IAS 23 - Chapter 27 - Borrowing Costs

Question 1

What does IAS 23 borrowing costs set out?

Answer 1

IAS 23 borrowing costs sets out the accounting rules in relation to capitalization of borrowing costs.

Question 2

What are the rules in relation to what costs are included in borrowing costs?

Answer 2

The borrowing costs must be directly attributable to the acquisition, construction or production of a qualifying asset.

A ‘directly attributable cost’ is one that would not have been incurred if the asset had not been acquired, constructed or produced.

Question 3

An entity can begin to capitalize borrowing costs when what 3 conditions are met?

Answer 3

An entity can begin to capitalize borrowing costs when all of the following conditions are met:

1 - expenditure on the asset has been/is being incurred.

2 - borrowing costs have been incurred.

3 - activities necessary to prepare the asset for its intended use or sale are underway.

Question 4

When can an entity no longer capitalize borrowing costs?

Answer 4

An entity can no longer capitalize borrowing costs when all activities necessary to prepare the qualifying asset for its intended use have been completed.

Question 5

What happens if work on an asset is suspended?

Answer 5

If work on an asset is suspended, the borrowing costs in this period cannot be capitalized but must be expensed to the SPLOCI.

Question 6

What’s the rule if borrowings have been raised generally?

Answer 6

If borrowings have been raised generally, then a weighted average rate shall be calculated and used for the capitalization of borrowing costs.

Question 7

How is interest income earned on surplus invested treated? (Assuming they occur while borrowing costs qualify for capitalization)

Answer 7

Interests earned on surplus funds invested reduces the amount of borrowing costs that can be capitalized.

Question 8

The 2 things should be disclosed in the financial statements in relation to the capitalization of borrowing costs?

Answer 8

The following shall be disclosed in the financial statements in relation to the capitalization of borrowing costs:

1 - the amount of borrowing costs capitalized during the year

2 - the capitalization rate used to determine the amount to be capitalized.