Wiley IFRS: Practical Implementation Guide and Workbook, 3rd Edition

Chapter 16

BORROWING COSTS (IAS 23)

BACKGROUND

IAS 23, Borrowing Costs, prescribes the criteria for determining whether borrowing costs can be capitalized as part of the cost of acquiring, constructing, or producing a “qualifying asset.” The Standard prescribes the capitalization of borrowing costs into the cost of a qualifying asset.

IAS 23 has been revised to eliminate the option available hitherto to recognize borrowing costs as an expense. This amendment to the standard was made as part of the efforts of the IASB and the US FASB towards convergence of their standards.

SCOPE

The Standard is to be applied in accounting for (i.e., recognizing) borrowing costs. Not all kinds of borrowing costs are to be capitalized. Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are to be capitalized as part of the cost of that asset.

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.

DEFINITIONS OF KEY TERMS

(in accordance with IAS 23)

 

Borrowing costs. Include interest and other costs incurred by an entity in relation to borrowing of funds.

Qualifying asset. An asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

PRACTICAL INSIGHT

The concept of “qualifying asset” is difficult to understand and ...