IAS 23 Borrowing Cost

Jul 17, 2026

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IAS 23 sets out the accounting requirement to capitalize borrowing costs that relate to the acquisition, construction, or production of a qualifying asset. Borrowing costs comprise interest and other costs incurred in connection with borrowing funds. A qualifying asset is one that requires a substantial period of time to be prepared for intended use or sale. The standard specifies eligible components including interest on borrowings, amortization of related discounts/premiums and ancillary costs, and certain foreign exchange differences treated as interest adjustments.

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Borrowing Cost IAS-23 Definition IAS 23 requires that borrowing costs associated with the acquisition, construction or production of a qualifying asset are be capitalised as part of the cost of that asset. Borrowing costs are defined as: ◦ “interest and other costs that an entity incurs in connection with the borrowing of funds.” A qualifying asset is defined as: ◦ “an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.” Standard list The standard lists what may be included in borrowing costs. ◦ Interest on bank overdrafts and short-term and long-term borrowings ◦ Amortisation of discounts or premiums relating to borrowings ◦ Amortisation of ancillary costs incurred in connection with the arrangement of borrowings ◦ Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs Qualifying assets Depending on the circumstances, any of the following may be qualifying assets. ◦ Inventories ◦ Manufacturing plants ◦ Power generation facilities ◦ Intangible assets ◦ Investment properties Financial assets and inventories that are manufactured, or otherwise produced over a short period of time are not qualifying assets. Assets that are ready for their intended use or sale when purchased are not qualifying assets. Borrowing costs eligible for capitalisation Those borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset must be identified. These are the borrowing costs that would have been avoided had the expenditure on the qualifying asset not been made. This is obviously straightforward where funds have been borrowed for the financing of one particular asset. Difficulties arise, however, where the entity uses a range of debt instruments to finance a wide range of assets, so that there is no direct relationship between particular borrowingsand a specific asset. Specific and general borrowings Where borrowings are made specifically to acquire a qualifying asset: ◦ Borrowing costs which may be capitalised are those actually incurred, less any investment income on the temporary investment of the borrowings. Where funds for the project are taken from general borrowings: ◦ The weighted average cost of general borrowings is taken. Example If a company had a $10million 6% loan and a $2million 8% loan, the weighted average cost of borrowing would be: ◦ ($10m × 6%) + ($2m × 8%)/$12m = 6.33% ◦ The amount to be capitalised would be the amount spent on the asset multiplied by 6.33%. Commencement of capitalization Capitalisation of borrowing costs should commence when all of the following conditions are met: ◦ expenditure for the asset is being incurred ◦ borrowing costs are being incurred ◦ activities that are necessary to prepare the asset for its intended use or sale are in progress. Example Grimtown took out a $10

Jul 17, 2026

Upload by Miles