IAS
23 – BORROWING COSTS
BORROWING COSTS
Borrowing
costs are interest costs and other costs that the entity incurs in connection
with the borrowing of funds.
Qualifying asset is
an asset that takes a substantial period of time to get ready for its intended
use or sale.
ACCOUNTING TREATMENT
·
Borrowing costs that are directly
attributable to the acquisition, construction or production of an asset are
included in the cost of that asset.
·
Other borrowing costs are recognised as
an expense in the period in which they are incurred.
COMMENCEMENT OF
CAPITALISATION
Capitalization
commerce when
1.
Expenditures for the asset are being incurred
2.
Borrowing costs are being incurred
3.
Activities that are necessary to prepare the asset for its intended use or sale
are in progress.
SUSPENSION OF
CAPITALISATION
Capitalisation
of borrowing costs shall be suspended during extended periods in which active
development is interrupted.
NOTE: Suspension excludes
1.
a period when substantial technical and administrative work is being carried
out.
2.
when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
CESSATION OF
CAPITALISATION
Capitalisation
of borrowing costs shall cease when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete.
HOW DO YOU CAPITALISE?
Capitalisation
of borrowing cost is done based on type of borrowing. These are
SPECIFIC BORROWINGS
Specific
borrowings are funds specifically borrowed for the purpose of acquiring, construction
or producing a qualifying asset.
To
calculate for the borrowing cost for specific borrowings, subtract investment
or interest income from the actual cost incurred on the specific borrowings. This
is shown by the mathematical formula below:
GENERAL BORROWINGS
General borrowings are other borrowings that could have been repaid if the expenditure on the qualifying asset had not been incurred. Apply the capitalisation rate (calculated as the weighted average) to the borrowing funds on that qualifying asset. The mathematical formula for the capitalisation rate is shown below:
Capitalisation
rate = (Total interest)/ (Total loans )
× 100
Note: when
calculating capitalisation rate for general borrowings, don’t include specific
borrowings in your computation.
To
calculate for the borrowing cost for general borrowings, multiply the
capitalisation rate on the general borrowings used on that qualifying asset. This
is shown by the mathematical formula below:
Borrowing
Cost = Capitalisation rate × pool funds used for qualifying asset
DISCLOSURE
The
financial statements shall disclose:
·
The accounting policy adopted for
borrowing costs.
·
The amount of borrowing costs
capitalized during the period.
·
The capitalisation rate used to
determine the amount of borrowing costs eligible for capitalisation.