IAS 23 –Borrowing Costs II

“If you learn only methods, you’ll be tied to your methods, but if you learn principles you can devise your own methods.”

                                                Ralph Waldo

Hello!

It’s another edition of IFRS is easy.

When you are cognizant of the rules, you would rarely get caught off-guard. Understanding the underlying principles of any standard goes a long way in simplifying it, especially with respect to the technical aspects of its calculations. IAS 23 –Borrowing costs, also falls into this category.

  

Here are some few points you might like to commit to memory:

·         IAS 23 DOES NOT apply to the following items: A qualifying asset measured at fair value; Inventories that are manufactured or otherwise produced in large quantities on a repetitive basis; and the actual or imputed cost of equity, including preferred capital not classified as a liability.

·         IAS 23 considers only assets which necessarily takes a substantial time to get ready for its intended use or sale.

·         Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.

·         Qualifying assets are assets that necessarily takes a substantial period of time to get ready for its intended use or sale.

·         Financial assets, and inventories that are manufactured, or otherwise produced, over a short period of time, are not qualifying assets. Also, assets that are ready for their intended use or sale when acquired are not qualifying assets.

·     Only Borrowing Costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized. Also, such borrowing costs must be those that would have been avoided if the expenditure on the qualifying asset had not been made.

·       Borrowing costs include the costs associated with either specific loans or general borrowings taken to fund the production or purchase of an asset.

·         When computing the borrowing cost for an asset funded with specific borrowing, such borrowing cost will not be pro-rated, regardless of when the payment (spending of the fund) is made. Its calculation only arises when construction/production begins (loan must have been collected by then). It will only be prorated if the amount was incurred (construction/production during the year) in less than twelve months.

·         Pro-ration of borrowing cost is made on assets funded by general borrowings as payment (spending of the fund) is made to fund the assets. Not based on when the fund was collected.

·         The amount of borrowing costs capitalized cannot exceed the amount of borrowing costs an entity incurred during a period.

·     Capitalization of Borrowing Costs shall commence when: Expenditures for the asset are being incurred; borrowing costs are being incurred; and activities necessary to prepare the asset for its intended use or sale are in progress.

·       Capitalization shall be suspended during extended periods in which active development is interrupted. Unless that period is a necessary part of the process for the production of the asset. However, capitalization of borrowing costs should not be suspended when there is only a temporary delay that is caused by certain expected and anticipated reasons.

·       Capitalization should cease when the asset is materially ready for its intended use or sale; or construction is completed in part and the completed part can be used independently.