3.3 Financial
assets .................................................................................................... 1552
4 DEFINITION OF BORROWING COSTS ......................................................... 1552
4.1
The definition of borrowing costs in IAS 23 ................................................. 1552
4.2 Other
finance
costs
.............................................................................................
1553
5 BORROWING COSTS ELIGIBLE FOR CAPITALISATION .............................. 1553
5.1
Directly attributable borrowing costs ............................................................. 1553
5.2 Specific
borrowings
............................................................................................
1554
5.3 General
borrowings
............................................................................................
1554
5.3.1
Definition of general borrowings .................................................... 1555
5.3.1.A
Borrowing costs on borrowings related to
completed qualifying assets ......................................... 1555
5.3.1.B
General borrowings related to specific non-
qualifying assets .............................................................. 1557
5.3.1.C
Effective date and transitional provisions of
December 2017 amendments to IAS 23 .................... 1557
5.3.2
Calculation of capitalisation rate ..................................................... 1558
5.3.3
Accrued costs and trade payables ................................................... 1560
1548 Chapter 21
5.3.4
Assets carried below cost in the statement of financial
position ................................................................................................. 1560
5.4
Exchange differences as a borrowing cost .................................................... 1561
5.5
Other finance costs as a borrowing cost ........................................................ 1562
5.5.1
Derivative financial instruments ...................................................... 1562
5.5.2
Gains and losses on derecognition of borrowings ....................... 1564
5.5.3
Gains or losses on termination of derivative financial
instruments .......................................................................................... 1565
5.5.4
Dividends payable on shares classified as financial
liabilities ................................................................................................ 1566
5.6
Capitalisation of borrowing costs in hyperinflationary economies ............ 1567
5.7 Group
considerations
......................................................................................... 1567
5.7.1
Borrowings in one company and development in another........ 1567
5.7.2
Qualifying assets held by joint arrangements................................ 1567
6 COMMENCEMENT, SUSPENSION AND CESSATION OF
CAPITALISATION ......................................................................................... 1568
6.1
Commencement of capitalisation.................................................................... 1568
6.1.1
Expenditures on a qualifying asset .................................................. 1569
6.2
Suspension of capitalisation ............................................................................. 1570
6.2.1
Impairment considerations ................................................................ 1571
6.3
Cessation of capitalisation ................................................................................. 1571
6.3.1
Borrowing costs on ‘land expenditures’ ......................................... 1572
7 DISCLOSURE REQUIREMENTS .................................................................... 1573
7.1
The requirements of IAS 23 ............................................................................. 1573
7.2 Disclosure
requirements in other IFRSs ........................................................ 1574
List of examples
Example 21.1:
Calculation of capitalisation rate (no investment income) ......... 1558
Example 21.2:
Calculation of amount to be capitalised – specific
borrowings with investment income .............................................. 1560
Example 21.3:
Foreign exchange differences in more than one period ............ 1562
Example 21.4:
Floating to fixed interest rate swaps ............................................... 1562
Example 21.5:
Cash flow hedge of variable-rate debt using an interest
rate swap .............................................................................................. 1563
1549
Chapter 21
Capitalisation of
borrowing costs
1 INTRODUCTION
A common question when determining the initial measurement of an asset is whether
or not finance costs incurred on its acquisition or during the period of its construction
should be capitalised. There have always been a number of strong arguments in favour
of the capitalisation of directly attributable finance costs. For example, it is argued that
they are just as much a cost as any other directly attributable cost; that expensing
finance costs distorts the choice between purchasing and constructing an asset; that
capitalising the costs leads to a carrying value that is far more akin to the market value
of the asset; and that the financial statements are more likely to represent the true results
of the project.
In accounting periods commencing prior to 1 January 2009, entities were permitted
to capitalise borrowing costs as an alternative to expensing them in the period they
were incurred. However, in March 2007, the IASB issued a revised version of IAS 23
– Borrowing Costs – mandating capitalisation of borrowing costs directly
attributable to the acquisition, construction or production of a qualifying asset. This
was done to achieve convergence in principle with US GAAP. [IAS 23.BC2]. It thereby
eliminated some (but not all) of the differences with SFAS 34 – Capitalization of
Interest Cost.1
The revised standard applied for the first time to accounting periods commencing on or
after 1 January 2009, although early implementation was permitted. [IAS 23.29]. In this
chapter we consider the requirements of this revised standard, as subsequently updated
by minor consequential amendments arising from a new standard, IFRS 16 – Leases (see
discussion below), and by minor amendments arising from the Annual Improvements to
IFRSs 2015-2017 Cycle (see 5.3.1.A below). These amendments apply to annual
reporting periods beginning on or after 1 January 2019, with early application permitted
subject to certain conditions.
