Capitalisation of borrowing costs 1573
the activities necessary to prepare both the land and building for that intended use or
sale are complete (see 6.3 above).
The Interpretation Committee concluded that the principles and requirements in IFRS
standards provide an adequate basis for an entity to determine when to cease
capitalising borrowing costs on land expenditures. Consequently, the Interpretation
Committee decided not to add this matter to its standard-setting agenda.10
7 DISCLOSURE
REQUIREMENTS
7.1
The requirements of IAS 23
An entity shall disclose:
• the amount of borrowing costs capitalised during the period; and
• the capitalisation rate used to determine the amount of borrowing costs eligible for
capitalisation. [IAS 23.26].
KAZ Minerals discloses in its ‘finance income and finance costs’ note its capitalisation
rates used to determine its borrowing costs. The amount of borrowing costs capitalised
during the period is also disclosed within the table that precedes this narrative
disclosure and within the table of movements in the property, plant and equipment note.
Extract 21.2: KAZ Minerals PLC (2017)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [extract]
11. Finance income and finance costs [extract]
1
Total interest expense includes $221 million (2016: $197 million) of interest incurred on borrowings,
$10 million PXF fees and $15 million (2016: $8 million) relating to the unwinding of the discount on the NFC
deferral agreement (see note 27).
2
In 2017, the Group capitalised to the cost of qualifying assets $10 million (2016: $82 million) of borrowing
costs incurred on the outstanding CDB-Bozshakol and Bozymchak facilities during the year at an average rate
of interest of 5.87% (2016: 5.40%), $56 million (2016: $73 million) on the CDB-Aktogay US$ and CNY
facilities at an average rate of interest of 5.60% and 4.54% respectively (2016: 5.12% and 4.33%) and
$11 million (2016: $nil) on the $300 million DBK loan at an average interest rate of 5.89%. Interest capitalised
also includes $11 million (2016: $8 million) of unwinding of interest on the deferred NFC payable (see
note 27).
27. Other liabilities [extract]
(a) Payables
to
NFC
In November 2015, the Group reached an agreement with its principal construction contractor at Aktogay,
NFC, to defer payment of $300 million. Under these terms, $300 million scheduled for payment in 2016
and 2017, was deferred for settlement in the first half of 2018, with $250 million becoming payable shortly
after 31 December 2017 and $50 million shortly after 30 June 2018. The extended credit terms arising from the
agreement were discounted using a rate of US$ LIBOR plus 4.2% on the estimated cost of services. The
discount rate applied is in line with the CBD Aktogay facility. The unwinding of the interest was charged to
property, plant and equipment as a borrowing cost (see note 11) until the date the sulphide plant reached
commercial production, after which it was charged to the income statement within finance costs. At
31 December 2017, the full liability, discounted to its present value, was recognised as current due to its
expected settlement in 2018. $250 million of the payable to NFC was settled in January 2018.
1574 Chapter 21
7.2
Disclosure requirements in other IFRSs
In addition to the disclosure requirements in IAS 23, an entity may need to disclose
additional information in relation to its borrowing costs in order to comply with
requirements in other IFRSs. For example, disclosures required by IAS 1 include:
• the nature and amount of material items included in profit or loss; [IAS 1.97]
• the measurement bases used in preparing the financial statements and other
accounting policies used that are relevant to an understanding of the financial
statements (see an example at Extract 21.1 above); [IAS 1.117] and
• the significant judgements made in the process of applying an entity’s accounting
policies that have the most significant effect on the recognised amounts (e.g.
criteria in determining a qualifying asset or a ‘part’ of a qualifying asset, including
definition of ‘substantial period of time’). [IAS 1.122].
As noted in 5.4 above, the Interpretations Committee considered a request for guidance
on the treatment of foreign exchange gains and losses and on the treatment of any
derivatives used to hedge such foreign exchange exposures.
The Interpretations Committee decided not to add the issue to its agenda but concluded
both that (i) how an entity applies IAS 23 to foreign currency borrowings is a matter of
accounting policy requiring an entity to exercise judgement and (ii) IAS 1 requires
disclosure of significant accounting policies and judgements that are relevant to an
understanding of the financial statements.11 The requirements of IAS 1 are discussed in
Chapter 3.
