MUHAMMAD ABU BAKAR

FCCA, ACA

Accounting
for Fixed
Assets
 IAS 23
Borrowing Costs

IAS 23
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 SCOPE
1) The Standard does not deal with the actual or imputed
cost of equity, including preferred capital not classified
as a liability.

2) An entity is not required to apply the Standard to

borrowing costs directly attributable to the acquisition,
construction or production of:
a) Qualifying asset measured at fair value, for example
a biological asset; or
b) Inventories that are manufactured, or otherwise
produced, in large quantities on a repetitive basis,
for example, maturing whisky.
IAS 23
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 Definitions
Borrowing costs are interest and other costs that an
entity incurs in connection with the borrowing of funds.

A qualifying asset is an asset that necessarily takes a

substantial period of time to get ready for its intended
use or sale.

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 RecognitionPrinciple
Borrowing costs that are directly attributable to the
acquisition, construction or production of a
qualifying asset form part of the cost of that asset.
Other borrowing costs are recognized as an expense

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 Measurement
a) Where funds are borrowed specifically, borrowing
costs (e.g., interest and amortization of issue costs)
eligible for capitalization are the actual costs incurred
less any income earned on the temporary investment
of such borrowings.

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 Measurement
a)-Illustration
On 1 January 2014 ABC Co borrowed $ 3m to finance the production of two assets, both of which
were expected to take a year to build. Work started during 2014. The loan facility was drawn down
and incurred on 1 January 2014, and was utilized as follows, with the remaining funds invested
temporarily.
Asset A Asset B
$000 $000
1 January 2014 500 1,000
1 July 2014 500 1,000

The loan rate was 9% and ABC Co can invest surplus funds at 7%
Required:
Calculate the borrowing costs which may be capitalized for each of the assets and consequently the
cost of each asset as at 31 December 2014.

IAS 23
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 Measurement
b) Where funds are part of a general pool, the eligible
amount is determined by applying a capitalisation rate
to the expenditure on that asset. The capitalisation
rate will be the weighted average of the borrowing
costs applicable to the general pool. However
borrowing costs calculated in this way must not
exceed actual borrowing costs incurred.

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 Measurement
b)-Illustration-i
$
Loans

Bank Loan 18% 4,000,000

Bank Loan 20% 5,000,000
Bank Loan 22% 3,000,000
Total 12,000,000
The company year-end is 31 December 2014. Bank loan of 20% was taken on April 30, 2014. Other
loans were brought forward from 2013.
Capitalization rate = Borrowing costs incurred / borrowing outstanding
Required:
Calculate the capitalization rate.

IAS 23
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 Measurement
b)-Illustration-ii
XYZ Co had the following loans in place at the beginning and end of 2015:
1January 31 December
2015 2015
$ m S m
10% Bank loan repayable 2018 240 240
9.5% bank loan repayable 2019 160 160
8.9% debenture repayable 2017 - 150

The 8.9% debenture was issued to fund the construction of a qualifying asset (a piece of mining
equipment), construction of which began on 1 July 2015.
On 1 January 2015, XYZ Co began construction of a qualifying asset, a piece of machinery for a
hydroelectric plant, using existing borrowings. Expenditure drawn down for the construction was; $
30m on 1 January 2015, $ 20m on 1 October 2015.

Required:
Calculate the borrowing costs that can be capitalized for the hydroelectric plant machine.

IAS 23
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 Measurement
c) Capitalisation should commence when expenditures are being
incurred, borrowing costs are being incurred and activities that
are necessary to prepare the asset for its intended use or sale are
in progress (may include some activities prior to commencement
of physical production).
d) Capitalisation should be suspended during periods in which active
development is interrupted.
e) Capitalisation should cease when substantially all of the activities
necessary to prepare the asset for its intended use or sale are
complete.
f) If only minor modifications are outstanding, this indicates that
substantially all of the activities are complete.
g) Where construction is completed in stages, which can be used
while construction of the other parts continues, capitalisation of
attributable borrowing costs should cease when substantially all
of the activities necessary to prepare that part for its intended use
or sale are complete.
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 Measurement
Illustration
Apex issued a $10 million unsecured loan with a coupon (nominal) interest of 6% on 1 April 2009. The
loan is redeemable at a premium which means the loan has an effective finance cost of 7.5% per
annum. The loan was specifically issued to finance the building of a new store which meets the
definition of a qualifying asset in IAS 23. Construction of the store commenced on 1 May 2009 and it
was completed and ready for use on 28 February 2010, but did not open for trading until 1 April 2010.
During the year trading at Apexs other stores was below expectations so Apex suspended the
construction of the new store for a two-month period during July and August 2009. The proceeds of
the loan were temporarily invested for the month of April 2009 and earned interest of $40,000.

Required:
Calculate the net borrowing cost that should be capitalized as part of the cost of the new store and
the finance cost that should be reported in the income statement for the year ended 31 March
2010.

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 THANK
YOU IAS 23
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