3. IAS 23 Borrowing

What does IAS 23 cover?

Borrowing costs incurred on qualifying assets.

What is a borrowing cost?

Interest and other costs incurred in borrowing funds.

What is a qualifying asset?

An asset taking a substantial period to prepare for intended use or sale.

Main IAS 23 rule?

Directly attributable borrowing costs for a qualifying asset are capitalised.

Borrowing cost not eligible for capitalisation?

Expense in profit or loss as incurred.

When does capitalisation start?

When spending, borrowing costs and preparation activities all occur.

What three conditions start capitalisation?

Asset expenditure; borrowing costs; preparation activities underway.

What happens in extended inactive development?

Usually suspend capitalisation, subject to unavoidable/necessary interruptions.

When does capitalisation stop?

When substantially all activities for intended use/sale are complete.

Specific borrowing basic formula?

Eligible loan × interest rate × eligible time, less applicable investment income.

General borrowing basic formula?

Weighted-average eligible expenditure × capitalisation rate × time.

Weighted average borrowing rate formula?

Total relevant interest costs ÷ weighted-average general borrowings.

Period fraction for 3 months?

3 ÷ 12 = 0.25 of an annual interest period.

Period fraction for 9 months?

9 ÷ 12 = 0.75 of an annual interest period.

Borrowing cost normal balance?

Expense, normal Dr: Dr ↑ increases; Cr ↓ decreases.

PPE under construction normal balance?

Asset, normal Dr: Dr ↑ increases; Cr ↓ decreases.

Loan payable normal balance?

Liability, normal Cr: Cr ↑ increases; Dr ↓ decreases.

Interest payable normal balance?

Liability, normal Cr: Cr ↑ increases; Dr ↓ decreases.

Bank normal balance?

Asset, normal Dr: Dr ↑ increases; Cr ↓ decreases.

Capitalize eligible interest €12k: journal?

Dr PPE under construction €12k ↑; Cr Interest payable/Bank €12k ↑ liability/↓ asset.

Expense ineligible interest €3k: journal?

Dr Finance cost €3k ↑ expense; Cr Interest payable/Bank €3k ↑ liability/↓ asset.

Pay interest previously accrued €5k: journal?

Dr Interest payable €5k ↓ liability; Cr Bank €5k ↓ asset.

Loan receipt €100k: journal?

Dr Bank €100k ↑ asset; Cr Loan payable €100k ↑ liability.

Example: €200k at 6% for 12 months. Interest?

€200k × 6% × 12/12 = €12k.

Example: €200k at 6% for 3 eligible months?

€200k × 6% × 3/12 = €3k capitalisable, if eligible.

Example: €100k at 8%, €300k at 6%. Weighted rate?

(€8k+€18k) ÷ €400k = 6.5%.

Example: eligible weighted spend €80k, rate 6.5%. Cost?

€80k × 6.5% = €5,200 for a full year.

Example: spend €60k halfway through year. Weighted expenditure?

€60k × 6/12 = €30k year-weighted.

What happens if construction is completed early?

Stop capitalising when substantially complete; later interest is expensed.

What is disclosed under IAS 23?

Borrowing costs capitalised and capitalisation rate used.

Key exam trap with loan duration?

Do not capitalise full-year interest if eligible asset construction period is shorter.

What is the link between IAS 23 and IAS 16?

Eligible interest becomes part of the PPE asset's initial cost.