IAS 23 – Borrowing Costs

1 Introduction – Borrowing Costs

A common question is that if asset is acquired by taking a loan then what is the accounting treatment of interest paid on the loan applied for acquisition or construction of asset? This matter is dealt in IAS 23 Borrowing cost.

1.1 Core principle for recognition

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense in the period in which they are incurred

However, this standard does not deal with the recognition of following costs:

  1. actual or imputed cost of equity, including preferred capital not classified as a liability.
  2. borrowing costs directly attributable to the acquisition, construction or production of:
    1. a qualifying asset measured at fair value, for example a biological asset; or
    2. inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis.

What are borrowing costs?

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.

What is qualifying asset?

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Depending on the circumstances, any of the following may be qualifying assets:

  1. inventories
  2. manufacturing plants
  3. power generation facilities
  4. intangible assets
  5. investment properties.

What is NOT a qualifying asset?

  1. Financial assets,
  2. Inventories that are manufactured, or otherwise produced, over a short period of time.
  3. Assets that are ready for their intended use or sale when acquired are not qualifying assets (assets acquired by retailer)