying Assets : Inventories 3

Therefore an entity may choose whether to apply the requirements of IAS 23 to such inventories as a matter of accounting policy. This optional scope exemption has been allowed because of the difficulty of calculating and monitoring the amount to be
capitalised, i.e. the costs of capitalisation are likely to exceed the potential benefits. [IAS 23.BC6].

Answer 9

Therefore an entity may choose whether to apply the requirements of IAS 23 to such inventories as a matter of accounting policy. This optional scope exemption has been allowed because of the difficulty of calculating and monitoring the amount to be
capitalised, i.e. the costs of capitalisation are likely to exceed the potential benefits. [IAS 23.BC6].

Question 10

Qualifying Assets : Inventories 4

There are many examples of such inventories, including large manufactured or constructed items that take some time to complete but are basically sold as standard items, such as aircraft and large items of equipment, or food and drink that take a long time to mature, such as cheese or alcohol that matures in bottle or cask.

Answer 10

There are many examples of such inventories, including large manufactured or constructed items that take some time to complete but are basically sold as standard items, such as aircraft and large items of equipment, or food and drink that take a long time to mature, such as cheese or alcohol that matures in bottle or cask.

Question 11

Qualifying Assets : Inventories 5

Conversely, IAS 23 is required to be applied to bespoke inventories (i.e. those made according to the unique specifications of a particular customer) that are occasionally manufactured or produced on a single item by item basis and take a substantial period of time to get ready for sale.

Answer 11

Conversely, IAS 23 is required to be applied to bespoke inventories (i.e. those made according to the unique specifications of a particular customer) that are occasionally manufactured or produced on a single item by item basis and take a substantial period of time to get ready for sale.

Question 12

Qualifying Assets : Assets measured at fair value 1

IAS 23 does not require entities to capitalise borrowing costs directly attributable to the acquisition, construction or production of assets measured at fair value that would otherwise be qualifying assets, for example, biological assets within the scope of IAS 41 – Agriculture. [IAS 23.4(a)].

Answer 12

IAS 23 does not require entities to capitalise borrowing costs directly attributable to the acquisition, construction or production of assets measured at fair value that would otherwise be qualifying assets, for example, biological assets within the scope of IAS 41 – Agriculture. [IAS 23.4(a)].

Question 13

Qualifying Assets : Assets measured at fair value 2

If the assets are held under a fair value model (or a fair value less costs to sell model) with all changes going to profit or loss, then capitalisation would not affect measurement in the statement of financial position and would involve no more than a reallocation between finance costs and the fair value movement in profit or loss.
However, this scope exemption is optional and would still allow an entity to choose whether to apply the requirements of IAS 23 to such assets as a matter of accounting policy.

Answer 13

If the assets are held under a fair value model (or a fair value less costs to sell model) with all changes going to profit or loss, then capitalisation would not affect measurement in the statement of financial position and would involve no more than a reallocation between finance costs and the fair value movement in profit or loss.
However, this scope exemption is optional and would still allow an entity to choose whether to apply the requirements of IAS 23 to such assets as a matter of accounting policy.

Question 14

Qualifying Assets : Assets measured at fair value 3

IAS 23 does not restrict the exemption to assets where the fair value movement is taken to profit or loss. Assets measured at fair value that fall under the revaluation model of IAS 16 – Property, Plant and Equipment – are also eligible for this scope exemption even though the revaluation gain or loss goes to other comprehensive income, not profit or loss. While such assets may be subject to the scope exemption, the revaluation model in IAS 16 is only applied subsequent to initial recognition. [IAS 16.31].
Therefore, such assets might be qualifying assets at initial recognition, but subject to the scope exemption subsequently.

Answer 14

IAS 23 does not restrict the exemption to assets where the fair value movement is taken to profit or loss. Assets measured at fair value that fall under the revaluation model of IAS 16 – Property, Plant and Equipment – are also eligible for this scope exemption even though the revaluation gain or loss goes to other comprehensive income, not profit or loss. While such assets may be subject to the scope exemption, the revaluation model in IAS 16 is only applied subsequent to initial recognition. [IAS 16.31].
Therefore, such assets might be qualifying assets at initial recognition, but subject to the scope exemption subsequently.

Question 15

Qualifying Assets : Assets measured at fair value 4

For example, assume that an entity borrows specific funds to construct a building, that the building is a qualifying asset and that the entity has a policy of revaluing all its land and buildings. When the constructed building is initially recognised, it will be measured at cost, which would include the directly attributable borrowing costs. [IAS 16.15, 16(b)].

Answer 15

For example, assume that an entity borrows specific funds to construct a building, that the building is a qualifying asset and that the entity has a policy of revaluing all its land and buildings. When the constructed building is initially recognised, it will be measured at cost, which would include the directly attributable borrowing costs. [IAS 16.15, 16(b)].

Question 16

Qualifying Assets : Assets measured at fair value 5

Assume that the entity subsequently renovates the building, that the renovation takes a substantial amount of time to complete and that those costs qualify for capitalisation under IAS 16. Since the asset is being revalued it would fall under the scope exemption in IAS 23. Therefore, the entity would not be required to capitalise any directly attributable borrowing costs relating to this subsequent renovation even if it takes a substantial amount of time to complete.

Answer 16

Assume that the entity subsequently renovates the building, that the renovation takes a substantial amount of time to complete and that those costs qualify for capitalisation under IAS 16. Since the asset is being revalued it would fall under the scope exemption in IAS 23. Therefore, the entity would not be required to capitalise any directly attributable borrowing costs relating to this subsequent renovation even if it takes a substantial amount of time to complete.