In January 20
16, the IASB issued a new leasing standard, IFRS 16, which supersedes
the leases standard and interpretations in IFRS. The consequential amendments
arising from IFRS 16 include an updated definition of borrowing costs to reflect the
requirements of IFRS 16 (see 4 below) which became effective on 1 January 2019.
1550 Chapter 21
Early application is permitted provided that IFRS 15 – Revenue from Contracts
with Customers – has been, or is, applied at the same date as IFRS 16. For the
detailed discussion and requirements of this new standard, see Chapter 24.
2
THE REQUIREMENTS OF IAS 23
2.1 Core
principle
IAS 23 requires borrowing costs to be capitalised if they are directly attributable to the
acquisition, construction or production of a qualifying asset (whether or not the funds
have been borrowed specifically). These borrowing costs are included in the cost of the
asset; all other borrowing costs are recognised as an expense in the period in which they
are incurred. [IAS 23.1, 8].
2.2 Scope
An entity should apply IAS 23 in accounting for borrowing costs. [IAS 23.2]. IAS 23 deals
with the treatment of borrowing costs in general, rather than solely focusing on
capitalising borrowing costs as part of the carrying value of assets.
The standard does not deal with the actual or imputed costs of equity used to fund the
acquisition or construction of an asset. [IAS 23.3]. This means that any distributions or
other payments made in respect of equity instruments, as defined by IAS 32 – Financial
Instruments: Presentation, are not within the scope of IAS 23. Conversely, interest and
dividends payable on instruments classified as financial liabilities appear to be within
the scope of the standard (see 4.2 below).
An entity is not required to apply the standard (i.e. application is optional) to borrowing
costs directly attributable to the acquisition, construction or production of:
• a qualifying asset measured at fair value (see 3.2 below); or
• inventories that are manufactured, or otherwise produced, in large quantities on a
repetitive basis (see 3.1 below). [IAS 23.4].
3 QUALIFYING
ASSETS
IAS 23 defines a qualifying asset as ‘an asset that necessarily takes a substantial period
of time to get ready for its intended use or sale’. [IAS 23.5].
Assets that are ready for their intended use or sale when acquired are not qualifying
assets. [IAS 23.7].
IAS 23 does not define ‘substantial period of time’ and this will therefore require the
exercise of judgement after considering the specific facts and circumstances. In practice,
an asset that normally takes twelve months or more to be ready for its intended use will
usually be a qualifying asset.
The standard indicates that, depending on the circumstances, the following may be
qualifying assets: manufacturing plants, power generation facilities, investment
properties, inventories, intangible assets and bearer plants. [IAS 23.7].
Capitalisation of borrowing costs 1551
3.1 Inventories
Inventories are within the scope of IAS 23 as long as they meet the definition of a qualifying
asset and require a substantial period of time to bring them to a saleable condition. This
means inventories that are manufactured, or otherwise produced, over a short period of
time are not qualifying assets and are out of scope of IAS 23. However, even if inventories
meet the definition of a qualifying asset and take a substantial period of time to get ready for
sale, an entity is not required to apply the standard to borrowing costs directly attributable
to the acquisition, construction or production of inventories if these are routinely
manufactured or otherwise produced in large quantities on a repetitive basis. [IAS 23.4(b), BC6].
Therefore an entity may choose whether to apply the requirements of IAS 23 to such
inventories as a matter of accounting policy. This optional scope exemption has been
allowed because of the difficulty of calculating and monitoring the amount to be
capitalised, i.e. the costs of capitalisation are likely to exceed the potential benefits.
[IAS 23.BC6]. There are many examples of such inventories, including large manufactured
or constructed items that take some time to complete but are basically sold as standard
items, such as aircraft and large items of equipment, or food and drink that take a long
time to mature, such as cheese or alcohol that matures in bottle or cask.
