International Accounting Standard 23 Borrowing Costs (IAS 23) is set out in paragraphs 1⁠–⁠30 and the Appendix. All of the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 23 should be read in the context of its core principle and the Basis for Conclusions, the Preface to IFRS Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance. [Refer:IAS 8 paragraphs 10⁠–⁠12]

International Accounting Standard 23Borrowing Costs

Core principle

1

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. [Refer:paragraphs 8 and 9]

Scope

2

An entity shall apply this Standard in accounting for borrowing costs.

3

The Standard does not deal with the actual or imputed cost of equity, including preferred capital not classified as a liability. [Refer:IAS 32]

4

An entity is not required to apply the Standard to borrowing costs directly attributable to the acquisition, construction or production of:

(a)

a qualifying asset measured at fair value, for example a biological asset within the scope of IAS 41 Agriculture; or

[Refer:Basis for Conclusions paragraph BC4]

(b)

inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis.

[Refer:Basis for Conclusions paragraphs BC5 and BC6]

Definitions

5

This Standard uses the following terms with the meanings specified: 

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. [Refer:paragraph 6]

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.E1 [Refer:paragraph 7]

E1

[IFRIC® Update, March 2019, Agenda Decision, ‘IAS 23 Borrowing Costs—Over Time Transfer of Constructed Good’

The Committee received a request about the capitalisation of borrowing costs in relation to the construction of a residential multi-unit real estate development (building).

In the fact pattern described in the request:

a.

a real estate developer (entity) constructs the building and sells the individual units in the building to customers. 

b.

the entity borrows funds specifically for the purpose of constructing the building and incurs borrowing costs in connection with that borrowing. 

c.

before construction begins, the entity signs contracts with customers for the sale of some of the units in the building (sold units). 

d.

the entity intends to enter into contracts with customers for the remaining part-constructed units (unsold units) as soon as it finds suitable customers. 

e.

the terms of, and relevant facts and circumstances relating to, the entity’s contracts with customers (for both the sold and unsold units) are such that, applying paragraph 35(c) of IFRS 15 Revenue from Contracts with Customers, the entity transfers control of each unit over time and, therefore, recognises revenue over time. The consideration promised by the customer in the contract is in the form of cash or another financial asset. 

The request asked whether the entity has a qualifying asset as defined in IAS 23 and, therefore, capitalises any directly attributable borrowing costs.

Applying paragraph 8 of IAS 23, an entity capitalises borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Paragraph 5 of IAS 23 defines a qualifying asset as ‘an asset that necessarily takes a substantial period of time to get ready for its intended use or sale’.

Accordingly, the entity assesses whether, in the fact pattern described in the request, it recognises an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Depending on the particular facts and circumstances, the entity might recognise a receivable, a contract asset and/or inventory.

The Committee concluded that, in the fact pattern described in the request:

a.

a receivable that the entity recognises is not a qualifying asset. Paragraph 7 of IAS 23 specifies that financial assets are not qualifying assets. 

b.

a contract asset that the entity recognises is not a qualifying asset. The contract asset (as defined in Appendix A to IFRS 15) would represent the entity’s right to consideration that is conditioned on something other than the passage of time in exchange for transferring control of a unit. The intended use of the contract asset—to collect cash or another financial asset—is not a use for which it necessarily takes a substantial period of time to get ready. 

c.

inventory (work-in-progress) for unsold units under construction that the entity recognises is not a qualifying asset. In the fact pattern described in the request, this asset is ready for its intended sale in its current condition—ie the entity intends to sell the part-constructed units as soon as it finds suitable customers and, on signing a contract with a customer, will transfer control of any work-in-progress relating to that unit to the customer. 

The Committee concluded that the principles and requirements in IAS 23 provide an adequate basis for an entity to determine whether to capitalise borrowing costs in the fact pattern described in the request. Consequently, the Committee decided not to add this matter to its standard-setting agenda.]

6

Borrowing costs may include:

(a)

interest expense calculated using the effective interest method as described in IFRS 9; [Refer:IFRS 9 Appendix A and paragraphs 5.4.1, 5.4.2 and B5.4.1⁠–⁠B5.4.7]

(b)

[deleted]

(c)

[deleted]

(d)

interest in respect of lease liabilities recognised in accordance with IFRS 16 Leases [Refer:IFRS 16 paragraphs 36(a) and 37]; and

(e)

exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.E2

[Refer:Basis for Conclusions paragraph BC20]
E2

[IFRIC® Update, January 2008, Agenda Decision, ‘IAS 23 Borrowing Costs (as revised in 2007)—Foreign exchange and capitalisable borrowing costs’ 

The IFRIC received a request for guidance on which foreign exchange differences may be regarded as adjustments to interest costs for the purpose of applying IAS 23. IAS 23 states that ‘Borrowing costs may include…exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs’ (emphasis added). The request asked for guidance both on the treatment of foreign exchange gains and losses and on the treatment of any derivatives used to hedge such foreign exchange exposures.