Question 17

Qualifying Assets : Financial assets

IAS 23 excludes all financial assets (which we consider include equity accounted investments) from the definition of qualifying assets. [IAS 23.7].

Answer 17

IAS 23 excludes all financial assets (which we consider include equity accounted investments) from the definition of qualifying assets. [IAS 23.7].

Question 18

The definition of borrowing costs in IAS 23 .1

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. [IAS 23.5]. Borrowing costs are defined in the standard to include:

• interest expense calculated using the effective interest method as described in IFRS 9 – Financial Instruments;
• interest in respect of liabilities recognised in accordance with IFRS 16 (or, for entities that have not yet adopted IFRS 16, finance charges in respect of finance leases recognised in accordance with IAS 17 – Leases); and
• exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. [IAS 23.6].

Answer 18

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. [IAS 23.5]. Borrowing costs are defined in the standard to include:

• interest expense calculated using the effective interest method as described in IFRS 9 – Financial Instruments;
• interest in respect of liabilities recognised in accordance with IFRS 16 (or, for entities that have not yet adopted IFRS 16, finance charges in respect of finance leases recognised in accordance with IAS 17 – Leases); and
• exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. [IAS 23.6].

Question 19

The definition of borrowing costs in IAS 23 .2

The standard addresses whether or not to capitalise borrowing costs as part of the cost of the asset. [IAS 23.8, 9].
The identification and measurement of finance costs are not dealt with in IAS 23

Answer 19

The standard addresses whether or not to capitalise borrowing costs as part of the cost of the asset. [IAS 23.8, 9].
The identification and measurement of finance costs are not dealt with in IAS 23

Question 20

The definition of borrowing costs in IAS 23 .3

IAS 23 is pretty silent on some types of expenses and there are doubts whether they are borrowing costs or not, for example:

• the many derivative financial instruments such as interest rate swaps, floors, caps and collars that are commonly used to manage interest rate risk on borrowings;
• gains and losses on derecognition of borrowings, for example early settlement of directly attributable borrowings that have been renegotiated prior to completion of an asset in the course of construction; and
• dividends payable on shares classified as financial liabilities (such as certain redeemable preference shares) that have been recognised as an expense in profit or loss.

Answer 20

IAS 23 is pretty silent on some types of expenses and there are doubts whether they are borrowing costs or not, for example:

• the many derivative financial instruments such as interest rate swaps, floors, caps and collars that are commonly used to manage interest rate risk on borrowings;
• gains and losses on derecognition of borrowings, for example early settlement of directly attributable borrowings that have been renegotiated prior to completion of an asset in the course of construction; and
• dividends payable on shares classified as financial liabilities (such as certain redeemable preference shares) that have been recognised as an expense in profit or loss.

Question 21

The definition of borrowing costs in IAS 23 .4

IAS 23 does not preclude the classification of costs, other than those it identifies, as borrowing costs. However, they must meet the basic criterion in the standard, i.e. that they are costs that are directly attributable to the acquisition, construction or production of a qualifying asset, which would, therefore, preclude treating the unwinding of discounts as borrowing costs.

Answer 21

IAS 23 does not preclude the classification of costs, other than those it identifies, as borrowing costs. However, they must meet the basic criterion in the standard, i.e. that they are costs that are directly attributable to the acquisition, construction or production of a qualifying asset, which would, therefore, preclude treating the unwinding of discounts as borrowing costs.

Question 22

The definition of borrowing costs in IAS 23 .5

Many unwinding discounts are treated as finance costs in profit or loss. These include discounts relating to various provisions such as those for onerous leases and decommissioning costs. These finance costs will not be borrowing costs under IAS 23 because they do not arise in respect of funds borrowed by the entity that can be attributed to a qualifying asset. Therefore, they cannot be capitalised.

Answer 22

Many unwinding discounts are treated as finance costs in profit or loss. These include discounts relating to various provisions such as those for onerous leases and decommissioning costs. These finance costs will not be borrowing costs under IAS 23 because they do not arise in respect of funds borrowed by the entity that can be attributed to a qualifying asset. Therefore, they cannot be capitalised.

Question 23

Eligible for Capitalisation : Directly attributable borrowing costs 1

Borrowing costs are eligible for capitalisation as part of the cost of an asset if they are directly attributable to the acquisition, construction or production of a qualifying asset, it is probable that such costs will result in future economic benefits to the entity and the
costs can be measured reliably. [IAS 23.8, 9].

Answer 23

Borrowing costs are eligible for capitalisation as part of the cost of an asset if they are directly attributable to the acquisition, construction or production of a qualifying asset, it is probable that such costs will result in future economic benefits to the entity and the
costs can be measured reliably. [IAS 23.8, 9].

Question 24

Eligible for Capitalisation : Directly attributable borrowing costs 2

The standard starts from the premise that borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those that would have been avoided if the expenditure on the qualifying asset had not been made.
[IAS 23.10].

Answer 24

The standard starts from the premise that borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those that would have been avoided if the expenditure on the qualifying asset had not been made.
[IAS 23.10].

Question 25

Eligible for Capitalisation : Directly attributable borrowing costs 3

Recognising that it may not always be easy to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings that could otherwise have been avoided, the standard includes separate requirements for specific borrowings and general borrowings.

