IAS 23 - BORROWING COSTS
What?
When?
CAPITALISE 1. Interest on borrowings
2. Other costs - (a) Finance charges with respect to leases
(b) exchange difference on foreign currency borrowings where they
are regarded as an adjustment to interest costs
. Incurred DIRECTLY in connection with borrowings of funds
. For acquisition, construction and production of
. QUALIFYING asset - (An asset which takes SUBSTANTIAL period to
get ready for Its intended use or sale, usually more than 1 year)
ALL OTHER BORROWING COSTS ARE EXPENSED TO PROFIT & LOSS
EXCLUSIONS
1. Assets initially measured at FAIR VALUE are excluded from IAS 23
2. Purchased building IMMEDIATELY PUT TO USE as they do not require a
substantial customisation or time to get ready for its intended use or sale
'
3 Inventories produced in LARGE QUANTITIES on repetitive basis is excluded
4. If inventories take a LONG TIME to get ready for its intended use or sale e.g wine,
cheese, whiskey, aircrafts, ships etc. then the choice lies with the company to
capitalise or not. - THE CHOICE LIES WITH INVENTORIES AND NOT WITH PPE
How?
MEASUREMENT in case of
SPECIFIC Borrowings i.e
borrowings taken specifically
for acquisition, construction
and purchase of a qualifying
asset
Borrowing cost =
(Amount borrowed x Rate of Interest on
specific borrowing x Time) - (Interest
earned on Idle funds)
GENERAL Borrowings i.e
borrowings taken for
usual course of business
Borrowing cost =
(Amount borrowed x Capitalisation
rate x Time)
Capitalisation Rate = Weighted
average rate of general borrowings