References
1 Effective from 15 September 2009, FASB
5
IFRIC Update, July 2009.
Statement No. 34 (SFAS 34) – Capitalization of
6
IASB Update, July 2009.
Interest Cost – was superseded by FASB 7
IFRIC Update, June 2017.
Accounting Standards Codification (ASC) 8
IFRIC Update, January 2008.
Topic 835-20 – Capitalization of Interest, a 9
IFRIC Update, June 2018.
subtopic to FASB ASC Topic 835 – Interest.
10 IFRIC Update, June 2018.
2
IFRIC Update, May 2014.
11 IFRIC Update, January 2008.
3
IASB Update, October 2015.
4
Annual Improvements to IFRS Standards
2015-2017 Cycle, IASB, December 2017, p.16.
1575
Chapter 22
Inventories
1 INTRODUCTION ........................................................................................... 1577
2 IAS
2: OBJECTIVE, SCOPE AND DEFINITIONS ........................................... 1577
2.1
Objective ............................................................................................................... 1577
2.2 Definitions
............................................................................................................
1578
2.3 Scope
..................................................................................................................... 1578
2.3.1
Practical application of the scope and recognition
requirements of IAS 2 ........................................................................ 1579
2.3.1.A
Core inventories and spare parts – IAS 2 or
IAS 16 ................................................................................ 1579
2.3.1.B
Broadcast rights – IAS 2 or IAS 38 ............................. 1579
2.3.1.C Emission
rights
–
IAS 2 or IAS 38 .............................. 1581
2.3.1.D
Bitcoin and other crypto-currencies ......................... 1581
2.3.1.E
Transfers of rental assets to inventory ....
.................. 1582
2.3.1.F Consignment
stock
and sale and repurchase
agreements ...................................................................... 1582
2.3.1.G
Sales with a right of return ........................................... 1583
3 MEASUREMENT ........................................................................................... 1583
3.1
What may be included in cost? ........................................................................ 1584
3.1.1
Costs of purchase ............................................................................... 1584
3.1.2 Costs
of
conversion ............................................................................ 1584
3.1.3 Other
costs
...........................................................................................
1586
3.1.3.A
Storage and distribution costs ..................................... 1586
3.1.3.B General
and
administrative overheads ...................... 1587
3.1.3.C
Borrowing costs and purchases on deferred
terms ................................................................................. 1587
3.1.3.D Service
providers
...........................................................
1588
3.1.3.E
Forward contracts to purchase inventory ................ 1588
3.1.3.F
Drug production costs within the
pharmaceutical industry ............................................... 1589
1576 Chapter 22
3.2
Measurement of cost .......................................................................................... 1589
3.2.1
Cost formulas ....................................................................................... 1590
3.2.1.A
First-in, first-out (FIFO) ............................................... 1590
3.2.1.B
Weighted average cost .................................................. 1591
3.2.1.C Last-in,
first-out
(LIFO)
................................................
1591
3.3
Net realisable value ............................................................................................ 1591
3.4
Measurement of crypto-assets in scope of IAS 2 ......................................... 1593
3.4.1
Crypto-assets: Cost or lower net realisable value ....................... 1594
3.4.2
Crypto-assets: Fair value less costs to sell ..................................... 1594
4 REAL ESTATE INVENTORY .......................................................................... 1595
4.1
Classification of real estate as inventory ....................................................... 1595
4.2
Costs of real estate inventory ........................................................................... 1595
4.2.1
Allocation of costs to individual units in multi-unit
developments ...................................................................................... 1595
4.2.2
Property demolition and operating lease costs ............................ 1596
5 RECOGNITION IN PROFIT OR LOSS ............................................................ 1597
6 DISCLOSURE REQUIREMENTS OF IAS 2 ................................................... 1598
1577
Chapter 22
Inventories
1 INTRODUCTION
Under IFRS the relevant standard for inventories is IAS 2 – Inventories. The term
‘inventories’ includes raw materials, work-in-progress, finished goods and goods for
resale, although the standard does not include all instances of these categories; some are
covered by other standards, for example growing crops are covered by IAS 41 –
Agriculture (see Chapter 38). This chapter deals only with the inventories within the
scope of IAS 2.