Answer 25

Recognising that it may not always be easy to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings
that could otherwise have been avoided, the standard includes separate requirements for specific borrowings and general borrowings

Question 26

Eligible for Capitalisation : Specific borrowings 1

When an entity borrows funds specifically to obtain a particular qualifying asset, the borrowing costs that are directly related to that qualifying asset can be readily identified. [IAS 23.10].

The borrowing costs eligible for capitalisation would be the actual borrowing costs incurred on that specific borrowing during the period. [IAS 23.12].

Answer 26

When an entity borrows funds specifically to obtain a particular qualifying asset, the borrowing costs that are directly related to that qualifying asset can be readily identified. [IAS 23.10].

The borrowing costs eligible for capitalisation would be the actual borrowing costs incurred on that specific borrowing during the period. [IAS 23.12].

Question 27

Eligible for Capitalisation : Specific borrowings 2

Entities frequently borrow funds in advance of expenditure on qualifying assets and may temporarily invest the borrowings. The standard makes it clear that any investment income earned on the temporary investment of those borrowings needs to be deducted from the borrowing costs incurred and only the net amount capitalised [IAS 23.12, 13].

Answer 27

Entities frequently borrow funds in advance of expenditure on qualifying assets and may temporarily invest the borrowings. The standard makes it clear that any investment income earned on the temporary investment of those borrowings needs to be deducted from the borrowing costs incurred and only the net amount capitalised [IAS 23.12, 13].

Question 28

Eligible for Capitalisation : Specific borrowings 3

There is no restriction in IAS 23 on the type of investment in which the funds can be invested but, in our view, to maintain the conclusion that the funds are specific borrowings, the investment must be of a nature that does not expose the principal amount to the risk of not being recovered. The more risky the investment, the greater is the likelihood that the borrowing is not specific to the qualifying asset. If the investment returns a loss rather than income, such losses are not added to the borrowing costs to be capitalised.

Answer 28

There is no restriction in IAS 23 on the type of investment in which the funds can be invested but, in our view, to maintain the conclusion that the funds are specific borrowings, the investment must be of a nature that does not expose the principal amount to the risk of not being recovered. The more risky the investment, the greater is the likelihood that the borrowing is not specific to the qualifying asset. If the investment returns a loss rather than income, such losses are not added to the borrowing costs to be capitalised.

Question 29

Eligible for Capitalisation : General borrowings 1

IAS 23 concedes that there may be practical difficulties in identifying a direct relationship between particular borrowings and a qualifying asset and in determining
the borrowings that could otherwise have been avoided. [IAS 23.11].

Answer 29

IAS 23 concedes that there may be practical difficulties in identifying a direct relationship between particular borrowings and a qualifying asset and in determining
the borrowings that could otherwise have been avoided. [IAS 23.11].

Question 30

Eligible for Capitalisation : General borrowings 2

This could be the case if the financing activity of an entity is co-ordinated centrally, for example, if an entity borrows to meet its funding requirements as a whole and the construction of the qualifying asset is financed out of general borrowings.

Answer 30

This could be the case if the financing activity of an entity is co-ordinated centrally, for example, if an entity borrows to meet its funding requirements as a whole and the construction of the qualifying asset is financed out of general borrowings.

Question 31

Eligible for Capitalisation : General borrowings 3

Other circumstances that may cause difficulties are identified by the standard as follows:

• a group has a treasury function that uses a range of debt instruments to borrow funds at varying rates of interest and lends those funds on various bases to other entities in the group; or
• loans are denominated in or linked to foreign currencies and the group operates in highly inflationary economies or there are fluctuations in exchange rates. [IAS 23.11].

Answer 31

Other circumstances that may cause difficulties are identified by the standard as follows:

• a group has a treasury function that uses a range of debt instruments to borrow funds at varying rates of interest and lends those funds on various bases to other entities in the group; or
• loans are denominated in or linked to foreign currencies and the group operates in highly inflationary economies or there are fluctuations in exchange rates. [IAS 23.11].

Question 32

Eligible for Capitalisation : General borrowings 4

In these circumstances, determining the amount of borrowing costs that are directly attributable to the acquisition of a qualifying asset may be difficult and require the exercise of judgement. [IAS 23.11].

Answer 32

In these circumstances, determining the amount of borrowing costs that are directly attributable to the acquisition of a qualifying asset may be difficult and require the exercise of judgement. [IAS 23.11].

Question 33

Eligible for Capitalisation : General borrowings 5

When general borrowings are used in part to obtain a qualifying asset, IAS 23 requires the application of a capitalisation rate to the expenditure on that asset in determining the amount of borrowing costs eligible for capitalisation. However, the amount of borrowing costs capitalised during a period cannot exceed the amount of borrowing costs incurred during that period. [IAS 23.14]

Answer 33

When general borrowings are used in part to obtain a qualifying asset, IAS 23 requires the application of a capitalisation rate to the expenditure on that asset in determining the amount of borrowing costs eligible for capitalisation. However, the amount of borrowing costs capitalised during a period cannot exceed the amount of borrowing costs incurred during that period. [IAS 23.14]

Question 34

Eligible for Capitalisation : General borrowings 6

The capitalisation rate applied should be the weighted average of the borrowing costs applicable to all borrowings of the entity that are outstanding during the period, excluding borrowing costs applicable to borrowings made specifically for the purpose of obtaining a qualifying asset until substantially all the activities necessary to prepare that asset for its intended use or sale are complete. [IAS 23.14].
The capitalisation rate is then applied to the expenditure on the qualifying asset.

