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IAS 23 establishes the accounting treatment for borrowing costs. It requires that borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset be capitalized as part of the cost of that asset. A qualifying asset takes a substantial period of time to get ready for its intended use or sale. Borrowing costs include interest, amortization of discounts or premiums, finance charges, and exchange differences from foreign currency borrowings. Capitalization should begin when expenditures are incurred and activities are undertaken to prepare the asset. Capitalization ceases when the asset is substantially complete. An entity must disclose its policy and amounts of capitalized borrowing costs.
IAS 23 establishes the accounting treatment for borrowing costs. It requires that borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset be capitalized as part of the cost of that asset. A qualifying asset takes a substantial period of time to get ready for its intended use or sale. Borrowing costs include interest, amortization of discounts or premiums, finance charges, and exchange differences from foreign currency borrowings. Capitalization should begin when expenditures are incurred and activities are undertaken to prepare the asset. Capitalization ceases when the asset is substantially complete. An entity must disclose its policy and amounts of capitalized borrowing costs.
IAS 23 establishes the accounting treatment for borrowing costs. It requires that borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset be capitalized as part of the cost of that asset. A qualifying asset takes a substantial period of time to get ready for its intended use or sale. Borrowing costs include interest, amortization of discounts or premiums, finance charges, and exchange differences from foreign currency borrowings. Capitalization should begin when expenditures are incurred and activities are undertaken to prepare the asset. Capitalization ceases when the asset is substantially complete. An entity must disclose its policy and amounts of capitalized borrowing costs.
attributable to the acquisition, construction or production of a qualifying assets form a part of the cost of that assets. Scope
IAS 23 applies to accounting for
borrowing cost for qualifying assets. qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Cont…. Borrowing cost may include: 1) Interest on bank O/D or short term or long term borrowings 2) Amortization of discount or premium relating to borrowings 3) Finance charge in respect of finance lease 4) Exchange differences arising from foreign currency borrowings The Standard applies only to borrowing costs relating to external borrowings and not to equity. Therefore, the Standard does not deal with the imputed or actual cost of equity, including preferred capital not classified as equity. On December 1, 20X4, Compassionate Inc. began construction of homes for those families that were hit by the tsunami disaster and were homeless. The construction is expected to take 3.5 years. It is being financed by issuance of bonds for $7 million at 12% per annum. The bonds were issued at the beginning of the construction. The bonds carry a 1.5% issuance cost. The project is also financed by issuance of share capital with a 14% cost of capital. Compassionate Inc. has opted under IAS 23 to capitalize borrowing costs. Required Compute the borrowing costs that need to be capitalized under IAS 23. Since these homes are “qualifying assets,” borrowing costs can be capitalized and are computed thus: a. Interest on $7 million bond = $7,000,000 ×12% = $840,000 b. Amortization of issuance costs of the bond (using the straight-line method)= [(0.015 × $7,000,000 ) / 3.5 years] =$30,000 Total borrowing to be capitalized = $840,000 + $30,000 = $870,000 qualifying assets Assets that are ready for their intended use or sale when acquired are not qualifying assets as envisioned by this Standard. Qualifying assets, for the purposes of this Standard, are assets that take a substantial period of time to get ready for their intended use. Examples of qualifying assets include A toll bridge that takes a couple of years to construct before it is ready for use and is opened to the public A power plant that takes a substantial period of time to get ready for its intended use A hydroelectric dam that services the needs of a village and takes a considerable period of time to construct Inventories that are routinely manufactured or are produced on a repetitive basis over a short period of time are obviously not qualifying assets. However, inventories that require a substantial period of time to bring to a salable condition can be regarded as qualifying assets for the purposes of this Standard. Cont…. Any of the following may be qualifying assets: a) Inventory b) Manufacturing plants c) Power generation facilities d) Intangibles e) Investment properties Recognition Benchmark Treatment Under the benchmark treatment, borrowing costs shall be recognized as an expense in the period in which they are incurred. When the benchmark treatment for recognizing borrowing costs is used, these costs are expensed regardless of how they are applied. Allowed Alternative Treatment Under the allowed alternative treatment, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset shall be capitalized as part of the cost of that asset. Capitalization of borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset as part of the cost of the asset is possible only if both these conditions are met: It is probable that they will result in future economic benefits to the entity. The costs can be measured reliably. (If borrowing costs do not meet these criteria, then they are expensed Recognition Amendments to IAS 23 Effective January 1, 2009 During March 2007, the IASB issued amendments to IAS 23. These amendments eliminate the option available under the existing standard to recognize borrowing costs as an expense. Under the revised standard, to the extent that borrowing costs relate to the acquisition, construction or production of a “qualifying asset,” they should be capitalized as part of the cost of the asset. All other borrowing costs should be expensed as incurred. The revised standard is effective for annual periods beginning on or after January 1, 2009. Early application is permitted but retrospective application is not permitted. Borrowing cost eligible or capitalization -cost that would have been avoided if expenditure of qualifying assets have not been made -any investment income from the temporary investment of that fund should be deducted from B.C. Capitalizations rate Capitalization rate should be the weighted average of the borrowing cost applicable to the borrowings Commencement of capitalization
At commencement date is the
date when an entity first meet all of the followings: 1. It incurs expenditure 2. In incurs borrowings 3. It undertakes activity to prepare the assets Cessation of capitalization When substantially all of the activities necessary to prepare the qualifying assets for its intended use or sale are complete. Disclosures 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