International Financial Reporting Standards_guide.pdf

Chapter 27 Borrowing Costs (IAS 23) 299
Strategic decisions Tactical decisions Problems to overcome
The entity should formulate and
implement a policy in line with IAS 23
to determine when capitalization of
borrowing costs should commence, be
suspended, and ceased.
When purchasing or constructing a
qualifying asset, management should
have a detailed project plan stipulating
the following:
• the date that expenses in respect
of getting the asset ready for its
intended use will commence;
• the date that the funding will be
obtained;
• the intended use of the asset and
the criteria that should be met before
it will be ready for its intended use;
• whether there will be periods that
substantial technical and administrative
work will be undertaken; and
• delays that are considered to be
inherent in getting the asset ready
for use.
Judgment should be applied to
distinguish whether the capitalization of
borrowing costs should be suspended
and ceased.
EXAMPLES: BORROWING COSTS
EXAMPLE 27.1
Morskoy Inc. is constructing a warehouse that will take about 18 months to complete. It
began construction on January 1, 20X2. The following payments were made during 20X2:
$’000
January 31 200
March 31 450
June 30 100
October 31 200
November 30 250
The first payment on January 31 was funded from the entity’s pool of debt. However, the
entity succeeded in raising a medium-term loan for an amount of $800,000 on March 31,
20X2, with simple interest of 9 percent per year, calculated and payable monthly in arrears.
These funds were specifically used for this construction. Excess funds were temporarily
invested at 6 percent per year monthly in arrears and payable in cash. The pool of debt was
again used for a $200,000 payment on November 30, which could not be funded from the
medium-term loan.
The construction project was temporarily halted for three weeks in May, when substantial
technical and administrative work was carried out.