Answer 34

The capitalisation rate applied should be the weighted average of the borrowing costs applicable to all borrowings of the entity that are outstanding during the period, excluding borrowing costs applicable to borrowings made specifically for the purpose of obtaining a qualifying asset until substantially all the activities necessary to prepare that asset for its intended use or sale are complete. [IAS 23.14].
The capitalisation rate is then applied to the expenditure on the qualifying asset.

Question 35

Eligible for Capitalisation : General borrowings 7

Expenditure on a qualifying asset includes only that expenditure resulting in the payment of cash, the transfer of other assets or the assumption of interest-bearing liabilities. Such expenditure must be reduced by any progress payments and grants received in connection with the asset (see IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance – and Chapter 25). The standard accepts that, when funds are borrowed generally, the average carrying amount of the asset during a period, including borrowing costs previously capitalised, is normally a reasonable approximation of the expenditure to which the capitalisation rate is applied in that period.
[IAS 23.18].

Answer 35

Expenditure on a qualifying asset includes only that expenditure resulting in the payment of cash, the transfer of other assets or the assumption of interest-bearing liabilities. Such expenditure must be reduced by any progress payments and grants received in connection with the asset (see IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance – and Chapter 25). The standard accepts that, when funds are borrowed generally, the average carrying amount of the asset during a period, including borrowing costs previously capitalised, is normally a reasonable approximation of the expenditure to which the capitalisation rate is applied in that period.
[IAS 23.18].

Question 36

Eligible for Capitalisation : General borrowings 8

The standard does not provide specific guidance regarding interest income earned from temporarily investing excess general funds. However, any interest income earned is unlikely to be directly attributable to the acquisition or construction of a qualifying asset. In addition, the capitalisation rate required by IAS 23 focuses on the borrowings of the entity outstanding during the period of construction or acquisition and does not include temporary investments. As such, borrowing costs capitalised should not be reduced by interest income earned from the investment of general borrowings nor should such income be included in determining the appropriate capitalisation rate.

Answer 36

The standard does not provide specific guidance regarding interest income earned from temporarily investing excess general funds. However, any interest income earned is unlikely to be directly attributable to the acquisition or construction of a qualifying asset. In addition, the capitalisation rate required by IAS 23 focuses on the borrowings of the entity outstanding during the period of construction or acquisition and does not include temporary investments. As such, borrowing costs capitalised should not be reduced by interest income earned from the investment of general borrowings nor should such income be included in determining the appropriate capitalisation rate.

Question 37

Eligible for Capitalisation : General borrowings - Accrued costs and trade payables 1

IAS 23 states that expenditure on qualifying assets includes only that expenditure resulting in the payment of cash, the transfer of other assets or the assumption of interest-bearing liabilities. [IAS 23.18].

Answer 37

IAS 23 states that expenditure on qualifying assets includes only that expenditure resulting in the payment of cash, the transfer of other assets or the assumption of interest-bearing liabilities. [IAS 23.18].

Question 38

Eligible for Capitalisation : General borrowings - Accrued costs and trade payables 2

Therefore, in principle, costs of a qualifying asset that have only been accrued but have not yet been paid in cash should be excluded from the amount on which interest is capitalised, as by definition no interest can have been incurred on an accrued payment. The same principle can be applied to non-interest bearing liabilities e.g. non-interest-bearing trade payables or
retention money that is not payable until the asset is completed.

Answer 38

Yes, in the separate financial statements of the borrowing company. However, be a bit careful about the consolidated financial statements, because based on the inter-company relationship (subsidiary or associate?), the inter-company loan might be eliminated. Also, let me point out one more issue in relation to inter-company loans: often, they are provided interest-free.

Question 39

Eligible for Capitalisation : General borrowings - Accrued costs and trade payables 3

The effect of applying this principle is often merely to delay the commencement of the capitalisation of interest since the capital expenditure will be included in the calculation once it has been paid in cash. If the time between incurring the cost and cash payment is not that great, the impact of this may not be material.

Answer 39

The effect of applying this principle is often merely to delay the commencement of the capitalisation of interest since the capital expenditure will be included in the calculation once it has been paid in cash. If the time between incurring the cost and cash payment is not that great, the impact of this may not be material.

Question 40

Eligible for Capitalisation : Can you capitalize foreign exchange loss on specifically borrowed money in a foreign currency?

No, you cannot do it fully.
Yes, IAS 23 says that exchange differences on foreign currency borrowings are a borrowing cost to the extent that they are regarded as an adjustment of interest cost. Simply speaking – you can capitalize the difference between the interest on the foreign currency loan and the hypothetical interest expense in your own (functional currency), because that’s regarded as borrowing cost.
The rest must be expensed in profit or loss.

Answer 40

No, you cannot do it fully.
Yes, IAS 23 says that exchange differences on foreign currency borrowings are a borrowing cost to the extent that they are regarded as an adjustment of interest cost.
Simply speaking – you can capitalize the difference between the interest on the foreign currency loan and the hypothetical interest expense in your own (functional currency), because that’s regarded as borrowing cost.
The rest must be expensed in profit or loss.

Question 41

Eligible for Capitalisation : Can you capitalize interest cost on inter-company loan for qualifying assets?1

Yes, in the separate financial statements of the borrowing company. However, be a bit careful about the consolidated financial statements, because based on the inter-company relationship (subsidiary or associate?), the inter-company loan might be eliminated. Also, let me point out one more issue in relation to inter-company loans: often, they are provided interest-free.

