IAS 23 prescribes the accounting treatment for borrowing costs and provides guidelines for capitalizing borrowing costs for qualifying assets. Borrowing costs eligible for capitalization include interest expense, finance charges, and certain exchange differences from foreign currency borrowings. Capitalization begins when expenditures on the asset are incurred and activities to prepare it for use are in progress. Capitalization ceases when substantially all activities to prepare the asset are complete. The amount capitalized is either the actual borrowing costs of specific loans obtained for the asset or a capitalization rate applied to qualifying asset expenditures.

1. IAS 23: Borrowing Costs
Roshankumar S Pimpalkar
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2. IAS 23 prescribes the accounting treatment for borrowing cost. It also gives
guidelines on determining the amount and timing for the capitalisation of borrowing
costs, if any.
This standard does not deal with actual or imputed cost of equity. In addition, two
types of assets that would otherwise be qualifying assets are excluded from the
scope of IAS 23:
Qualifying assets measured at fair value, such as biological assets accounted
for under IAS 41: Agriculture
Inventories that are manufactured, or otherwise produced, in large quantities
on a repetitive basis; even if they take a substantial period to get ready for
sale (e.g. maturing whisky)
However this exclusion does not prohibit entities from following the capitalisation
approach in respect of such assets if they choose to do so as a matter of accounting
policy.
Borrowing Costs are interest and other costs incurred by an enterprise in
connection with the borrowing of funds.
e.g.
Interest expense calculated using effective interest rate method
Finance charges in respect of finance lease
Exchange differences arising from foreign currency borrowings to the extent
that they are regarded as an adjustment to the interest costs.
Basic principles of Capitalisation of Borrowing costs
Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset shall be capitalised as a part of the cost of
that asset.
All other borrowing costs incurred during the period shall be recognised as an
expense.
As per IFRIC 1.8, capitalisation is not permitted for the periodic unwinding of
the discount in relation to changes in obligations to dismantle, remove or
restore the item of property, plant and equipment. The periodic unwinding of
the discount shall be recognised in profit or loss as a finance cost as it occurs.
Qualifying asset is an asset that necessarily takes substantial period of time to get
ready for its intended use or sale.
General recognition and measurement criteria for assets:
Borrowing costs are capitalised only when it is probable that they will result in
future economic benefits to the enterprise and the costs can be measured
reliably.
If the capitalisation of borrowing costs leads to an asset’s carrying amount
exceeding its recoverable amount, the impairment requirements under IAS
36: Impairment of Assets apply.
Commencing the capitalisation of borrowing costs
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3. The capitalisation of borrowing costs, as a part of cost of qualifying asset, shall
commence when all these factors are present:
Expenditure on qualifying asset is incurred through payments of cash,
transfer of other assets or the assumption of interest bearing liabilities.
Borrowing costs are interest and other costs incurred by an enterprise in
connection with the borrowing of funds. The company shall therefore have
outstanding borrowings.
The activities necessary to prepare the asset for intended use or sale involve
more than the physical construction of asset. They include technical and
administrative work prior to the commencement of physical construction, such
as the activities associated with obtaining permits prior to the commencement
of the physical construction. However such activities exclude the holding of
an asset when no production or development that changes the assets
condition is taking place.
Stopping Capitalisation
The capitalisation of borrowing costs shall be suspended during extended periods in
which active development is interrupted.
When substantial technical and administrative work is carried out, the
capitalisation of borrowing costs is not normally suspended. The capitalisation of
borrowing costs is also not suspended when a temporary delay is a necessary part
of the process of getting an asset ready for its intended use or sale. E.g. when the
temporary delay is caused due to reasons which are common during the
construction, capitalisation is not suspended.
The 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.
When the construction of qualifying asset is completed in parts and each part is
capable of being used while construction continues on other parts, the capitalisation
of borrowing cost shall cease when substantially all the activities necessary to
prepare that part for its intended use or sale are complete.
Amounts to Capitalise
Specific loan: it is the amount borrowed for the construction of specific asset. In
such case the amount of borrowing costs eligible for capitalisation on that asset
shall be determined as the actual borrowing costs incurred on that borrowing during
the period, less any investment income on the temporary investment of those
borrowing.
General Borrowing: these are the funds borrowed generally and used for the
purpose of obtaining a qualifying asset. The amount of borrowing cost eligible for
capitalisation shall be determined by applying the capitalisation rate to the
expenditures on that asset. However the amount of borrowing cost capitalised
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4. during the year shall not exceed the amount of borrowing cost actually incurred
during the year.
The capitalisation rate shall be the weighted average of borrowing cost applicable to
borrowings of the enterprise that are outstanding during the period, other than the
borrowings made specifically for the purpose of obtaining the qualifying asset.
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