IAS 23 Borrowing Costs : Below we have provided IAS 23 Definition, IAS 23 Practice Questions and Answers, IAS 23 Examples and PPT Presentation. The Indian Accounting Standard 23 (IAS 23) is one of the most relevant and crucial topics when it comes to preparation of Financial Statements. While going through IAS 23 Borrowing Costs, you may need to understand certain important words like Qualifying Asset, Finance Charge etc. In our earlier articles, we have already provided detailed explanation on other Account Standards like IAS 11 and IAS 15. This article on ‘IAS 23 Borrowing Costs’ has been contributed by CA Anand Mishra.
Foreword for IAS 23 Borrowing Costs
|IAS 23 Applies For||Exchange Differences|
|IAS 23 Disclosure||Required|
|PPT on IAS 23||Download|
|IAS 23 Example||Download|
Definition : IAS 23 Borrowing Costs
IAS 23 describes the treatment of borrowing costs. Most of the entities borrow, to fund their activities and incur interest (finance charge) on the same.
Finance charge can be either:-
- Charged to Profit & Loss or;
- Capitalized with the asset.( in this case the cost will be charged off by way of depreciation after the asset is put to use)
Borrowing cost (finance charge) is added to the cost of qualifying asset (capitalized) if they are directly attributable to it’s:
- Construction or
Qualifying asset is an asset that takes substantial period of time to get ready for its intended use or sale. Any asset which is ready for its intended use or sale is excluded.
Examples of Qualifying Asset : IAS 23 Borrowing Costs
- Manufacturing plant
- Power generation facilities
- Investment property (assets held for letting out or capital appreciation)
- Intangible assets (Eg: development cost)
- Inventories that require substantial period of time to bring them into saleable condition (eg. Whisky, made to order goods). Inventories produced on a large scale repetitively is excluded.
All other borrowing cost should be recognized as an expense in the period in which it is incurred.
IAS 23 Borrowing costs includes
- Interest cost
- Other costs incurred in connection with borrowing of funds(Eg : processing charges)
- Exchange differences to the extent they are adjustment to interest costs
- Preference dividend if preference capital is classified as debt.
Any income earned on temporary investment of the loan during the period when finance charge is capitalized should be reduced from the finance charge capitalized. In case the income is earned when the capitalization is suspended then it should be reduced from interest charged off to profit and loss.
A project may be financed through specifically arranged borrowings or a general pool of borrowings. When borrowing is specifically allocated to a project, it is very easy to identify finance costs for capitalization. However when funds are borrowed generally at different rates and utilized across various projects then, a weighted average borrowing cost of borrowings outstanding during the period other than specific borrowings (if any) should be ascertained for arriving at finance charge.
Capitalization shall commence when : IAS 23 Borrowing Costs
- Activities necessary to prepare the asset for its intended use or sale are in progress,(Eg: technical and administrative work including obtaining permits)
- expenditure for asset being constructed are being incurred (Eg: Labour, material etc) ,
- Borrowing costs are incurred.
Expenditure are reduced by any progress payments or grants received in connection with the asset.
Capitalization shall be suspended when active development of the construction of asset is interrupted. It will not be suspended if the delay is a necessary part of the process of getting an asset ready for its intended use or sale.
Capitalization is ceased when all activities necessary for preparing the qualifying asset for its intended use or sale are complete. When construction of qualifying asset is completed in parts then, capitalization of borrowing cost shall cease when substantially all the activities necessary to prepare that part for its intended use or sale are completed.
Disclosure under IAS 23 Borrowing Costs
The financial statements should disclose:
- Accounting policy adopted for borrowing costs
- Amount of borrowing costs capitalized during the period
- Capitalization rate used to determine borrowing costs eligible for capitalization
Note: Notional borrowing costs cannot be capitalized.
Conclusion : IAS 23 Borrowing Costs
We give our sincere thank you to CA Anand for contributing this useful editorial on IAS 23 for Borrowing Costs. If you find any mistakes in this article on ‘ IAS 23 for Borrowing Costs’, you can post your comments below.