Borrowing Costs - IAS - 23
•Syllabus
6. Accounting for non-current assets
IAS 23 Borrowing Costs
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Borrowing Costs
(i) Some items of property, plant & equipment PPE take substantial time to get ready for their use.
E.g. development of a plot of land, and then asset may have to be constructed.
A business in this position may take out loan & incur finance charges.
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(ii) Alternatively, a business may acquire a complete asset immediately ready for use.
Cost of this asset would include financing cost incurred by 3rd party
during development phase
To enhance comparability of these two situations, asset in former case (i) is called a qualifying asset and
borrowing costs incurred by business for this qualifying asset form part of cost of asset.
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Calculation of Borrowing Costs
If business borrows funds specifically for a qualifying asset, it is easy to identify borrowing
cost.
Sometimes it is difficult to identify direct relationship between borrowings & qualifying
asset.
For example, many businesses coordinate their financing activities centrally.
HBLTheyNBP
have pool
of financing (loans) from different sources. @ @
20%21%
Debentures
@ 15%
In this case the amount of borrowing costs that should be capitalised is calculated by reference
to weighted average cost of general borrowings. © 2009 Prentice-Hall, Inc. 6 – 3
Calculation of Borrowing Costs
Specific Borrowing:
Where funds are specifically borrowed for qualifying asset, the amount of borrowing cost
less investment income if any on temporary investment of those funds shall be capitalized
Example 3
Swan Limited borrowed from bank on 12% per annum amounting to Rs. 1,000,000 for
construction of power generation facilities of company.
Loan was received on January 01 and utilized Rs. 300,000 on Qualifying Asset.
On January 01, company deposited remaining amount in a bank yielding interest @ 6%. Whole
of amount is withdrawn and paid to contractor on March 01.
Company returned loan to bank after 9 months i.e. on October 01. You are required to calculate
amount of borrowing cost eligible for capitalization.
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Calculation of Borrowing Costs
General borrowings
Amount to be capitalized is computed on basis of capitalisation rate, which is weighted
average of borrowing costs applicable to outstanding borrowing during the period, i.e
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Example 4
MCQ (Private) Limited has the following loans outstanding as at December 31, 20X5.
Loan – 1 @ 6% 300,000
Loan – 2 @ 8% 200,000
Loan – 3 @ 9% 150,000
Loans were brought from previous year. Neither loan is acquired during year nor paid.
The company spent following amounts on construction of an asset.
January 31, 20X5 70,000
April 01, 20X5 80,000
December 01, 20X5 10,000
Calculate: (i) Capitalization rate (ii) Borrowing cost eligible for capitalization.
Example 5 – Try yourselves
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Timelines of Capitalization of Borrowing Costs
Borrowing costs are capitalised from commencement date until the date when substantially all activities
necessary to prepare asset for its intended use are complete.
The commencement date is the first date when all three of following conditions are met:
(a) Company incurs expenditure on the asset
(b) Company incurs borrowing costs
(c) Company undertakes activities that are necessary to prepare asset for its intended use.
Cessation of capitalisation of borrowing costs is when asset is available for use & not when asset is
actually used.
E.g. shifting of business to property that has been constructed is delayed but property is complete,
interest incurred during period of delay is not added to cost of property.
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Qualifying Assets
Qualifying asset is an asset that necessarily takes a substantial time to get ready for its intended
use or sale.
Examples of qualifying assets
(a) manufacturing plants
(b) power generation facilities
(c) intangible assets
(d) investment properties.
Following are not Qualifying Assets
Financial assets
Inventories that are manufactured, or produced, over a short period of time
Assets that are ready for their intended use or sale when acquired
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Example
Identify qualifying assets:
(a) Power plant being in the process of manufacturing
(b) Inventories routinely manufactured;
(c) Asset ready for use;
(d) Special inventories requiring a substantial period for manufacturing.
(e) Special order for a special inventory that will be manufactured in 5 months.
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DISCLOSURES
An entity shall disclose:
(a) Amount of borrowing costs capitalised during the period;
(b) Capitalisation rate used to determine amount of borrowing costs.
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Excess of Carrying amount of Qualifying Asset over
Recoverable Amount
If carrying amount of qualifying asset exceeds its net realizable value, the carrying
amount is written down in accordance with requirements of other Standards
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