Objective
IAS 23 prescribes the accounting treatment for borrowing costs, specifically when they should be capitalized as part of the cost of a qualifying asset versus recognized as an expense.
Borrowing costs are interest and other costs incurred in connection with borrowing funds.
🧾 1. Scope
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Applies to all borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset.
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Qualifying asset: Asset that takes substantial time to get ready for intended use or sale (e.g., buildings, manufacturing plants, ships).
Examples of qualifying assets:
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Construction of factories
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Large-scale infrastructure projects
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Inventories requiring a long production period
Non-qualifying assets:
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Inventory that can be produced within a short period
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Assets ready for immediate use
💡 2. Key Definitions
| Term | Meaning |
|---|---|
| Borrowing Costs | Interest expense (bank loans, bonds), finance charges, amortization of discounts, and certain foreign exchange differences on borrowings. |
| Capitalization | Adding borrowing costs to the cost of a qualifying asset rather than expensing immediately. |
| Qualifying Asset | Asset that requires substantial time to be ready for use or sale. |
⚙️ 3. Recognition and Capitalization
A. When to Capitalize
Borrowing costs directly attributable to a qualifying asset should be capitalized.
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Capitalization begins when:
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Expenditures for the asset are incurred
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Borrowing costs are incurred
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Activities to prepare the asset are in progress
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Capitalization ceases when the asset is substantially ready for use or sale.
B. What to Capitalize
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Interest on specific borrowings for the asset
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Weighted average interest rate on general borrowings used to finance qualifying assets
Not included:
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Administrative costs unrelated to borrowing
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Costs during idle periods unrelated to construction
C. Treatment of Borrowing Costs Not Capitalized
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Expensed in the period they are incurred.
🧮 4. Examples
Example 1 – Specific Borrowing
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Borrowing $1,000,000 at 6% interest to construct a building
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Construction period = 2 years
Capitalized Interest per year:
=
Journal Entry:
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At the end of construction, the building’s cost includes $120,000 interest.
Example 2 – General Borrowings
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Company has total borrowings = $2,000,000, interest = $100,000/year
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Funds used to construct qualifying asset = $1,000,000
Weighted average interest rate:
Interest to capitalize:
Journal Entry:
Example 3 – Non-qualifying Asset
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Borrowing to purchase inventory that can be sold immediately
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Interest = $5,000
Treatment: Recognize $5,000 as expense in profit or loss.
⚖️ 5. Disclosure Requirements
Entities must disclose:
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Accounting policy for borrowing costs
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Amount of borrowing costs capitalized during the period
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Qualifying assets in which borrowing costs were capitalized
Example Disclosure:
“Borrowing costs directly attributable to the construction of the factory ($120,000) were capitalized during the year. Borrowing costs relating to short-term assets are expensed.”
🧩 6. Summary Table
| Item | Capitalize? | Example |
|---|---|---|
| Building under construction | Yes | $60,000/year interest added to cost |
| Equipment financed by general loans | Yes (weighted avg) | $50,000 capitalized |
| Inventory ready for sale | No | $5,000 interest expensed |
| Idle construction | No | Interest during idle period expensed |
🎯 7. Key Points
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IAS 23 ensures borrowing costs are recognized in the cost of long-term assets, reflecting the true cost of acquisition or construction.
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Specific borrowings: capitalize directly
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General borrowings: capitalize proportionally
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Non-qualifying assets or idle periods: expense immediately
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Disclosure of capitalization policy and amounts is required