Answer 41

Yes, in the separate financial statements of the borrowing company. However, be a bit careful about the consolidated financial statements, because based on the inter-company relationship (subsidiary or associate?), the inter-company loan might be eliminated. Also, let me point out one more issue in relation to inter-company loans: often, they are provided interest-free.

Question 42

Eligible for Capitalisation : Can you capitalize interest cost on inter-company loan for qualifying assets? 2

Under IFRS 9, you should recognize almost all financial instruments at their fair value (sometimes plus transaction cost) and if a subsidiary gets an interest-free loan from a parent, it’s nominal amount is not at fair value.
Therefore, a subsidiary needs to set the fair value of the loan received using the market interest rates and book the difference between the loan’s fair value and the cash received in profit or loss (based on the substance of a transaction).
Then, interest expense calculated by the effective interest method is capitalized. I know, this might sound odd: the loan is interest-free, but you still need to capitalize some borrowing cost on it. Careful!

Answer 42

Under IFRS 9, you should recognize almost all financial instruments at their fair value (sometimes plus transaction cost) and if a subsidiary gets an interest-free loan from a parent, it’s nominal amount is not at fair value.
Therefore, a subsidiary needs to set the fair value of the loan received using the market interest rates and book the difference between the loan’s fair value and the cash received in profit or loss (based on the substance of a transaction).
Then, interest expense calculated by the effective interest method is capitalized. I know, this might sound odd: the loan is interest-free, but you still need to capitalize some borrowing cost on it. Careful!

Question 43

Commencement of capitalisation 1

IAS 23 requires that capitalisation of borrowing costs as part of the cost of a qualifying asset commences when the entity first meets all of the following conditions:

(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for its intended use or sale.
[IAS 23.17].

Answer 43

IAS 23 requires that capitalisation of borrowing costs as part of the cost of a qualifying asset commences when the entity first meets all of the following conditions:

(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. [IAS 23.17].

Question 44

Commencement of capitalisation 2

The standard is explicit that only that expenditure on a qualifying asset that has resulted in payments of cash, transfers of other assets or the assumption of interest-bearing liabilities, may be included in determining borrowing costs. Such expenditure must be reduced by any progress payments and grants received in connection with the asset. [IAS 23.18].

Answer 44

The standard is explicit that only that expenditure on a qualifying asset that has resulted in payments of cash, transfers of other assets or the assumption of interest-bearing liabilities, may be included in determining borrowing costs. Such expenditure must be reduced by any progress payments and grants received in connection with the asset. [IAS 23.18].

Question 45

Commencement of capitalisation 3

The activities necessary to prepare an asset for its intended use or sale can include more than the physical construction of the asset. Necessary activities can start before the commencement of physical construction and include, for example, technical and
administrative work such as the activities associated with obtaining permits prior to the commencement of the physical construction. [IAS 23.19].
However, this does not mean that borrowing costs can be capitalised if the permits that are necessary for the construction are not expected to be obtained. Borrowing costs are capitalised as part of the cost of an asset when it is probable that they will result in future economic benefits to the entity and the costs can be measured reliably. [IAS 23.9].

Answer 45

The activities necessary to prepare an asset for its intended use or sale can include more than the physical construction of the asset. Necessary activities can start before the commencement of physical construction and include, for example, technical and
administrative work such as the activities associated with obtaining permits prior to the commencement of the physical construction. [IAS 23.19].
However, this does not mean that borrowing costs can be capitalised if the permits that are necessary for the construction are not expected to be obtained. Borrowing costs are capitalised as part of the cost of an asset when it is probable that they will result in future economic benefits to the entity and the costs can be measured reliably. [IAS 23.9].

Question 46

Commencement of capitalisation 4

Therefore, in assessing whether borrowing costs can be capitalised in advance of obtaining permits – assuming the borrowing costs otherwise meet the criteria – a judgement must be made, at the date the expenditure is incurred, as to whether it is sufficiently probable that the relevant permits will be granted.
Conversely, if during the application and approval process of such permits it is no longer expected that the necessary permits will be granted, capitalisation of borrowing costs should cease, any related borrowing costs that were previously capitalised should be
written off in accordance with IAS 36 – Impairment of Assets – and accordingly, the carrying amount of any related qualifying asset subject to development or redevelopment (or, if appropriate, the cash generating unit where such an asset belongs) should be tested
for impairment, where applicable

Answer 46

Therefore, in assessing whether borrowing costs can be capitalised in advance of obtaining permits – assuming the borrowing costs otherwise meet the criteria – a judgement must be made, at the date the expenditure is incurred, as to whether it is sufficiently probable that the relevant permits will be granted.
Conversely, if during the application and approval process of such permits it is no longer expected that the necessary permits will be granted, capitalisation of borrowing costs should cease, any related borrowing costs that were previously capitalised should be
written off in accordance with IAS 36 – Impairment of Assets – and accordingly, the carrying amount of any related qualifying asset subject to development or redevelopment (or, if appropriate, the cash generating unit where such an asset belongs) should be tested
for impairment, where applicable

Question 47

Commencement of capitalisation 5

Borrowing costs may not be capitalised during a period in which there are no activities that change the condition of the asset. For example a house-builder or property developer may not capitalise borrowing costs on its ‘land bank’ i.e. that land which is held for future development. Borrowing costs incurred while land is under development are capitalised during the period in which activities related to the development are being
undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity represent a holding cost of the land. Such costs do not qualify for capitalisation and hence would be considered
a period cost (i.e. expensed as incurred). [IAS 23.19].

