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IAS 23 Borrowing Costs -...
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IAS 23 Borrowing Costs
Scope
• New scope exclusions:
– Qualifying assets measured at fair value• e.g.: Biological assets under IAS 41
– Inventories that are manufactured in large
quantities on a repetitive basis
Definitions
What is a “Qualifying Asset”?
“an asset that necessarily takes a substantial period of time to get ready for its intended use”
Definitions
What are “Borrowing Costs”?
• interest expense (effective interest method),
• finance charges in respect of finance leases, and
• exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs
• Borrowing costs include amortisation of ancillary costs incurred in connection with borrowings. It does not include actual or imputed cost of equity capital
Principle change -Recognition
Used to be 2 treatments:
Benchmark: Expense Alternative: Capitalise
Only Option
• Recognition
– borrowing costs directly attributable to acquisition,
construction or production of a qualifying asset shouldbe capitalised as part of the cost of that asset
• Measurement
– amount capitalised depends on the nature of the
funding used
What costs should be used in calculation?
• Capitalise costs directly attributable to the acquisition, construction or production of qualifying asset
– IF the costs would have been avoided had the investment in the asset not been made
• Costs should arise from:
– Specifically borrowed funds
– Generally borrowed funds
Specific funds
• Funds borrowed specifically
Capitalise:Actual borrowing costs incurred
less
Any investment income on temporary investment of those funds
General funds
• Funds borrowed generally
1. calculate capitalisation rate
2. apply capitalisation rate to expenditures on the asset
3. compare amount calculated to actual borrowing cost incurred
4. capitalise lesser of the 2 amounts
When to start….
• Commencement of capitalisation
– expenditures are being incurred
– borrowing costs are being incurred
– activities to prepare asset are in progress
When to Stop!
• Suspension of capitalisation
– capitalisation suspended during extended periods in
which active development interrupted
• Cessation of capitalisation
– ceases when substantially all activities needed to
prepare asset are complete
– when asset consists of separate parts, ceases for each part as that part is completed
Note!
• Expenditures must be reduced by:– Progress payments received
– Government grants received
• Impairment– borrowing costs continue to be capitalised, but
• carrying amount of asset is reduced to recoverable amount to recognise any impairment loss
Disclosure
• Disclosure
– amount capitalised during the period
– capitalisation rate used