Introduction
IAS 23 sets out the accounting treatment for borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset. The objective of this standard is to prescribe the appropriate accounting treatment for borrowing costs so that they are recognized as an expense in the period in which they are incurred and not carried forward as an asset.
Scope
IAS 23 applies to all borrowing costs, except for those that are specifically dealt with in another IFRS. This standard applies to borrowing costs related to the acquisition, construction, or production of a qualifying asset. A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale.
Recognition
Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized as part of the cost of that asset. Capitalization should start when the following criteria are met:
- Expenditure for the asset has been incurred.
- Borrowing costs have been incurred.
- Activities that are necessary to prepare the asset for its intended use or sale are in progress.
If funds are borrowed specifically to finance the acquisition, construction, or production of a qualifying asset, the amount of borrowing costs eligible for capitalization is the actual borrowing costs incurred during the period less any investment income on the temporary investment of those borrowings.
If funds are borrowed generally and used for the acquisition, construction, or production of a qualifying asset, the amount of borrowing costs eligible for capitalization is determined by applying a capitalization rate to the expenditures on that asset. The capitalization rate should be the weighted average of the borrowing costs applicable to the borrowing of funds during the period in which the asset is being constructed or produced.
When the construction or production of a qualifying asset is interrupted for a lengthy period, capitalization of borrowing costs should cease until construction or production resumes.
Measurement
Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized as part of the cost of that asset. Capitalization should start when the following criteria are met:
Disclosure
The following should be disclosed in the financial statements:
- The accounting policy adopted for borrowing costs.
- The amount of borrowing costs capitalized during the period.
- The capitalization rate used to determine the amount of borrowing costs capitalized during the period.
- The total amount of borrowing costs incurred during the period.
- The amount of borrowing costs expensed during the period.
- The amount of any borrowing costs capitalized during the period that have been included in the cost of an asset that has been sold or disposed of during the period.
Conclusion
IAS 23 prescribes the appropriate accounting treatment for borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset. Borrowing costs that meet the recognition criteria should be capitalized as part of the cost of that asset. The amount of borrowing costs eligible for capitalization should be determined based on whether funds are borrowed specifically or generally to finance the qualifying asset. The disclosure requirements should be followed to provide sufficient information to users of financial statements.
FAQs
Frequently Asked Questions about IAS 23
IAS 23 sets out the accounting treatment for borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset. The objective of this standard is to prescribe the appropriate accounting treatment for borrowing costs so that they are recognized as an expense in the period in which they are incurred and not carried forward as an asset.
A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale.
Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized as part of the cost of that asset when the following criteria are met: expenditure for the asset has been incurred, borrowing costs have been incurred, and activities that are necessary to prepare the asset for its intended use or sale are in progress.
Borrowing costs that are capitalized as part of the cost of a qualifying asset should be measured at the actual rate of borrowing.
The following should be disclosed in the financial statements: the accounting policy adopted for borrowing costs, the amount of borrowing costs capitalized during the period, the capitalization rate used to determine the amount of borrowing costs capitalized during the period, the total amount of borrowing costs incurred during the period, the amount of borrowing costs expensed during the period, and the amount of any borrowing costs capitalized during the period that have been included in the cost of an asset that has been sold or disposed of during the period.
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- By completing the CIS training program, individuals can develop the necessary knowledge and skills to understand the complexities of IAS 23. The training program covers the principles and concepts of financial reporting under IFRS, which can help individuals understand the context of IAS 23 in relation to other accounting standards.
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- In summary, completing Future Connect Training's CIS training program can help individuals understand IAS 23 by providing a comprehensive understanding of the principles, concepts, and application of financial reporting under IFRS.