Answer 47

Borrowing costs may not be capitalised during a period in which there are no activities that change the condition of the asset. For example a house-builder or property developer may not capitalise borrowing costs on its ‘land bank’ i.e. that land which is held for future development. Borrowing costs incurred while land is under development are capitalised during the period in which activities related to the development are being
undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity represent a holding cost of the land. Such costs do not qualify for capitalisation and hence would be considered
a period cost (i.e. expensed as incurred). [IAS 23.19].

Question 48

Commencement of capitalisation 6

An entity may make a payment to a third party contractor before that contractor commences construction activities. It is unlikely to be appropriate to capitalise borrowing costs in such a situation until the contractor commences activities that are necessary to prepare the asset for its intended use or sale.

Answer 48

An entity may make a payment to a third party contractor before that contractor commences construction activities. It is unlikely to be appropriate to capitalise borrowing costs in such a situation until the contractor commences activities that are necessary to prepare the asset for its intended use or sale.

Question 49

Commencement of capitalisation : Expenditures on a qualifying asset 1

In June 2018, the Interpretation Committee received a request about the amount of borrowing costs eligible for capitalisation when an entity uses general borrowings to obtain a qualifying asset. In the fact pattern described in the request:

• an entity constructs a qualifying asset;
• the entity has no borrowings at the start of the construction of the qualifying asset;
• partway through construction, it borrows funds generally and uses them to finance the construction of the qualifying asset; and
• the entity incurs expenditures on the qualifying asset both before and after it incurs borrowing costs on the general borrowings.

Answer 49

In June 2018, the Interpretation Committee received a request about the amount of borrowing costs eligible for capitalisation when an entity uses general borrowings to obtain a qualifying asset. In the fact pattern described in the request:

• an entity constructs a qualifying asset;
• the entity has no borrowings at the start of the construction of the qualifying asset;
• partway through construction, it borrows funds generally and uses them to finance the construction of the qualifying asset; and
• the entity incurs expenditures on the qualifying asset both before and after it incurs borrowing costs on the general borrowings.

Question 50

Commencement of capitalisation : Expenditures on a qualifying asset 2

The request asked whether an entity includes expenditures on a qualifying asset incurred before obtaining general borrowings in determining the amount of borrowing costs eligible for capitalisation.

Answer 50

The request asked whether an entity includes expenditures on a qualifying asset incurred before obtaining general borrowings in determining the amount of borrowing costs eligible for capitalisation.

Question 51

Commencement of capitalisation : Expenditures on a qualifying asset 3

The Interpretation Committee observed that an entity applies paragraph 17 of IAS 23 in determining the commencement date for capitalising borrowing costs. This paragraph requires an entity to begin capitalising borrowing costs when it meets of the following
conditions:
• it incurs expenditures for the asset;
• it incurs borrowing costs; and
• it undertakes activities that are necessary to prepare the asset for its intended use or sale. [IAS 23.17]

Answer 51

The Interpretation Committee observed that an entity applies paragraph 17 of IAS 23 in determining the commencement date for capitalising borrowing costs. This paragraph requires an entity to begin capitalising borrowing costs when it meets of the following
conditions:
• it incurs expenditures for the asset;
• it incurs borrowing costs; and
• it undertakes activities that are necessary to prepare the asset for its intended use or sale. [IAS 23.17]

Question 52

Commencement of capitalisation : Expenditures on a qualifying asset 4

Applying paragraph 17 of IAS 23 to the fact pattern described in the request, the entity would not begin capitalising borrowing costs until it incurs borrowing costs.

Answer 52

Applying paragraph 17 of IAS 23 to the fact pattern described in the request, the entity would not begin capitalising borrowing costs until it incurs borrowing costs.

Question 53

Suspension of capitalisation 1

An entity may incur borrowing costs during an extended period in which it suspends the activities necessary to prepare an asset for its intended use or sale.
In such a case, IAS 23 states that capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted. [IAS 23.20, 21].

Answer 53

An entity may incur borrowing costs during an extended period in which it suspends the activities necessary to prepare an asset for its intended use or sale.
In such a case, IAS 23 states that capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted. [IAS 23.20, 21].

Question 54

Suspension of capitalisation 2

Such costs are costs of holding partially completed assets and do not qualify for capitalisation. However, the standard distinguishes between extended periods of interruption (when capitalisation would be suspended) and periods of temporary delay that are a necessary part of preparing the asset for its intended purpose (when capitalisation is not normally suspended). [IAS 23.21].

Answer 54

Such costs are costs of holding partially completed assets and do not qualify for capitalisation. However, the standard distinguishes between extended periods of interruption (when capitalisation would be suspended) and periods of temporary delay that are a necessary part of preparing the asset for its intended purpose (when capitalisation is not normally suspended). [IAS 23.21].

Question 55

Suspension of capitalisation 3

An entity does not normally suspend capitalising borrowing costs during a period when it carries out substantial technical and administrative work. Also, capitalising borrowing costs would not be suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale.

Answer 55

An entity does not normally suspend capitalising borrowing costs during a period when it carries out substantial technical and administrative work. Also, capitalising borrowing costs would not be suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale.

