Introduction and the Framework



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Related standards

  • Borrowing Costs
  • Related standards
  • IAS 23
  • Current GAAP comparisons
  • IFRS financial statement disclosures
  • Looking ahead
  • End-of-chapter practice
  • Related Standards
  • Related Standards
  • IAS 2 Inventories
  • IAS 16 Property, plant and equipment
  • IAS 38 Intangible assets
  • IAS 40 Investment property

Objective and scope

  • IAS 23 - Overview
  • Objective and scope
  • Recognition
  • Disclosure

Principle –

  • IAS 23 – Objective and Scope
  • Principle –
  • The cost of an asset should include all costs incurred that are necessary to get it ready for its intended use.
  • IAS 23 sets out requirements for capitalizing financing costs related to the acquisition, construction, or production of a qualifying asset.
  • IAS 23 – Objective and Scope
  • Borrowing costs: “interest and other costs that an entity incurs in connection with the borrowing of funds”
  • e.g., interest expense that results from use of the effective interest method set out in IAS 39 Financial Instruments-Recognition and Measurement

  • IAS 23 – Objective and Scope
  • Qualifying assets: those that require substantial time to get ready for their intended use or sale
  • e.g., inventory, PP&E, intangible assets, investment property (qualifying assets measured at FV and inventories produced in large quantities on a repetitive basis may, but are not required to, apply IAS 23)
  • IAS 23 - Recognition
  • Recognize borrowing costs (during construction or production) on qualifying assets as part of the cost of those assets as long as:
  • they will result in future benefits
  • they can be measured reliably

Borrowing costs to capitalize = the avoidable costs, i.e., those that would not have been incurred if expenditures for the qualifying asset had not been made, less any investment income earned on the temporary investment of such funds.

  • IAS 23 - Recognition
  • Borrowing costs to capitalize = the avoidable costs, i.e., those that would not have been incurred if expenditures for the qualifying asset had not been made, less any investment income earned on the temporary investment of such funds.
  • If borrowing is specific to a qualifying asset, avoidable costs are easy to calculate

If not asset-specific borrowing:

  • IAS 23 - Recognition
  • If not asset-specific borrowing:
  • Calculate a capitalization rate
  • Calculate the weighted average expenditures on the qualifying asset
  • Calculate the costs to capitalize
  • IAS 23 - Recognition
  • Example
  • DH Ltd. begins construction of a building on Feb. 1 and completes it on Nov. 30. Expenditures: Mar. 1- $150; June 1- $120; Nov. 30 - $300
  • DH Ltd. Borrows $100 on Mar. 1 (5 year 12% note) to pay for construction. Debt outstanding all year: $200, 5-year 13% note payable; $350 4-year 15% note payable
  • How much interest is included in the cost of the building?

Capitalization rate on general borrowing:

  • IAS 23 - Recognition
  • Capitalization rate on general borrowing:
  • Debt
  • $ Debt
  • Weight
  • Weighted
  • Debt
  • Interest
  • $200
  • 12/12
  • $200
  • $26.0
  • 15% Note Payable
  • $350
  • 12/12
  • $350
  • 52.5
  • $550
  • $78.5
  • Capitalization rate: $78.5 ÷ $550 =
  • 14.3%

Weighted average expenditures

  • IAS 23 - Recognition
  • Weighted average expenditures
  • Date
  • Payment
  • Weight
  • Weighted
  • Expenditures
  • Mar. 1
  • $150
  • 150 × 9/12
  • $112.5
  • Jun. 1
  • $120
  • 120 × 6/12
  • 60.0
  • Nov.30
  • $300
  • 300 × 0/12
  • 0.0
  • Total weighted expenditures
  • $172.5
  • Financed by specific borrowing: $100 × 9/12
  • 75.0
  • Financed by general borrowing
  • $ 97.5


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