International Financial Reporting Standards_guide.pdf

Chapter 27 Borrowing Costs (IAS 23) 297
27.5 PRESENTATION AND DISCLOSURE
The following should be disclosed:
■ the amount of borrowing costs capitalized during the period; and
■ the capitalization rate used to determine the amount of borrowing costs capitalized.
27.6 FINANCIAL ANALYSIS AND INTERPRETATION
27.6.1 Capitalized interest becomes a part of the historical cost of the asset. Included in
capitalized interest are explicit interest costs and interest related to a finance lease. This
capitalized interest requirement does not apply to:
■ inventories routinely produced or purchased for sale or use;
■ assets that are not being made ready for use; or
■ assets that could be used immediately, whether or not they are actually being used.
27.6.2 The amount of interest cost to be capitalized is that portion of interest expense
incurred during the asset’s construction period that theoretically could have been avoided if
the asset had been acquired ready to use. This includes any interest on borrowings that are
made specifically to finance the construction of the asset, and any interest on the general debt
of the company, up to the amount invested in the project. The capitalized interest cost cannot
exceed the total interest expense that the entity incurred during the period.
27.6.3 Before the asset is operational, the interest portion should be included and recorded
on the Statement of Financial Position as an asset in course of construction. That capitalized
interest will subsequently be expensed over the life of the asset by means of depreciation of
the asset.
27.6.4 The capitalization of interest expense that is incurred during the construction of an
asset reduces interest expense during the period in which the interest was paid. As a result,
capitalized interest causes accounting profit to be greater than cash flow.
27.6.5 For analytical purposes, especially when comparing two companies that do not have
similar borrowing patterns, analysts often remove the capitalized interest expense from the
asset portion of the Statement of Financial Position and treat that capitalized interest as an
interest expense. If this adjustment is not made, analysts reason that important ratios—such
as the interest coverage ratio—will be higher than those of comparable companies. However,
IFRS no longer provides a choice of expensing interest and now requires capitalization of
interest on qualifying assets. The financial statements of companies that have not capitalized
such interest should therefore be adjusted.
27.7 COMMENTARY
27.7.1 Judgment could be required to determine what comprises general borrowings for
the purposes of capitalizing borrowing costs and calculating the capitalization rate. IAS 23
paragraph 14 states that “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, other than borrowings made specifically for the purpose of obtaining a qualifying