Question 56

Suspension of capitalisation 4

For example, capitalisation would continue during the extended period in a situation where construction of a bridge is delayed by temporary adverse weather conditions or high water levels, if such conditions are common during the construction period in the geographical region involved. [IAS 23.21].
Similarly, capitalisation continues during periods when inventory is undergoing slow transformation – the example is given of inventories taking an extended time to mature (presumably such products as Scotch whisky or Cognac, although the relevance of this may be limited as these products are likely to meet the
optional exemption for ‘routinely manufactured’ products

Answer 56

For example, capitalisation would continue during the extended period in a situation where construction of a bridge is delayed by temporary adverse weather conditions or high water levels, if such conditions are common during the construction period in the geographical region involved. [IAS 23.21].
Similarly, capitalisation continues during periods when inventory is undergoing slow transformation – the example is given of inventories taking an extended time to mature (presumably such products as Scotch whisky or Cognac, although the relevance of this may be limited as these products are likely to meet the
optional exemption for ‘routinely manufactured’ products

Question 57

Suspension of capitalisation 5

Borrowing costs incurred during extended periods of interruption caused, for example, by a lack of funding or a strategic decision to hold back project developments during a period of economic downturn are not considered a necessary part of preparing the asset for its intended purpose and should not be capitalised.

Answer 57

Borrowing costs incurred during extended periods of interruption caused, for example, by a lack of funding or a strategic decision to hold back project developments during a period of economic downturn are not considered a necessary part of preparing the asset for its intended purpose and should not be capitalised.

Question 58

Suspension of capitalisation :
Impairment considerations 1

When it is determined that capitalisation is appropriate, an entity continues to capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of the asset even if the capitalisation causes the expected ultimate cost of the asset to exceed its recoverable amount or net realisable value.

Answer 58

When it is determined that capitalisation is appropriate, an entity continues to capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of the asset even if the capitalisation causes the expected ultimate cost of the asset to exceed its recoverable amount or net realisable value.

Question 59

Suspension of capitalisation :
Impairment considerations 2

When the carrying amount of the qualifying asset exceeds its recoverable amount or net realisable value (depending on the type of asset), the carrying amount of the asset must be written down or written off in accordance with the relevant IFRSs.

Answer 59

When the carrying amount of the qualifying asset exceeds its recoverable amount or net realisable value (depending on the type of asset), the carrying amount of the asset must be written down or written off in accordance with the relevant IFRSs.

Question 60

Suspension of capitalisation :
Impairment considerations 3

IAS 36 will apply if the qualifying asset is property, plant and equipment accounted for in accordance with IAS 16 or if the asset is otherwise within the scope of IAS 36. For inventories that are qualifying assets, the requirements of IAS 2 – Inventories – on net realisable value will apply

Answer 60

IAS 36 will apply if the qualifying asset is property, plant and equipment accounted for in accordance with IAS 16 or if the asset is otherwise within the scope of IAS 36. For inventories that are qualifying assets, the requirements of IAS 2 – Inventories – on net realisable value will apply

Question 61

Cessation of capitalisation 1

The standard requires capitalisation of borrowing costs to cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. [IAS 23.22].

Answer 61

The standard requires capitalisation of borrowing costs to cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. [IAS 23.22].

Question 62

Cessation of capitalisation 2

An asset is normally ready for its intended use or sale when the physical construction of the asset is complete, even though routine administrative work might still continue. If minor modifications, such as the decoration of a property to the purchaser’s or user’s specification, are all that are outstanding, this indicates that substantially all the activities are complete. [IAS 23.23]. In some cases there may be a
requirement for inspection (e.g. to ensure that the asset meets safety requirements) before the asset can be used. Usually ‘substantially all the activities’ would have been completed before this point in order to be ready for inspection. In such a situation, capitalisation would cease prior to the inspection.

Answer 62

An asset is normally ready for its intended use or sale when the physical construction of the asset is complete, even though routine administrative work might still continue. If minor modifications, such as the decoration of a property to the purchaser’s or user’s specification, are all that are outstanding, this indicates that substantially all the activities are complete. [IAS 23.23]. In some cases there may be a
requirement for inspection (e.g. to ensure that the asset meets safety requirements) before the asset can be used. Usually ‘substantially all the activities’ would have been completed before this point in order to be ready for inspection. In such a situation, capitalisation would cease prior to the inspection.

Question 63

Cessation of capitalisation 3

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, capitalisation should cease for the borrowing costs on the portion of borrowings attributable to that part when substantially all the activities necessary to prepare that part for its intended use or sale are completed.
[IAS 23.24].

Answer 63

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, capitalisation should cease for the borrowing costs on the portion of borrowings attributable to that part when substantially all the activities necessary to prepare that part for its intended use or sale are completed.
[IAS 23.24].

Question 64

Cessation of capitalisation 4

An example of this might be a business park comprising several buildings, each of which is capable of being fully utilised individually while construction continues on other parts. [IAS 23.25].
This principle also applies to single buildings where one part is capable of being fully utilised even if the building as a whole is incomplete (for example, individual floors of a high-rise office building).

Answer 64

An example of this might be a business park comprising several buildings, each of which is capable of being fully utilised individually while construction continues on other parts. [IAS 23.25].
This principle also applies to single buildings where one part is capable of being fully utilised even if the building as a whole is incomplete (for example, individual floors of a high-rise office building).

Question 65

Cessation of capitalisation 5

For a qualifying asset that needs to be complete in its entirety before any part can be used as intended, it would be appropriate to capitalise related borrowing costs until all the activities necessary to prepare the entire asset for its intended use or sale are substantially complete. An example of this is an industrial plant, such as a steel mill, involving several processes which are carried out in sequence at different parts of the plant within the same site.
[IAS 23.25].

