IAS 23/IND AS 23 — BORROWING COST
Hi Friends,
Below brief summary to quickly revisit IAS23/IND AS 23 in question and answer format :
- What is the Objective?
-Accounting treatment for borrowing cost
2. What is Borrowing Cost?
-includes —
a)interest expense calculated by the effective interest method
b)finance charges in respect of finance leases and
c)exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs
3. Only Above are borrowing cost?
Standard has quite inclusive definition hence other cost related to borrowing needs to be evaluated based on our knowledge or judgement and apply the same policy consistently
4. Accounting treatment?
A. CAPITALISE — if the cost is related to acquisition, construction or production of a qualifying asset
B. EXPENSE OFF- All other borrowing cost to be expensed off in the p&l
5. What is Qualifying Asset?
Asset that take substantial period of time to get ready for its intended use or sale.
6. Substantial period of time?
It’s not defined under the standard, use judgement.
7. My asset if qualifying asset when to start capitalizing the borrowing cost?
A. Commence —
a)when the expenditures are incurred ,
b)borrowing costs being incurred AND
c)activities necessary to prepare the asset for its intended use or sale are in progress
B. Suspend —
a)during periods in which active development is interrupted
C. Cease-
a)when substantially all of the activities necessary to prepare the asset for its intended use or sale are complete
8. Measurement/ Amount to capitalize?
A. Funds borrowed specifically
Actual costs — any income on the funds temporary invested of such borrowings
B. General Pool
capitalization rate * expenditure on that asset
9. What is capitalization rate?
will be the weighted average of the borrowing costs applicable to the general pool
10. Any disclosure required as per the standard? If yes, then what?
a)Amount of borrowing cost capitalized during the period
b)Capitalization rate used
Quick Commentary:
Borrowing cost generally we expense off. However, this standard was brought to ensure that we should capitalize the borrowing cost related to asset where-in it takes substantial period of time to get ready for its intended use or sale. The standard further provides guidance on when to start ,how much amount and when to suspend/stop the capitalization of the cost.
Thank you❤️