The IFRIC noted that the principle set out in paragraph 8 of IAS 23 states ‘an entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.’ The IFRIC also noted that paragraph 11 states ‘the determination of the amount of borrowing costs that are directly attributable to the acquisition of a qualifying asset is difficult and the exercise of judgement is required.’ Consequently, how an entity applies IAS 23 to foreign currency borrowings is a matter of accounting policy requiring the exercise of judgement. IAS 1  Presentation of Financial Statements requires clear disclosure of significant accounting policies and judgements that are relevant to an understanding of the financial statements.

The IFRIC noted that, notwithstanding the guidance in paragraphs 8 and 11 of IAS 23, the standard itself acknowledges that judgement will be required in its application and appropriate disclosure of accounting policies and judgements would provide users with the information they need to understand the financial statements. The IFRIC concluded that it was unnecessary to provide application guidance. The IFRIC also noted that, as part of its project to amend IAS 23, the Board specifically considered this issue and decided not to develop further guidance in this area. The IFRIC concluded that it should not develop guidance as the Board had already decided not to provide it.

The IFRIC therefore decided not to add the issue to its agenda.]

7

Depending on the circumstances, any of the following may be qualifying assets:

(a)

inventories

(b)

manufacturing plants

(c)

power generation facilities

(d)

intangible assets

(e)

investment properties

(f)

bearer plants.

Financial assets, and inventories that are manufactured, or otherwise produced, over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

Recognition

8

An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognise other borrowing costs as an expense in the period in which it incurs them.

9

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are included in the cost of that asset. Such borrowing costs are capitalised as part of the cost of the asset when it is probable that they will result in future economic benefits to the entity and the costs can be measured reliably. When an entity applies IAS 29 Financial Reporting in Hyperinflationary Economies, it recognises as an expense the part of borrowing costs that compensates for inflation during the same period in accordance with paragraph 21 of that Standard.

Borrowing costs eligible for capitalisation

10

The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made. When an entity borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified.

11

It may be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings that could otherwise have been avoided. Such a difficulty occurs, for example, when the financing activity of an entity is co‑ordinated centrally. Difficulties also arise when a group uses a range of debt instruments to borrow funds at varying rates of interest, and lends those funds on various bases to other entities in the group. Other complications arise through the use of loans denominated in or linked to foreign currencies, when the group operates in highly inflationary economies, and from fluctuations in exchange rates. As a result, the determination of the amount of borrowing costs that are directly attributable to the acquisition of a qualifying asset is difficult and the exercise of judgement is required.

12

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.

13

The financing arrangements for a qualifying asset may result in an entity obtaining borrowed funds and incurring associated borrowing costs before some or all of the funds are used for expenditures on the qualifying asset. In such circumstances, the funds are often temporarily invested pending their expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalisation during a period, any investment income earned on such funds is deducted from the borrowing costs incurred.

14

To the extent that an entity borrows funds generally and uses them 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.E3 The capitalisation rate shall be the weighted average of the borrowing costs applicable to all borrowings of the entity that are outstanding during the period. [Refer:Basis for Conclusions paragraph BC14E] However, an entity shall exclude from this calculation borrowing costs applicable to borrowings made specifically for the purpose of obtaining a qualifying asset until substantially all the activities necessary to prepare that asset for its intended use or sale are complete. [Refer:Basis for Conclusions paragraphs BC14A⁠–⁠BC14D] The amount of borrowing costs that an entity capitalises during a period shall not exceed the amount of borrowing costs it incurred during that period.

[Refer also:paragraphs 28A and 29D for transition and effective date]
E3

[IFRIC® Update, September 2018, Agenda Decision, ‘Expenditures on a qualifying asset (IAS 23 Borrowing Costs)’

The Committee received a request about the amount of borrowing costs eligible for capitalisation when an entity uses general borrowings to obtain a qualifying asset.

In the fact pattern described in the request:

a.

an entity constructs a qualifying asset;

b.

the entity has no borrowings at the start of the construction of the qualifying asset. Partway through construction, it borrows funds generally and uses them to finance the construction of the qualifying asset; and

c.

the entity incurs expenditures on the qualifying asset both before and after it incurs borrowing costs on the general borrowings.

