Borrowing Costs Eligible for Capitalization
Borrowing costs essentially refers to the interest related costs. But borrowing costs eligible for capitalization as per IAS 23 are not merely interest related costs that are levied on borrowings done for short period, like bank OD’s (Overdrafts) and notes that are payable. It is also not the costs that are levied on borrowings for long-term like real estate mortgage and term loan. Instead, borrowing costs comprises of other costs as well, like premiums on borrowings or amortising of discounts, amortising of ancillary expenses incurred as part of the borrowings or arrangements, differences in exchange arising as a result of foreign exchange borrowings to an extent that they are considered in the form of interest costs related adjustments, finance related charges made on finance related leases and recognized as per IAS 17 Leases.
Treatment for Borrowing Costs as per IAS 23
The problem arises at the time of analyzing whether borrowing costs should be capitalized or not after incurring expenses on constructing, acquiring and producing a ‘qualifying asset’. As per IAS 23, there are two different treatments for the purpose of recognizing the borrowing related costs. The first method calls for capitalizing of borrowing costs into qualifying asset’s cost. The second treatments that has been prescribed is expensing of borrowing costs at the time of incurring it. This particular standard is applicable at the time of recognizing the borrowing costs. However, not every kind of borrowing costs can be capitalized. Borrowing costs, which are attributable directly to constructing, acquiring or producing of an asset that qualifies should be capitalized as part of that particular asset’s cost. In addition to this, once this kind of accounting related policy has been adopted, it must be applied on all the assets that qualify.
What is also important to note here is that this particular standard is applicable only on the borrowing costs that are related to external borrowings and not to those made on equity.
Definitions of Terms (as per IAS 23)
Borrowing costs: Consists of interest as well as other costs that are incurred by an organization with regard funds borrowing.Qualifying asset: The asset which takes a great deal of time to prepare for it intended sale or use.
Start free ReadyRatios
reporting tool now!
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software