1. Borrowing Costs: IAS 23
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2. Borrowing Costs Related standards IAS 23 Current GAAP comparisons
IFRS financial statement disclosures
Looking ahead
End-of-chapter practice

3. Related Standards
FAS 34 Capitalization of interest cost

4. Related Standards IAS 2 Inventories
IAS 16 Property, plant and equipment
IAS 38 Intangible assets
IAS 40 Investment property

5. IAS 23 - Overview
Objective and scope
Recognition
Disclosure

6. IAS 23 – Objective and Scope
Principle –
The cost of an asset should include all costs incurred that are necessary to get it ready for its intended use.
IAS 23 sets out requirements for capitalizing financing costs related to the acquisition, construction, or production of a qualifying asset.

7. IAS 23 – Objective and Scope
Borrowing costs: “interest and other costs that an entity incurs in connection with the borrowing of funds”
e.g., interest expense that results from use of the effective interest method set out in IAS 39 Financial Instruments-Recognition and Measurement

8. IAS 23 – Objective and Scope
Qualifying assets: those that require substantial time to get ready for their intended use or sale
e.g., inventory, PP&E, intangible assets, investment property (qualifying assets measured at FV and inventories produced in large quantities on a repetitive basis may, but are not required to, apply IAS 23)

9. IAS 23 - Recognition
Recognize borrowing costs (during construction or production) on qualifying assets as part of the cost of those assets as long as:
they will result in future benefits
they can be measured reliably

10. IAS 23 - Recognition
Borrowing costs to capitalize = the avoidable costs, i.e., those that would not have been incurred if expenditures for the qualifying asset had not been made, less any investment income earned on the temporary investment of such funds.
If borrowing is specific to a qualifying asset, avoidable costs are easy to calculate

11. IAS 23 - Recognition If not asset-specific borrowing:
Calculate a capitalization rate
Calculate the weighted average expenditures on the qualifying asset
Calculate the costs to capitalize

12. IAS 23 - Recognition Example
DH Ltd. begins construction of a building on Feb. 1 and completes it on Nov. 30. Expenditures: Mar. 1- $150; June 1- $120; Nov $300
DH Ltd. Borrows $100 on Mar. 1 (5 year 12% note) to pay for construction. Debt outstanding all year: $200, 5-year 13% note payable; $350 4-year 15% note payable
How much interest is included in the cost of the building?

13. IAS 23 - Recognition Capitalization rate on general borrowing: $200
Debt
$ Debt
Weight
Weighted
Interest
13% Note Payable
$200
12/12
$26.0
15% Note Payable
$350
52.5
$550
$78.5
Capitalization rate: $78.5 ÷ $550 =
14.3%

14. IAS 23 - Recognition Weighted average expenditures Mar. 1 $150
Date
Payment
Weight
Weighted
Expenditures
Mar. 1
$150
150 × 9/12
$112.5
Jun. 1
$120
120 × 6/12
60.0
Nov.30
$300
300 × 0/12
0.0
Total weighted expenditures
$172.5
Financed by specific borrowing: $100 × 9/12
75.0
Financed by general borrowing
$ 97.5

15. Borrowing Costs to Capitalize
IAS 23 - Recognition
Costs to capitalize
Description
Calculations
Borrowing Costs to Capitalize
On expenditures financed by asset-specific debt
$75 × 12%
$ 9.0
On remaining expenditures financed by general debt
$97.5 × 14.3%
13.9
$ 22.9

16. IAS 23 - Recognition Entry: Dr. Building $22.9
Cr. Interest expense $22.9
Capitalization stops when asset is substantially ready for use

17. IAS 23 - Disclosure Disclose:
The amount of borrowing costs capitalized during the period, and
The capitalization rate used to determine the costs eligible for capitalization

18. Current GAAP Comparisons
Page 122 of 164 of

19. IFRS Financial Statement Disclosures
Royal Dutch Shell plc
Accounting policies – page 122 of 224
Interest expense Note 5 – page 129 of 224

20. Looking Ahead
Treatment explained for IAS 23 in this chapter takes effect on January 1, 2009
Recent revisions to IAS were part of IASB-FASB short-term convergence project
Borrowing costs are no longer on the IASB agenda

21. End-of-Chapter Practice
13-1 Alpha Inc. manufactures equipment for companies in the forestry and related sectors. During its year ended March 31, 2009 Alpha is engaged in the manufacture of the following, all of which require an extended period of time to complete:
1. log-handling equipment produced routinely on a repetitive basis for inventory
2. a specialized machine custom-ordered and designed by a major customer that made a $50 advance payment on its production
3. a new production facility for Alpha’s own use
Except for a $100 loan arranged as interim financing on the new production facility, no specific debt was incurred to finance these activities.
Instructions
Prepare a memo for Alpha Inc.’s controller that responds to the following questions:
(a) Do the carrying costs on all three assets have to be capitalized under IAS 23?
(b) Are borrowing costs and interest payments the same thing?
(c) Does the $50 advance payment on the custom-ordered machine affect the calculation of borrowing costs to be capitalized? If it does, how?
(d) Explain briefly how the capitalization rate should be calculated.

22. End-of-Chapter Practice
13-2 Gamma Ltd. (GL) signed a contract on September 29, 2008 for the $200 construction of a state-of-the-art distribution center for the company’s Atlantic region. Gamma has a December 31 fiscal year end. On September 30, GL borrowed $120 from the bank at a rate of 10% to finance the first part of the construction. GL paid the contractor $40 on September 30 and $50 on December 2, 2008, investing the excess funds in short-term securities. As of December 31, 2008, GL earned $2 interest on the excess funds.
Instructions
(a) Determine the borrowing costs to be capitalized for GL’s year ended December 31, 2008.
(b) If GL had paid the bank a fee of $3 on September 30 to enter into the loan agreement, how would this affect your calculation in part (a), if at all?

23. End-of-Chapter Practice
13-3 Epsilon Inc. (EI) is a franchisor that has been growing at a rate of 20% per year over the past three years. As part of EI’s agreement with its franchisees, EI is responsible for construction of the franchisees’ outlets. The outlets are transferred to the individual franchisee at cost plus 10% shortly after completion of construction and final inspection. In 2009, EI contracted with Ace Builders to construct five outlets in different parts of a growing municipality at a cost of $100 each, for a total cost of $500. In accordance with the contract, EI made the following payments in 2009:
March 1 $120
April
December
$400
All five outlets were completed as of December 31, 2009, and ready for transfer to the franchisees on January 4, The franchisees paid for the outlets when invoiced in late January 2010, at which time EI made the final payment to Ace Builders. EI did not enter into any new borrowing arrangements to finance this construction. The following interest-bearing liabilities were reported on EI’s January 31, 2009 balance sheet at the end of its fiscal year.
8% eight-year $200 loan payable, dated April 1, 2008, interest payable each April 1
10% 12-year $300 bond payable issued at face value on September 25, 2003, interest payable each September 25
Instructions
(a) Calculate the capitalization rate for determining the borrowing costs to be capitalized as part of the cost of the outlets.
(b) Calculate the amount of borrowing costs to be capitalized.
(c) What would be the appropriate accounting treatment for the borrowing costs incurred by the company during the year if EI had issued additional common shares to finance the construction? Explain.

24. End-of-Chapter Practice
13-4 In this chapter, flag icons identify areas where there are GAAP differences between IFRS requirements and national standards.
Instructions
Access the website(s) identified on the inside back cover of this book, and prepare a concise summary of the differences that are flagged throughout the chapter material.

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