The request asked whether an entity includes expenditures on a qualifying asset incurred before obtaining general borrowings in determining the amount of borrowing costs eligible for capitalisation.

The Committee observed that an entity applies paragraph 17 of IAS 23 to determine the commencement date for capitalising borrowing costs. The paragraph requires an entity to begin capitalising borrowing costs when it meets all the following conditions:

a.

it incurs expenditures for the asset;

b.

it incurs borrowing costs; and

c.

it undertakes activities that are necessary to prepare the asset for its intended use or sale.

Applying paragraph 17 of IAS 23 to the fact pattern described in the request, the entity would not begin capitalising borrowing costs until it incurs borrowing costs.

Once the entity incurs borrowing costs and therefore satisfies all three conditions in paragraph 17 of IAS 23, it then applies paragraph 14 of IAS 23 to determine the expenditures on the qualifying asset to which it applies the capitalisation rate. The Committee observed that in doing so the entity does not disregard expenditures on the qualifying asset incurred before it obtains the general borrowings.

The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine the amount of borrowing costs eligible for capitalisation in the fact pattern described in the request. Consequently, the Committee decided not to add this matter to its standard-setting agenda.]

15

In some circumstances, it is appropriate to include all borrowings of the parent and its subsidiaries when computing a weighted average of the borrowing costs; in other circumstances, it is appropriate for each subsidiary to use a weighted average of the borrowing costs applicable to its own borrowings.

Excess of the carrying amount of the qualifying asset over recoverable amount

16

When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its recoverable amount or net realisable value, the carrying amount is written down or written off in accordance with the requirements of other Standards. In certain circumstances, the amount of the write‑down or write‑off is written back in accordance with those other Standards.

Commencement of capitalisation

17

An entity shall begin capitalising borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalisation is the date when the entity first meets all of the following conditions:

(a)

it incurs expenditures for the asset;

(b)

it incurs borrowing costs; and

(c)

it undertakes activities that are necessary to prepare the asset for its intended use or sale.

18

Expenditures on a qualifying asset include only those expenditures that have resulted in payments of cash, transfers of other assets or the assumption of interest‑bearing liabilities. Expenditures are reduced by any progress payments received and grants received in connection with the asset (see IAS 20 Accounting for Government Grants and Disclosure of Government Assistance). The average carrying amount of the asset during a period, including borrowing costs previously capitalised, is normally a reasonable approximation of the expenditures to which the capitalisation rate is applied in that period.

19

The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the asset’s condition is taking place. For example, borrowing costs incurred while land is under development are capitalised during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalisation.

Suspension of capitalisation

20

An entity shall suspend capitalisation of borrowing costs during extended periods in which it suspends active development of a qualifying asset.

21

An entity may incur borrowing costs during an extended period in which it suspends the activities necessary to prepare an asset for its intended use or sale. Such costs are costs of holding partially completed assets and do not qualify for capitalisation. However, an entity does not normally suspend capitalising borrowing costs during a period when it carries out substantial technical and administrative work. An entity also does not suspend capitalising borrowing costs when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. For example, capitalisation continues during the extended period that high water levels delay construction of a bridge, if such high water levels are common during the construction period in the geographical region involved.

Cessation of capitalisation

22

An entity shall cease capitalising borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.

23

An asset is normally ready for its intended use or sale when the physical construction of the asset is complete even though routine administrative work might still continue. If minor modifications, such as the decoration of a property to the purchaser’s or user’s specification, are all that are outstanding, this indicates that substantially all the activities are complete.

24

When an entity completes the construction of a qualifying asset in parts and each part is capable of being used while construction continues on other parts, the entity shall cease capitalising borrowing costs when it completes substantially all the activities necessary to prepare that part for its intended use or sale.E4

E4

[IFRIC® Update, September 2018, Agenda Decision, ‘Borrowing costs on land (IAS 23 Borrowing Costs)’

The Committee received a request about when an entity ceases capitalising borrowing costs on land.

In the fact pattern described in the request:

a.

an entity acquires and develops land and thereafter constructs a building on that land—the land represents the area on which the building will be constructed;

b.

both the land and the building meet the definition of a qualifying asset; and

c.

the entity uses general borrowings to fund the expenditures on the land and construction of the building.

The request asked whether the entity ceases capitalising borrowing costs incurred in respect of expenditures on the land (land expenditures) once it starts constructing the building or whether it continues to capitalise borrowing costs incurred in respect of land expenditures while it constructs the building.