Under the historical cost accounting system, costs of inventories comprise expenditure
which has been incurred in the normal course of business in bringing the inventory to its
present location and condition. All costs incurred in respect of inventories are charged as
period costs, except for those which relate to those unconsumed inventories which are
expected to be of future benefit to the entity. These are carried forward as an asset, to be
matched with the revenues that they will generate in the future. Inventories in the
statement of financial position have characteristics similar to those of prepaid expenses
or property, plant and equipment – they are effectively deferred costs.
When IAS 2 was revised in 2003 all references to matching and to the historical cost
system were deleted, even though historical cost was retained as the primary
measurement approach for IAS 2 inventories. However, there have been no recent
developments suggesting a move away from this widely accepted and traditional cost-
based inventory measurement model to one based on fair value.
2
IAS 2: OBJECTIVE, SCOPE AND DEFINITIONS
2.1 Objective
The objective of IAS 2 is to prescribe the accounting treatment for inventories. The
standard notes that a primary issue in accounting for inventories is the cost to be
recognised as an asset until the related revenues are recognised. The standard provides
guidance on the determination of cost and its subsequent recognition as an expense,
including any write-down to net realisable value. Further to this, it provides guidance
on the cost formulas that are used to assign costs to inventories. [IAS 2.1].
1578 Chapter 22
2.2 Definitions
IAS 2 uses the following terms with the meanings specified below. [IAS 2.6].
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or
in the rendering of services.
Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make
the sale.
Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
2.3 Scope
IAS 2 applies to all inventories in financial statements except:
• financial instruments (see Chapters 40 to 50); and
• biological assets related to agricultural activity and agricultural produce at the point
of harvest (see Chapter 38). [IAS 2.2].
Agricultural produce that has been harvested by the entity from its biological assets is
in scope; it is initially recognised at its fair value less costs to sell at the point of harvest,
as set out in IAS 41 (see Chapter 38). This figure becomes the cost of inventories at that
date for the purposes of IAS 2. [IAS 2.20].
The measurement provisions of IAS 2 do not apply to the measurement of inventories
held by:
(a) producers of agricultura
l and forest products, agricultural produce after
harvest, and minerals and mineral products, to the extent that they are
measured at net realisable value in accordance with well-established practices
in those industries. When such inventories are measured at net realisable value,
changes in that value are recognised in profit or loss in the period of the change.
[IAS 2.3]. This occurs, for example, when agricultural crops have been harvested
or minerals have been extracted and sale is assured under a forward contract
or a government guarantee, or when an active market exists and there is a
negligible risk of failure to sell. [IAS 2.4]. However, in practice this approach is
not common; and
(b) commodity broker-traders who measure their inventories at fair value less costs to
sell. If these inventories are measured at fair value less costs to sell, the changes in
fair value less costs to sell are recognised in profit or loss in the period of the
change. [IAS 2.3]. Broker-traders are those who buy or sell commodities for others
or on their own account and these inventories are principally acquired with the
purpose of selling in the near future and generating a profit from fluctuations in
price or broker-traders’ margin. [IAS 2.5].
Inventories
1579
In both cases, the standard stresses that these inventories are only scoped out from the
measurement requirements of IAS 2; the standard’s other requirements, such as disclosure,
continue to apply. Fair value and net realisable value (NRV) are discussed at 3 below.
Inventories can include all types of goods purchased and held for resale including, for
example, merchandise purchased by a retailer and other tangible assets such as land and
other property, although investment property accounted for under IAS 40 – Investment
Property – is not treated as an inventory item. The term also encompasses finished
goods produced, or work in progress being produced, by the entity and includes
materials and supplies awaiting use in the production process. Costs incurred to fulfil a
contract with a customer that do not give rise to inventories (or assets within the scope
of another Standard) are accounted for in accordance with IFRS 15 – Revenue from
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 311