Answer 65

For a qualifying asset that needs to be complete in its entirety before any part can be used as intended, it would be appropriate to capitalise related borrowing costs until all the activities necessary to prepare the entire asset for its intended use or sale are substantially complete. An example of this is an industrial plant, such as a steel mill, involving several processes which are carried out in sequence at different parts of the plant within the same site.
[IAS 23.25].

Question 66

Cessation of capitalisation :
Borrowing costs on ‘land expenditures’ 1

In June 2018, the Interpretation Committee received a request about when an entity ceases capitalising borrowing costs on land. In the fact pattern described in the request:

• an entity acquires and develops land and thereafter constructs a building on that land – the land represents the area on which the building will be constructed;
• both the land and the building meet the definition of a qualifying asset; and
• the entity uses general borrowings to fund the expenditures on the land and construction of the building.

Answer 66

In June 2018, the Interpretation Committee received a request about when an entity ceases capitalising borrowing costs on land. In the fact pattern described in the request:

• an entity acquires and develops land and thereafter constructs a building on that land – the land represents the area on which the building will be constructed;
• both the land and the building meet the definition of a qualifying asset; and
• the entity uses general borrowings to fund the expenditures on the land and construction of the building.

Question 67

Cessation of capitalisation :
Borrowing costs on ‘land expenditures’ 2

The request asked whether the entity ceases capitalising borrowing costs incurred in respect of expenditures on the land (‘land expenditures’) once it starts constructing the building or whether it continues to capitalise borrowing costs incurred in respect of land expenditures while it constructs the building.

Answer 67

The request asked whether the entity ceases capitalising borrowing costs incurred in respect of expenditures on the land (‘land expenditures’) once it starts constructing the building or whether it continues to capitalise borrowing costs incurred in respect of land expenditures while it constructs the building.

Question 68

Cessation of capitalisation :
Borrowing costs on ‘land expenditures’ 3

The Interpretation Committee observed that in applying IAS 23 to determine when to cease capitalising borrowing costs incurred on land expenditures an entity considers:

• the intended use of the land; and
• in applying paragraph 24 of IAS 23, whether the land is capable of being used for its intended purpose while the construction continues on the building.

Answer 68

The Interpretation Committee observed that in applying IAS 23 to determine when to cease capitalising borrowing costs incurred on land expenditures an entity considers:

• the intended use of the land; and
• in applying paragraph 24 of IAS 23, whether the land is capable of being used for its intended purpose while the construction continues on the building.

Question 69

Cessation of capitalisation :
Borrowing costs on ‘land expenditures’ 4

Land and buildings are used for owner-occupation (and therefore recognised as property, plant and equipment applying IAS 16); rent or capital appreciation (and
therefore recognised as investment property applying IAS 40 – Investment Property); or for sale (and therefore recognised as inventory applying IAS 2).
The intended use of the land is not simply for the construction of a building on the land, but rather to use it for one of these three purposes.

Answer 69

Land and buildings are used for owner-occupation (and therefore recognised as property, plant and equipment applying IAS 16); rent or capital appreciation (and
therefore recognised as investment property applying IAS 40 – Investment Property); or for sale (and therefore recognised as inventory applying IAS 2).
The intended use of the land is not simply for the construction of a building on the land, but rather to use it for one of these three purposes.

Question 70

Cessation of capitalisation :
Borrowing costs on ‘land expenditures’ 5

If the land is not capable of being used for its intended purpose while construction continues on the building, the entity considers the land and the building together to assess when to cease capitalising borrowing costs on the land expenditures. In this situation, the land would not be ready for its intended use or sale until substantially all the activities necessary to prepare both the land and building for that intended use or sale are complete.

Answer 70

If the land is not capable of being used for its intended purpose while construction continues on the building, the entity considers the land and the building together to assess when to cease capitalising borrowing costs on the land expenditures. In this situation, the land would not be ready for its intended use or sale until substantially all the activities necessary to prepare both the land and building for that intended use or sale are complete.

Question 71

Disclosure Requirements 1

An entity shall disclose:
• the amount of borrowing costs capitalised during the period; and
• the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.
[IAS 23.26].

Answer 71

An entity shall disclose:
• the amount of borrowing costs capitalised during the period; and
• the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.
[IAS 23.26].

Question 72

Disclosure Requirements 2

An entity may need to disclose additional information in relation to its borrowing costs in order to comply with
requirements in other IFRSs. For example, disclosures required by IAS 1 include:

• the nature and amount of material items included in profit or loss; [IAS 1.97]
• the measurement bases used in preparing the financial statements and other accounting policies used that are relevant to an understanding of the financial
statements ; [IAS 1.117] and
• the significant judgements made in the process of applying an entity’s accounting policies that have the most significant effect on the recognised amounts (e.g.
criteria in determining a qualifying asset or a ‘part’ of a qualifying asset, including definition of ‘substantial period of time’). [IAS 1.122].

Answer 72

An entity may need to disclose additional information in relation to its borrowing costs in order to comply with
requirements in other IFRSs. For example, disclosures required by IAS 1 include:

• the nature and amount of material items included in profit or loss; [IAS 1.97]
• the measurement bases used in preparing the financial statements and other accounting policies used that are relevant to an understanding of the financial
statements ; [IAS 1.117] and
• the significant judgements made in the process of applying an entity’s accounting policies that have the most significant effect on the recognised amounts (e.g.
criteria in determining a qualifying asset or a ‘part’ of a qualifying asset, including definition of ‘substantial period of time’). [IAS 1.122].