The Committee observed that in applying IAS 23 to determine when to cease capitalising borrowing costs incurred on land expenditures:

a.

an entity considers the intended use of the land. Land and buildings are used for owner-occupation (recognised as property, plant and equipment applying IAS 16 Property, Plant and Equipment); rent or capital appreciation (recognised as investment property applying IAS 40 Investment Property); or for sale (recognised as inventory applying IAS 2 Inventories). The intended use of the land is not simply for the construction of a building on the land, but rather to use it for one of these three purposes.

b.

applying paragraph 24 of IAS 23, an entity considers whether the land is capable of being used for its intended purpose while construction continues on the building. If the land is not capable of being used for its intended purpose while construction continues on the building, the entity considers the land and building together to assess when to cease capitalising borrowing costs on the land expenditures. In this situation, the land would not be ready for its intended use or sale until substantially all the activities necessary to prepare both the land and building for that intended use or sale are complete.

The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine when to cease capitalising borrowing costs on land expenditures. Consequently, the Committee decided not to add this matter to its standard-setting agenda.]

25

A business park comprising several buildings, each of which can be used individually, is an example of a qualifying asset for which each part is capable of being usable while construction continues on other parts. An example of a qualifying asset that needs to be complete before any part can be used is an industrial plant involving several processes which are carried out in sequence at different parts of the plant within the same site, such as a steel mill.

Disclosure

Disclosure of borrowing costs [text block] Disclosure text block 800500, 836200

26

An entity shall disclose:

(a)

the amount of borrowing costs capitalised during the period; and

Borrowing costs capitalised Disclosure Xduration 836200

(b)

the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.

Capitalisation rate of borrowing costs eligible for capitalisation Disclosure X.XX 836200

Transitional provisions

27

When application of this Standard constitutes a change in accounting policy, [Refer:IAS 8 paragraph 14] an entity shall apply the Standard to borrowing costs relating to qualifying assets for which the commencement date for capitalisation [Refer:paragraphs 17⁠–⁠19] is on or after the effective date.

[Refer:Basis for Conclusions paragraph BC15]

28

However, an entity may designate any date before the effective date and apply the Standard to borrowing costs relating to all qualifying assets for which the commencement date for capitalisation [Refer:paragraphs 17⁠–⁠19] is on or after that date.

[Refer:Basis for Conclusions paragraphs BC15 and BC16]

28A

Annual Improvements to IFRS Standards 2015⁠–⁠2017 Cycle, issued in December 2017, amended paragraph 14. An entity shall apply those amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments.

[Refer:Basis for Conclusions paragraph BC18A]

Effective date

29

An entity shall apply the Standard for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the Standard from a date before 1 January 2009, it shall disclose that fact.

29A

Paragraph 6 was amended by Improvements to IFRSs issued in May 2008. An entity shall apply that amendment for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the amendment for an earlier period it shall disclose that fact.

29B

IFRS 9, as issued in July 2014, amended paragraph 6. An entity shall apply that amendment when it applies IFRS 9.

29C

IFRS 16, issued in January 2016, amended paragraph 6. An entity shall apply that amendment when it applies IFRS 16.

29D

Annual Improvements to IFRS Standards 2015⁠–⁠2017 Cycle, issued in December 2017, amended paragraph 14 and added paragraph 28A. An entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted. If an entity applies those amendments earlier, it shall disclose that fact.

Withdrawal of IAS 23 (revised 1993)

30

This Standard supersedes IAS 23 Borrowing Costs revised in 1993.

Appendices

AppendixAmendments to other pronouncements

The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2009. If an entity applies this Standard for an earlier period, the amendments in this appendix shall be applied for that earlier period. In the amended paragraphs, new text is underlined and deleted text is struck through.

* * * * *

The amendments contained in this appendix when this IFRS was issued in 2007 have been incorporated into the relevant IFRSs published in this volume.

Board Approvals

Approval by the Board of IAS 23 issued in March 2007

International Accounting Standard 23 Borrowing Costs (as revised in 2007) was approved for issue by eleven of the fourteen members of the International Accounting Standards Board. Messrs Cope, Danjou and Garnett dissented. Their dissenting opinions are set out after the Basis for Conclusions.

Sir David TweedieChairman
Thomas E JonesVice-Chairman
Mary E Barth
Hans-Georg Bruns
Anthony T Cope
Philippe Danjou
Jan Engström
Robert P Garnett
Gilbert Gélard
James J Leisenring
Warren J McGregor
Patricia L O’Malley
John T Smith
Tatsumi Yamada