Overview and Core Principle International Accounting Standard 23: Borrowing Costs (IAS 23) is an international financial reporting standard adopted by the International Accounting Standards Board (IASB).IASB. IAS 23, Paragraph IN1. Borrowing costs refer to the interest and other costs that an entity incurs in connection with the borrowing of funds.IASB. IAS 23, Paragraph 5. IAS 23 provides guidance on how to measure borrowing costs, particularly when the costs of acquisition, construction or production are funded by an entity’s general borrowings.Deloitte. IAS 23 — Summary of Borrowing Costs. The standard mandates that borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset must be capitalized as part of the cost of that asset.IASB. IAS 23, Paragraph 1. Other borrowing costs are recognized as an expense in the period in which they are incurred.IASB. IAS 23, Paragraph 8.
Definitions Borrowing costs may include interest expense calculated using the effective interest method as described in IFRS 9.IASB. IAS 23, Paragraph 6(a). They also include interest in respect of lease liabilities recognized in accordance with IFRS 16.Deloitte. IAS 23 — Definitions of borrowing costs. Exchange differences arising from foreign currency borrowings are included to the extent that they are regarded as an adjustment to interest costs.IASB. IAS 23, Paragraph 6(e).
Depending on the circumstances, qualifying assets may include inventories that require a substantial period to get ready for their intended use or sale.IASB. IAS 23, Paragraph 7. Manufacturing plants, power generation facilities, and intangible assets can also meet the definition of a qualifying asset.Deloitte. IAS 23 — Examples of qualifying assets. Furthermore, investment properties and bearer plants may be classified as qualifying assets under the standard.IASB. IAS 23, Paragraph 7.
Recognition and Measurement An entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.IASB. IAS 23, Paragraph 8. Where funds are borrowed specifically, costs eligible for capitalization are the actual costs incurred less any investment income earned on the temporary investment of those borrowings.IASB. IAS 23, Paragraph 12. Where funds are part of a general pool, the eligible amount is determined by applying a capitalization rate to the expenditures on that asset.Deloitte. IAS 23 — General borrowings and capitalization rates. The capitalization rate should be the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period.IASB. IAS 23, Paragraph 14.
Commencement and Suspension The capitalization of borrowing costs begins when the entity first incurs expenditures for the asset and incurs borrowing costs.IASB. IAS 23, Paragraph 17(a)-(b). Capitalization also requires that the entity undertakes activities necessary to prepare the asset for its intended use or sale.Deloitte. IAS 23 — Conditions for commencement. An entity shall suspend capitalization during extended periods in which it suspends active development of a qualifying asset.IASB. IAS 23, Paragraph 20.
Cessation 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.IASB. IAS 23, Paragraph 22. When an entity completes the construction of a qualifying asset in parts, it shall cease capitalizing borrowing costs on a part when that part is completed.Deloitte. IAS 23 — Cessation of capitalization.
Disclosure Requirements An entity is required to disclose the amount of borrowing costs capitalized during the reporting period.IASB. IAS 23, Paragraph 26(a). Additionally, the entity must disclose the capitalization rate used to determine the amount of borrowing costs eligible for capitalization.IASB. IAS 23, Paragraph 26(b).
Accounting Examples for IAS 23
The following examples illustrate the journal entries required for borrowing costs under the specific and general borrowing treatments of IAS 23.
1. Specific Borrowings When an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the amount to be capitalized is the actual borrowing costs incurred less any investment income on temporary investments.IASB. IAS 23, Paragraph 12.
Scenario: A company borrows $1,000,000 at 5% interest specifically to build a factory. During the year, it earns $5,000 by temporarily investing part of the loan before it was spent on construction.
Event Debit Credit Rationale Recognition of interest incurred Asset under construction (SoFP) Cash / Interest Payable Capitalization of borrowing costs directly attributable to the asset.Deloitte. IAS 23 — Summary of specific borrowings. Recognition of investment income Cash / Bank Asset under construction (SoFP) Reduction of capitalized cost by income earned on temporary investment of specific funds.IASB. IAS 23, Paragraph 12.
2. General Borrowings If an entity uses a general pool of debt to fund a qualifying asset, it must determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset.IASB. IAS 23, Paragraph 14.
Scenario: A company has general loans of $2,000,000 at 6% and $3,000,000 at 8%. It spends $500,000 of these general funds on a new project. The weighted average capitalization rate is 7.2%.
Event Debit Credit Rationale Annual interest on general debt Interest Expense (P&L) Cash / Interest Payable Initial recognition of all interest on general borrowings as an expense.Deloitte. IAS 23 — Treatment of general borrowings. Capitalization adjustment Asset under construction (SoFP) Interest Expense (P&L) Reclassification of the portion of general interest attributable to the qualifying asset.IASB. IAS 23, Paragraph 14.
3. Cessation of Capitalization Capitalization must cease when substantially all activities necessary to prepare the qualifying asset for its intended use or sale are complete.IASB. IAS 23, Paragraph 22.
Event Debit Credit Rationale Completion of asset Finished Asset (e.g., PPE) Asset under construction (SoFP) Transfer of the total capitalized cost (including borrowing costs) to the final asset category.Deloitte. IAS 23 — Cessation criteria. Post-completion interest Interest Expense (P&L) Cash / Interest Payable Interest incurred after the asset is ready must be expensed and cannot be capitalized.IASB. IAS 23, Paragraph 25.
Disclosure Requirements (IAS 23) IAS 23 requires an entity to disclose information regarding the borrowing costs capitalized during the period to ensure transparency regarding the cost of "qualifying assets."IASB. IAS 23, Paragraph 26.
Paragraph Category Disclosure Requirement Description / Examples IAS 23.26(a) Capitalized Amounts Costs Capitalized in Period The amount of borrowing costs capitalized during the period (i.e., the interest and other costs added to the carrying amount of qualifying assets). IAS 23.26(b) Capitalization Rate Weighted Average Rate The capitalization rate used to determine the amount of borrowing costs eligible for capitalization (usually the weighted average of the borrowing costs applicable to general borrowings). IAS 23.IN1 Accounting Policy Policy Note Although not explicitly in paragraph 26, IAS 1 requires the disclosure of the accounting policy for borrowing costs (noting that capitalization is mandatory for qualifying assets).
References
External links Official IAS 23 Standard (IFRS Foundation) Summary of IAS 23 by Deloitte