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Section 3220: Capitalization of Interest Costs

International Accounting Standard 23
Borrowing Costs

1. First version of IAS 23
"Capitalisation of Borrowing Costs" issued in March 1984

2. Revisions
December 1993: Borrowing Costs
March 2007: Borrowing Costs

[U.S. GAAP Codification Topic]
835 Interest
835-10 Overall
835-20 Capitalization of interest
835-30 Imputation of interest

3. Borrowing costs
--> interest and other costs to borrow funds

4. Qualifying asset
--> an asset that takes substantial time to be ready for use or sale
Financial assets are not qualifying assets
Inventories produced over a short period of time are not qualifying assets

5. Two Types of Borrowing Costs
Type 1: borrowing costs that are
directly attributable to acquisition of qualifying assets
--> recognised as part of cost of the asset

Type 2: borrowing costs that are NOT
directly attributable to acquisition of qualifying assets
--> recognised as an expense

6. Two Types of Funds
Type 1: funds borrowed specifically to acquire qualifying assets
--> actual borrowing costs are eligible for Capitalisation

Type 2: other funds borrowed for general purposes
--> weighted average of other borrowing costs is used as Capitalisation rate

7. Total amount of borrowing costs capitalised ≤ Total amount of borrowing costs

8. Capitalisation of borrowing cost begins on the commencement date
Commencement date, IAS 23.17
--> the date when all of the conditions in (1), (2), (3) are first met:
(1) expenditures to acquire the asset are incurred
(2) borrowing costs are incurred
(3) activities to prepare the asset for use or sale are undertaken

9. Suspension of capitalisation, IAS 23.20
Capitalisation is suspended during the period when
--> active development of a qualifying assets is suspended

10. Cessation of Capitalisation, IAS 23.22
Capitalisation of borrowing costs is ceased
--> when all activities in (1) are substantially completed
(1) activities to prepare qualifying asset for use and sale

11. IAS 23 and U.S. GAAP
IAS 23.12
Borrowing costs eligible for capitalisation = (1) - (2)
(1) Actual borrowing costs
(2) Income on temporary investment of borrowings

U.S. GAAP, ASC 835-20-30-10
For certain tax-exempt borrowings and certain gifts and grants
--> Interest earned is not offset against interest cost