Conversely, IAS 23 is required to be applied to bespoke inventories (i.e. those made
according to the unique specifications of a particular customer) that are occasionally
manufactured or produced on a single item by item basis and take a substantial period
of time to get ready for sale.
3.2
Assets measured at fair value
IAS 23 does not require entities to capitalise borrowing costs directly attributable to the
acquisition, construction or production of assets measured at fair value that would
otherwise be qualifying assets, for example, biological assets within the scope of IAS 41 –
Agriculture. [IAS 23.4(a)]. If the assets are held under a fair value model (or a fair value less
costs to sell model) with all changes going to profit or loss, then capitalisation would not
affect measurement in the statement of financial position and would involve no more than
a reallocation between finance costs and the fair value movement in profit or loss.
However, this scope exemption is optional and would still allow an entity to choose
whether to apply the requirements of IAS 23 to such assets as a matter of accounting policy.
IAS 23 does not restrict the exemption to assets where the fair value movement is taken
to profit or loss. Assets measured at fair value that fall under the revaluation model of
IAS 16 – Property, Plant and Equipment – are also eligible for this scope exemption
even though the revaluation gain or loss goes to other comprehensive income, not profit
or loss (see Chapter 18 at 4.1.2). While such assets may be subject to the scope
exemption, the revaluation model in IAS 16 is only applied subsequent to initial
recognition. [IAS 16.31]. Therefore, such assets might be qualifying assets at initial
recognition, but subject to the scope exemption subsequently.
For example, assume that an entity borrows specific funds to construct a building, that the
building is a qualifying asset and that the entity has a policy of revaluing all its land and
buildings. When the constructed building is initially recognised, it will be measured at cost,
which would include the directly attributable borrowing costs. [IAS 16.15, 16(b)]. Assume that the
1552 Chapter 21
entity subsequently renovates the building, that the renovation takes a substantial amount of
time to complete and that those costs qualify for capitalisation under IAS 16. Since the asset
is being revalued it would fall under the scope exemption in IAS 23. Therefore, the entity
would not be required to capitalise any directly attributable borrowing costs relating to this
subsequent renovation even if it takes a substantial amount of time to complete.
However, for disclosure purposes, an entity will still need to monitor the carrying
amount of such an
asset, including those borrowing costs that would have been
recognised had such an asset been carried under the cost model.
In May 2014 the Interpretations Committee received a request for clarification as to
whether an entity is required to reflect the capitalisation of borrowing costs to meet the
disclosure requirement of IAS 16 for assets stated at revalued amounts (see Chapter 18
at 8.2) and for which borrowing costs are not capitalised. Since, as discussed above, the
capitalisation of borrowing costs for such assets is not required, the determination of
the amount of borrowing costs that would have been capitalised under a cost model –
solely to meet a disclosure requirement – might be considered burdensome.
The Interpretations Committee noted that the requirements in paragraph 77(e) of IAS 16
are clear. This paragraph requires an entity to disclose the amount at which assets stated
at revalued amounts would have been stated had those assets been carried under the
cost model. The amount to be disclosed includes borrowing costs capitalised in
accordance with IAS 23.
The Interpretations Committee determined that, in the light of the existing IFRS
requirements, neither an interpretation nor an amendment to a standard was necessary
and consequently decided not to add this issue to its agenda.2
3.3 Financial
assets
IAS 23 excludes all financial assets (which we consider include equity accounted
investments) from the definition of qualifying assets. [IAS 23.7].
4
DEFINITION OF BORROWING COSTS
4.1
The definition of borrowing costs in IAS 23
Borrowing costs are interest and other costs that an entity incurs in connection with the
borrowing of funds. [IAS 23.5]. Borrowing costs are defined in the standard to include:
• interest expense calculated using the effective interest method as described in
IFRS 9 – Financial Instruments;
• interest in respect of liabilities recognised in accordance with IFRS 16 (or, for
entities that have not yet adopted IFRS 16, finance charges in respect of finance
leases recognised in accordance with IAS 17 – Leases); and
• exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs (see 5.4 below). [IAS 23.6].
The standard addresses whether or not to capitalise borrowing costs as part of the cost
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 306