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Borrowing Costs: IAS 23
Wiecek and Young
IFRS Primer
Chapter 13
Borrowing Costs
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Related standards
IAS 23
Current GAAP comparisons
IFRS financial statement disclosures
Looking ahead
End-of-chapter practice
Related Standards
FAS 34 Capitalization of interest cost
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Related Standards
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IAS 2 Inventories
IAS 16 Property, plant and equipment
IAS 38 Intangible assets
IAS 40 Investment property
IAS 23 - Overview
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Objective and scope
Recognition
Disclosure
IAS 23 – Objective and Scope
Principle –
The cost of an asset should include all costs
incurred that are necessary to get it ready for
its intended use.
IAS 23 sets out requirements for capitalizing
financing costs related to the acquisition,
construction, or production of a qualifying
asset.
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IAS 23 – Objective and Scope
Borrowing costs: “interest and other costs
that an entity incurs in connection with the
borrowing of funds”
e.g., interest expense that results from use of
the effective interest method set out in IAS
39 Financial Instruments-Recognition and
Measurement
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IAS 23 – Objective and Scope
Qualifying assets: those that require
substantial time to get ready for their
intended use or sale
e.g., inventory, PP&E, intangible assets,
investment property (qualifying assets
measured at FV and inventories produced in
large quantities on a repetitive basis may, but
are not required to, apply IAS 23)
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IAS 23 - Recognition
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Recognize borrowing costs (during
construction or production) on qualifying
assets as part of the cost of those assets
as long as:
they will result in future benefits
they can be measured reliably
IAS 23 - Recognition
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Borrowing costs to capitalize = the avoidable
costs, i.e., those that would not have been
incurred if expenditures for the qualifying
asset had not been made, less any
investment income earned on the temporary
investment of such funds.
If borrowing is specific to a qualifying asset,
avoidable costs are easy to calculate
IAS 23 - Recognition
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If not asset-specific borrowing:
Calculate a capitalization rate
Calculate the weighted average
expenditures on the qualifying asset
Calculate the costs to capitalize
IAS 23 - Recognition
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Example
 DH Ltd. begins construction of a building on
Feb. 1 and completes it on Nov. 30.
Expenditures: Mar. 1- $150; June 1- $120;
Nov. 30 - $300
 DH Ltd. Borrows $100 on Mar. 1 (5 year 12%
note) to pay for construction. Debt
outstanding all year: $200, 5-year 13% note
payable; $350 4-year 15% note payable
 How much interest is included in the cost of
the building?
IAS 23 - Recognition
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Capitalization rate on general borrowing:
Debt
$ Debt
Weight
Weighted
Debt
13% Note
Payable
$200
12/12
$200
$26.0
15% Note
Payable
$350
12/12
$350
52.5
$550
$78.5
Capitalization rate:
$78.5 ÷ $550 =
Interest
14.3%
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IAS 23 - Recognition
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Weighted average expenditures
Date
Payment
Weight
Weighted
Expenditures
Mar. 1
$150
150 × 9/12
$112.5
Jun. 1
$120
120 × 6/12
60.0
Nov.30
$300
300 × 0/12
0.0
Total weighted expenditures
Financed by specific borrowing: $100 × 9/12
Financed by general borrowing
$172.5
75.0
$ 97.5
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IAS 23 - Recognition
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Costs to capitalize
Description
Calculations
On expenditures financed by
asset-specific debt
$75 × 12%
On remaining expenditures
financed by general debt
$97.5 × 14.3%
Borrowing Costs
to Capitalize
$ 9.0
13.9
$ 22.9
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IAS 23 - Recognition
Entry:
Dr. Building
$22.9
Cr. Interest expense
$22.9
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Capitalization stops when asset is
substantially ready for use
IAS 23 - Disclosure
Disclose:
1.
2.
