IAS 23

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). ^[1] Borrowing costs refer to the interest and other costs that an entity incurs in connection with the borrowing of funds. ^[2] 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. ^[3] 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. ^[4] Other borrowing costs are recognized as an expense in the period in which they are incurred. ^[5]

Definitions

Borrowing costs may include interest expense calculated using the effective interest method as described in IFRS 9. ^[6] They also include interest in respect of lease liabilities recognized in accordance with IFRS 16. ^[7] Exchange differences arising from foreign currency borrowings are included to the extent that they are regarded as an adjustment to interest costs. ^[8]

Depending on the circumstances, qualifying assets may include inventories that require a substantial period to get ready for their intended use or sale. ^[9] Manufacturing plants, power generation facilities, and intangible assets can also meet the definition of a qualifying asset. ^[10] Furthermore, investment properties and bearer plants may be classified as qualifying assets under the standard. ^[11]

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. ^[12] 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. ^[13] Where funds are part of a general pool, the eligible amount is determined by applying a capitalization rate to the expenditures on that asset. ^[14] 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. ^[15]

Commencement and Suspension

The capitalization of borrowing costs begins when the entity first incurs expenditures for the asset and incurs borrowing costs. ^[16] Capitalization also requires that the entity undertakes activities necessary to prepare the asset for its intended use or sale. ^[17] An entity shall suspend capitalization during extended periods in which it suspends active development of a qualifying asset. ^[18]

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. ^[19] 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. ^[20]

Disclosure Requirements

An entity is required to disclose the amount of borrowing costs capitalized during the reporting period. ^[21] Additionally, the entity must disclose the capitalization rate used to determine the amount of borrowing costs eligible for capitalization. ^[22]

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. ^[23]

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. [24]
Recognition of investment income	Cash / Bank	Asset under construction (SoFP)	Reduction of capitalized cost by income earned on temporary investment of specific funds. [25]

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. ^[26]

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. [27]
Capitalization adjustment	Asset under construction (SoFP)	Interest Expense (P&L)	Reclassification of the portion of general interest attributable to the qualifying asset. [28]

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. ^[29]

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. [30]
Post-completion interest	Interest Expense (P&L)	Cash / Interest Payable	Interest incurred after the asset is ready must be expensed and cannot be capitalized. [31]

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." ^[32]

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

1. IASB. IAS 23, Paragraph IN1.
2. IASB. IAS 23, Paragraph 5.
3. Deloitte. IAS 23 — Summary of Borrowing Costs.
4. IASB. IAS 23, Paragraph 1.
5. IASB. IAS 23, Paragraph 8.
6. IASB. IAS 23, Paragraph 6(a).
7. Deloitte. IAS 23 — Definitions of borrowing costs.
8. IASB. IAS 23, Paragraph 6(e).
9. IASB. IAS 23, Paragraph 7.
10. Deloitte. IAS 23 — Examples of qualifying assets.
11. IASB. IAS 23, Paragraph 7.
12. IASB. IAS 23, Paragraph 8.
13. IASB. IAS 23, Paragraph 12.
14. Deloitte. IAS 23 — General borrowings and capitalization rates.
15. IASB. IAS 23, Paragraph 14.
16. IASB. IAS 23, Paragraph 17(a)-(b).
17. Deloitte. IAS 23 — Conditions for commencement.
18. IASB. IAS 23, Paragraph 20.
19. IASB. IAS 23, Paragraph 22.
20. Deloitte. IAS 23 — Cessation of capitalization.
21. IASB. IAS 23, Paragraph 26(a).
22. IASB. IAS 23, Paragraph 26(b).
23. IASB. IAS 23, Paragraph 12.
24. Deloitte. IAS 23 — Summary of specific borrowings.
25. IASB. IAS 23, Paragraph 12.
26. IASB. IAS 23, Paragraph 14.
27. Deloitte. IAS 23 — Treatment of general borrowings.
28. IASB. IAS 23, Paragraph 14.
29. IASB. IAS 23, Paragraph 22.
30. Deloitte. IAS 23 — Cessation criteria.
31. IASB. IAS 23, Paragraph 25.
32. IASB. IAS 23, Paragraph 26.

External links

• Official IAS 23 Standard (IFRS Foundation)
• Summary of IAS 23 by Deloitte