International Financial Reporting Standards_guide.pdf

298 Chapter 27 Borrowing Costs (IAS 23)
asset.” Different interpretations of what comprises general borrowings exist and are accepted
in practice. One interpretation is that all borrowings, other than borrowings made specifically
for the purpose of obtaining a qualifying asset, have to be taken into account when
calculating the capitalization rate. Another interpretation is that the capitalization rate should
be calculated by allocating amounts between general borrowings and other borrowings
made specifically for the acquisition of other assets that do not meet the definition of qualifying
assets.
27.7.2 Consequently, the application of IAS 23 for purposes of capitalization of borrowing
costs is a matter of accounting policy requiring the exercise of judgment. IAS 1 (refer to chapter
3) requires clear disclosure of significant accounting policies and judgments that are relevant
to an understanding of the financial statements.
27.7.3 The IASB issued the amended IAS 23 in March 2007. The revised IAS 23 requires the
capitalization of borrowing costs. The amendment was made as part of the IASB’s project to
converge IFRSs with U.S. GAAP. The amendment eliminates the main difference in the fundamental
accounting recognition principle between IFRSs and U.S. GAAP in this area,
although significant measurement differences remain. The IASB’s current project agenda
does not include any future amendments to IAS 23.
27.8 IMPLEMENTATION DECISIONS
The following table sets out some of the strategic and tactical decisions that should be considered
when applying IAS 23.
Strategic decisions Tactical decisions Problems to overcome
If an entity purchases or constructs an
asset and incurs borrowing costs on this
asset, management should determine
whether it meets the definition of
a qualifying asset (that is, it takes a
substantial period of time to get the
asset ready for its intended use or sale).
Entities acquiring or constructing a
qualifying asset should determine
whether funds utilized to purchase or
construct the assets will be borrowed
specifically or whether they will utilize
the entity’s general borrowings.
Management should ensure that
capitalized borrowing costs meet the
IAS 23 criteria for capitalization.
If general borrowings are utilized, the
entity should formulate a policy on
how the amount of borrowing costs
capitalized and the capitalization rate
will be determined; that is, whether
funds to obtain nonqualifying assets will
be included or not when determining
the capitalization rate.
If specific borrowings are used,
management should decide whether
excess funds will temporarily be
invested and investment income
tracked.
The specific facts and circumstances
should be considered and judgment
applied in order to determine whether
the period required to get the asset
ready for its intended use is substantial.
IAS 23 does not define what is
considered substantial.
When the entity utilizes funds from
its general borrowings to construct
or purchase a qualifying asset,
management should apply judgment
in order to determine the capitalization
rate and the borrowing costs that are
directly attributable to obtaining the
qualifying asset.