Prescribes the accounting treatment for borrowing costs.
Specifies whether borrowing costs should be capitalized as part of the cost of an asset or expensed in the period incurred.
IAS 23 Borrowing Costs
IFRS Summaries by Imad Uddin, FRM
Objective of IAS 23
Scope
Applies to all entities in accounting for borrowing costs.
Does NOT apply to:
The actual or imputed cost of equity capital, including preferred capital not classified as a liability.
Borrowing costs directly attributable to the acquisition, construction, or production of qualifying assets measured at fair value (e.g., biological assets accounted for under IAS 41).
Inventories manufactured, or otherwise produced, in large quantities on a repetitive basis, even if they take a substantial period to get ready for sale (unless specific criteria are met to treat them as qualifying assets, which is rare).
Key Principle: Capitalization
Core Principle: Capitalize borrowing costs directly attributable to a qualifying asset; Expense all others.
Recognition Rule:
An entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset.
Capitalization means adding these borrowing costs to the cost of that asset.
An entity shall recognize all other borrowing costs as an expense in profit or loss in the period in which they are incurred.
Definitions
Borrowing Costs:
Interest and other costs that an entity incurs in connection with the borrowing of funds.
May include:
Interest expense calculated using the effective interest method as described in IFRS 9.
Finance charges in respect of leases recognized in accordance with IFRS 16.
Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
Other costs like loan arrangement fees, premiums/discounts on borrowing (amortized over loan term).
Qualifying Asset:
An asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
"Substantial period" is a matter of judgment, but typically suggests more than a few months, often a year or more, depending on the asset type.
Qualifying Assets
Definition Recap:
Asset requiring a substantial period to prepare for intended use or sale.
Examples (May Include):
| Asset Category | Examples | Notes |
|---|---|---|
| Inventories | Maturing inventories (e.g., cheese, wine, whiskey); Assets constructed under long-term contracts (e.g., ships, complex machinery). | Requires substantial period; excludes routinely mass-produced inventory. |
| Manufacturing Plants | Construction of a new factory or significant production line. | Preparation period is key. |
| Power Generation Facilities | Construction of a power plant, wind farm, etc. | Typically long construction periods. |
| Intangible Assets | Development phase of complex software, pharmaceutical research leading to a patent. | Only during the period meeting qualifying asset criteria (e.g., IAS 38 development criteria met). |
| Investment Properties | Construction or substantial redevelopment of property held for rental or capital appreciation (under IAS 40 cost model). | If measured at fair value, borrowing costs are expensed. |
| Property, Plant & Equipment | Self-constructed buildings, bridges, significant machinery requiring long installation/setup. | Must take substantial time. |
| Bearer Plants | Growing phase before maturity (when they are capable of bearing produce). | Covered by IAS 16. |
Exclusions (Generally NOT Qualifying Assets):
Assets routinely manufactured or produced in large quantities on a repetitive basis over a short period (standard inventory).
Assets that are ready for their intended use or sale when acquired.
Financial assets.
Assets measured at fair value (e.g., biological assets under IAS 41).
Borrowing Costs Eligible for Capitalization
Definition Recap:
Costs directly attributable to the acquisition, construction, or production of a qualifying asset.
These are borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made.
Identifying Directly Attributable Costs:
Easily identified when funds are borrowed specifically for the purpose of obtaining a particular qualifying asset.
More complex when funds are borrowed generally (part of a pool) and used for obtaining a qualifying asset. Requires applying a capitalization rate to expenditures on the asset (see Calculation section).
Measurement Basis:
Based on the actual borrowing costs incurred on the specific or general borrowing during the period.
Adjustments:
Capitalizable borrowing costs should be reduced by any investment income earned on the temporary investment of those specific borrowings (i.e., funds borrowed specifically for an asset but temporarily invested before being spent).
Commencement of Capitalization
Conditions (ALL must be met to start):
Expenditure for the qualifying asset is being incurred.
Borrowing costs are being incurred.
Activities necessary to prepare the asset for its intended use or sale are in progress.
Activities include more than just physical construction; they encompass technical and administrative work prior to commencement (e.g., obtaining permits), provided these activities are ongoing.
Suspension of Capitalization
Condition:
An entity shall suspend capitalization during extended periods in which active development is interrupted.
Exceptions (Do NOT suspend if):
Suspension is not required during periods when substantial technical and administrative work is being carried out.
Suspension is not required if a temporary delay is a necessary part of the process of getting an asset ready (e.g., high water levels delaying bridge construction that are common for the geographical area, inventory maturing).
Cessation of Capitalization
Condition:
An entity shall cease capitalizing borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
Asset Ready for Use/Sale:
An asset is normally ready when its physical construction is complete, even if routine administrative work still continues.
If only minor modifications (e.g., decorating, minor fit-outs based on user request) are outstanding, this indicates substantial completion.
Phased Completion:
When construction is completed in parts, and each part is capable of being used while construction continues on other parts (e.g., a business park with several usable buildings):
Capitalization ceases for each part when it is substantially complete and ready for use/sale.
Capitalization continues for the other parts still under development.
Capitalization for the entire project ceases only when all parts are substantially complete.
Calculation of Capitalizable Borrowing Costs
Funds Borrowed Specifically for a Qualifying Asset:
Amount to Capitalize = Actual borrowing costs incurred on that specific borrowing during the period...
Less: Any investment income earned on the temporary investment of those borrowings.
Funds Borrowed Generally (Part of a Pool) and Used for a Qualifying Asset:
Determine the amount to capitalize by applying a capitalization rate to the expenditures incurred on that asset during the period.
Expenditures are typically the average carrying amount of the asset during the period, including previously capitalized borrowing costs.
Capitalization Rate (for General Borrowings):
| Component | Description |
|---|---|
| Numerator | Weighted average of the borrowing costs applicable to the general pool of borrowings outstanding during the period. |
| Denominator | Weighted average of those general borrowings outstanding during the period. |
| Exclusion | Exclude borrowing costs and borrowings related to funds borrowed specifically for qualifying assets from this calculation (until specific asset complete, then may become general). |
| Application | Capitalizable Amount = Capitalization Rate × Average Expenditures on Asset |
Limit on Capitalization:
The total amount of borrowing costs capitalized during a period cannot exceed the total amount of borrowing costs incurred by the entity during that period.
Disclosure Requirements
Key Disclosures in Financial Statements:
The accounting policy adopted for borrowing costs (i.e., capitalization for qualifying assets).
The total amount of borrowing costs capitalized during the period.
The capitalization rate used to determine the amount of borrowing costs eligible for capitalization (specifically relating to general borrowings).
Disclaimer: These IFRS summaries are provided for educational purposes only.
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Imad Uddin is deeply passionate about IFRS and has founded Analyqt, a consulting firm dedicated to helping clients navigate complex accounting and financial reporting challenges. In addition to his advisory work, Imad is committed to education and knowledge-sharing, which led to the creation of IFRSMasterclass.com, a platform offering high-quality IFRS training and resources.
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