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The amount of borrowing costs capitalized
during the period, and
The capitalization rate used to determine
the costs eligible for capitalization
Current GAAP Comparisons
Page 122 of 164 of
http://www.kpmg.co.uk/pubs/IFRScomparedtoU
.S.GAAPAnOverview(2008).pdf
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IFRS Financial Statement
Disclosures
Royal Dutch Shell plc
http://wwwstatic.shell.com/static/investor/downloads/fin
ancial_information/reports/2007/2007_annual
_report.pdf
Accounting policies – page 122 of 224
Interest expense Note 5 – page 129 of 224
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Looking Ahead
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Treatment explained for IAS 23 in this
chapter takes effect on January 1, 2009
Recent revisions to IAS were part of IASBFASB short-term convergence project
Borrowing costs are no longer on the IASB
agenda
End-of-Chapter Practice
13-1 Alpha Inc. manufactures equipment for companies in the forestry and related sectors. During its
year ended March 31, 2009 Alpha is engaged in the manufacture of the following, all of which
require an extended period of time to complete:
1. log-handling equipment produced routinely on a repetitive basis for inventory
2. a specialized machine custom-ordered and designed by a major customer that made a
$50 advance payment on its production
3. a new production facility for Alpha’s own use
Except for a $100 loan arranged as interim financing on the new production facility, no specific
debt was incurred to finance these activities.
Instructions
Prepare a memo for Alpha Inc.’s controller that responds to the following questions:
(a) Do the carrying costs on all three assets have to be capitalized under IAS 23?
(b) Are borrowing costs and interest payments the same thing?
(c) Does the $50 advance payment on the custom-ordered machine affect the calculation of
borrowing costs to be capitalized? If it does, how?
(d) Explain briefly how the capitalization rate should be calculated.
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End-of-Chapter Practice
13-2 Gamma Ltd. (GL) signed a contract on September 29, 2008 for the $200 construction of a
state-of-the-art distribution center for the company’s Atlantic region. Gamma has a December
31 fiscal year end. On September 30, GL borrowed $120 from the bank at a rate of 10% to
finance the first part of the construction. GL paid the contractor $40 on September 30 and $50
on December 2, 2008, investing the excess funds in short-term securities. As of December 31,
2008, GL earned $2 interest on the excess funds.
Instructions
(a) Determine the borrowing costs to be capitalized for GL’s year ended December 31, 2008.
(b) If GL had paid the bank a fee of $3 on September 30 to enter into the loan agreement, how
would this affect your calculation in part (a), if at all?
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End-of-Chapter Practice
13-3 Epsilon Inc. (EI) is a franchisor that has been growing at a rate of 20% per year over the past three years.
As part of EI’s agreement with its franchisees, EI is responsible for construction of the franchisees’ outlets. The
outlets are transferred to the individual franchisee at cost plus 10% shortly after completion of construction and
final inspection. In 2009, EI contracted with Ace Builders to construct five outlets in different parts of a growing
municipality at a cost of $100 each, for a total cost of $500. In accordance with the contract, EI made the
following payments in 2009:
March 1
$120
April 30
150
December 30
130
$400
All five outlets were completed as of December 31, 2009, and ready for transfer to the franchisees on January 4,
2010. The franchisees paid for the outlets when invoiced in late January 2010, at which time EI made the final
payment to Ace Builders. EI did not enter into any new borrowing arrangements to finance this construction. The
following interest-bearing liabilities were reported on EI’s January 31, 2009 balance sheet at the end of its fiscal
year.
• 8% eight-year $200 loan payable, dated April 1, 2008, interest payable each April 1
• 10% 12-year $300 bond payable issued at face value on September 25, 2003, interest payable each
September 25
Instructions
(a) Calculate the capitalization rate for determining the borrowing costs to be capitalized as part of the cost of the
outlets.
(b) Calculate the amount of borrowing costs to be capitalized.
(c) What would be the appropriate accounting treatment for the borrowing costs incurred by the company during
the year if EI had issued additional common shares to finance the construction? Explain.
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End-of-Chapter Practice
13-4
In this chapter, flag icons identify areas where there are GAAP differences between IFRS
requirements and national standards.
Instructions
Access the website(s) identified on the inside back cover of this book, and prepare a concise
summary of the differences that are flagged throughout the chapter material.
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