IAS 23

BORROWING COSTS

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Learning Objectives
At the completion of studying this
chapter, you will be able to:

Define qualifying assets

Identify what borrowing costs are
Identify pre-conditions for the capitalisation of
borrowing costs
distinguish between the accounting treatment
of borrowing costs under US GAAP and IFRS
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List of Applicable IFRS

Topic List

Standards

Borrowing Costs

IAS 23

Property, Plant and Equipment

IAS 16

Investment Property

IAS 40

Inventories
Intangible Assets

IAS 2
IAS 38

The objective of IAS 38

The objective of IAS 38 is to prescribe the criteria

for determining whether borrowing costs can be
capitalized

QUALIFYING ASSETS

A qualifying asset is an asset that necessarily

takes a substantial period of time to get ready for
its intended use or sale.
Assets that are ready for their intended use or
sale when acquired are NOT qualifying assets.
IAS 23 does not define substantial period of
time.
However, an asset that normally takes twelve
months or more to be ready for its
intended use will usually be a qualifying
asset.
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QUALIFYING ASSETS: What do

you think?

a)

b)

c)

d)

Which of the following may not be considered a

qualifying asset under IAS 23?
GIBE IV power generation plant that normally
takes two years to construct.
An expensive sugar cane crasher that can be
purchased by sugar corporation from abroad.
A bridge on Wabi Shebele River at Somali Region
that usually takes more than a year to build.
A ship ordered by Ethiopian Shipping Lines that
normally takes one to two years to complete.
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ELEMENTS OF BORROWING
COSTS

Borrowing costs, as understood generally, refer to

interest costs.
Rather, borrowing costs also include other related
costs, such as:

Exchange differences arising from foreign currency

borrowings to the extent they are regarded as an
adjustment to interest costs
Finance charges in respect of finance leases
recognized in accordance with IFRS 16, Leases

ELEMENTS OF BORROWING
COSTS: What do you think?

a)

b)

c)
d)

e)

Which of the following costs may not be eligible for

capitalization as borrowing costs under IAS 23?
Interest on bonds issued to finance the construction of
a qualifying asset.
The cost of a preferred stock that is not classified as a
liability
Imputed cost of equity.
Exchange differences arising from foreign currency
borrowings to the extent they are regarded as an
adjustment to interest costs pertaining to a qualifying
asset.
b&c
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Borrowing Costs..ctd

IAS 23 does NOT deal with the actual or imputed

cost of equity, including preferred capital not
classified as a liability.

COMMENCEMENT OF
CAPITALIZATION

Capitalization of borrowing costs shall commence

when

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.

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SUSPENSION OF
CAPITALIZATION

Capitalization shall be suspended during

extended periods in which active development is
interrupted
Question:

should capitalization be suspended during an

interruption to the construction of a bridge during very
high water levels?

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SUSPENSION OF
CAPITALIZATION: What do you
think?

Capitalization of borrowing costs:

a) Shall be suspended during temporary periods
of delay.
b) May be suspended only during extended
periods of delays in which active development
is delayed.
c) Should never be suspended once capitalization
commences.
d) Shall be suspended only during extended
period of delays in which active development is
delayed.
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CESSATION OF CAPITALIZATION

Capitalization of borrowing costs ceases when

substantially all the activities are complete.

The asset is considered to be substantially

complete if all that is left are minor modifications.

When parts of a qualifying asset become ready

for use in stages, capitalization ceases on those
parts that are ready for use.

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DISCLOSURE

An entity shall disclose:

its accounting policy for the recognition of borrowing

costs,
the amount of borrowing costs capitalized during the
period, and
the capitalization rate used to determine the amount of
borrowing costs eligible for capitalization.

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Similarities and Difference

between IFRS and US GAAP

Similarities

Both capitalize borrowing costs (e.g., interest costs)

directly attributable to the acquisition, construction or
production of a qualifying asset.
Besides, qualifying assets are generally defined similarly
under both accounting models.

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CASE STUDY

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Case Study-II

A socially responsible multinational corporation (MNC)

decided to construct a tunnel that will link two sides of
the village that were separated by a natural disaster
years ago.
Realizing its role as a good corporate citizen, the MNC
has been in this village for a couple of years exploring
oil and gas in the nearby offshore area.
The tunnel would take two years to build and the total
capital outlay needed for the construction would be
not less than ETB20 million.
To allow itself a margin of safety, the MNC borrowed
ETB22 million from three sources and used the extra
ETB2 million for its working capital purposes.
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Case Studyctd

Financing was arranged in this way:

Bank term loans: ETB5 million at 7% per annum
Institutional borrowings: ETB7 million at 8% per
annum
Corporate bonds: ETB10 million at 9% per
annum
In the first phase of the construction of the tunnel,
there were idle funds of ETB10 million, which the
MNC invested for a period of six months.
Income from this investment was ETB500,000.
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Case Studyctd

Required : If the MNC applies IAS 23:

How would it treat the borrowing costs?
How would it capitalize the borrowing costs, and
what would it do with the investment income?

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Solution

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Similarities and Difference .

ctd

Significant Differences

Item of
Difference
Measurem
ent
of
borrowing
costs

US GAAP

IFRS

borrowing costs DO borrowing

costs
NOT
include include exchange
exchange
rate rate differences
differences.
capitalized
Interest
income borrowing costs are
cannot offset interest offset
by
costs
investment income
earned
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Questions?

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Thank You!

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