IAS 23

Borrowing Costs

1Objective and scope

IAS 23 prescribes the accounting treatment for borrowing costs. Its core principle: borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset; all other borrowing costs are expensed in the period incurred.

2Key definitions

Borrowing costs

Interest and other costs an entity incurs in connection with borrowing funds, including interest expense calculated using the effective interest method, finance charges on lease liabilities, and exchange differences from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs.

Qualifying asset

An asset that necessarily takes a substantial period of time to get ready for its intended use or sale - e.g. a self-constructed factory, a power plant under construction, or inventory that requires a substantial production period.

3Capitalisation

Capitalisation begins when all three conditions are met: expenditures for the asset are being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for its intended use or sale are in progress. Capitalisation is suspended during extended periods in which active development is interrupted, and ceases when substantially all the activities necessary to prepare the asset for its intended use or sale are complete.

Type of borrowing	How the capitalised amount is determined
Specific borrowing, taken out specifically to fund the qualifying asset	Actual borrowing costs incurred on that borrowing during the period, less any investment income earned on the temporary investment of unspent funds
General borrowings, not specific to any one asset	A capitalisation rate = the weighted average of the borrowing costs applicable to the entity's general borrowings outstanding during the period, applied to expenditure on the asset

4Presentation and disclosure

The amount of borrowing costs capitalised during the period
The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation, where general borrowings were used

5Examinable focus

What KASNEB tests

Computing the capitalised borrowing cost for a specific loan (deducting investment income earned on temporarily-invested surplus funds) and for a pool of general borrowings (the weighted average capitalisation rate applied to qualifying expenditure, capped at the actual borrowing costs incurred) is a standing numerical question, often combined with an IAS 16 PPE question.