Lkas 23

Borrowing Costs
LKAS 23
Objectives and Scope
• Identify borrowing costs;

• Identify qualifying assets;
• Distinguish between the borrowing cost to be
capitalized and expensed;
• Account for borrowing cost to be capitalized; and
• Apply the disclosure requirements of LKAS 23-
Borrowing costs.
Borrowing costs: “interest and other costs

that an entity incurs in connection with the
borrowing of funds”
The principle issue is whether finance costs on borrowings

incurred during the construction of an asset are, in effect,
part of the cost of the asset.
The recognition of borrowing costs as part of the cost of the

qualifying asset is known as ‘capitalizing’ such costs
Other borrowing cost are recognized as an expense

This standard shall be applied in accounting for

borrowing costs.
LKAS 23 does not deal with the actual or imputed

cost of equity, including preferred capital
Not applicable for borrowing costs directly

attributable to the acquisition, construction or
production of the following assets:
• Biological assets
• Inventories that are manufactured, or otherwise
produced, in large quantities on a repetitive basis.
Definitions
Borrowing costs are interest and other costs
incurred by an entity in connection with the
borrowing of funds.
Borrowing costs may include:
 Interest expenses calculated using the effective
interest method (LKAS 39)
 Finance charges in respect of financial lease
(LKAS 17)
 Exchange differences arising from foreign
currency borrowings
 Amortization of loan issue costs
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:
Inventories, Manufacturing plant, Power generation
facilities, Intangible assets, Investment properties
Non Qualifying Assets
• Financial assets, and inventories that are

manufactured or otherwise produced over a
short period of time, are not qualifying assets.
• Assets are ready for their intended use or sale

when acquired also are not qualifying assets.
Examples
Qualifying Assets
1. Power plant being under the Not Qualifying Assets

process of manufacture.
2. Inventories routinely
Not Qualifying Assets
manufactured.
3. Assets ready to use. Qualifying Assets
4. Inventories requiring a substantial
period for the manufacturing.
5. Special order for a special
inventory that will be Qualifying Assets
manufactured in five months.
Recognition
• Borrowing costs that are directly attributable to

the acquisition, construction or production of a
qualifying asset should be capitalized as part of the
cost of that asset.
• Other borrowing costs should be expense in the

period in which it incurs them.
Borrowing of an enterprise
Eligible Borrowing Costs
• Specific borrowings:
To the extent that an entity borrows funds specifically for
the purpose of obtaining a qualifying asset, the entity
shall determine the amount of borrowing costs eligible
for capitalisation as the actual borrowing costs
incurred on that borrowing during the period less any
investment income on the temporary investment of
those borrowings.
Generally Borrowed Funds
• To the extent that an entity borrows funds generally and uses it for
the purpose of obtaining a qualifying asset, the entity shall
determine the amount of borrowing costs eligible for capitalisation
by applying a capitalisation rate to the expenditures on that asset.
• The capitalisation rate shall be the weighted average of the
borrowing costs applicable to the borrowings of the entity that are
outstanding during the period
• For a period, the amount capitalized should not exceed borrowing
costs incurred
Commencement of Capitalization
Capitalization should commence when
• Expenditures are being incurred

• Borrowing costs are being incurred and
• Activities that are necessary to prepare the asset for its
intended use or sale are in progress (may include some
activities prior to commencement of physical production)
Suspension of Capitalization
Capitalization should be suspended during periods in which active development is interrupted

Cessation of Capitalization
Capitalization should cease when substantially all of the activities

necessary to prepare the asset for its intended use or sale are
completed.
Disclosures
• The accounting policy adopted

• Amount of borrowing cost capitalized during the
period
• Capitalization rate used
The End
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Borrowing Costs

• Identify borrowing costs;

Borrowing costs: “interest and other costs

The principle issue is whether finance costs on borrowings

The recognition of borrowing costs as part of the cost of the

Other borrowing cost are recognized as an expense

This standard shall be applied in accounting for

LKAS 23 does not deal with the actual or imputed

Not applicable for borrowing costs directly

A qualifying asset is an asset that necessarily takes a

Depending on the circumstances, any of the following

• Financial assets, and inventories that are

• Assets are ready for their intended use or sale

1. Power plant being under the Not Qualifying Assets

• Borrowing costs that are directly attributable to

• Other borrowing costs should be expense in the

Capitalization should commence when

• Expenditures are being incurred

Capitalization should be suspended during periods in which active development is interrupted

Capitalization should cease when substantially all of the activities

• The accounting policy adopted

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