Study Unit 6 - Borrowing Costs

Borrowing costs
Chapter 14
• IAS 23
Consultation times
To be conducted during business hours i.e. 08:30 to 17:00
In person consultation Monday:

(09:30 – 10:30)
By appointment Wednesday:
(09:30 – 10:30)
Virtual consultations Monday – Friday
By appointment via Microsoft Teams

Quote of the semester
“Those who complete the course will do so only because they do

not, as fatigue sets in, convince themselves that the road ahead is
still too long, the inclines too steep, the loneliness impossible to
bear and the prize itself of doubtful value.”
― Thabo Mbeki
Happy second term of 2024 Academic year.

Learning Outcomes
1. Understand when borrowing costs can be capitalised.

2. Understand when to cease capitalising borrowing costs.
3. Understand what a qualifying asset is.
4. Understand the difference between the specific and general borrowing costs.
5. Determine borrowing costs to be capitalised.
6. Understand the required disclosures as set out in IAS 23.
Assessment Criteria
1. Discuss when capitalisation of borrowing costs commences.

2. Discuss when to cease capitalisation of borrowing costs.
3. Discuss what is meant by “qualifying asset”.
4. Explain the difference between specific borrowing costs and general borrowing costs.
5. Calculate the borrowing costs to be capitalised and provide the necessary journal entries
to record these borrowing costs.
6. Disclose the capitalised borrowing costs.
Introduction
Introduction
 Borrowing costs are covered in IAS 23.
 Q: What is a borrowing cost?
 If borrowing costs are directly attributable to the acquisition, construction or production of a qualifying asset, they must be
capitalized as part of the cost of the asset.
 NB: All other borrowing costs are expensed when they are incurred.
 Need to know;
o know your definitions (borrowing costs, qualifying assets
o know how to apply them
o Know the two exceptions (scope exclusions)
o know when to start capitalizing
o Know when to stop capitalizing
Introduction (continued)
 Capitalization shall;
o starts on commencement date
o ends on cessation date, and
o must be suspended during any extended periods on which active development of the asset is suspended
 The measurement of borrowing costs that must be capitalised can be technical, it depends on whether
the borrowings are specific borrowings or general borrowing
o specific borrowings are borrowings that are specifically raised to fund the acquisition, construction
production of the asset.
o general borrowings are borrowings that the entity simply tapped into the entity’s availability
borrowings.
Introduction (continued)
Tax implications – there is a possible deferred tax implications
Tax authorities generally allow the deduction of borrowing costs when they are incurred.
If we then, we capitalised them to them to the cost of our asset, a temporary difference arise.
 that temporary difference is called deferred tax and must be recognised.
 the deferred will reverse as the asset is expensed.
 There are also few small disclosure requirements.

Scope & Scope exclusion
Scope exclusion
 The concept of borrowing costs does not include the cost of equity.
 Q: What is the cost of equity, give an example?
 An entity is not forced to apply IAS 23 if the qualifying asset is;

o measured at fair value; or is
o inventory that is produced in large quantities on a repetitive basis
 Q: What could be the possible reason for this:

 A: at the end financial year, or the closing carrying amount, it will be adjusted to the fair value of the
asset, therefore it makes no difference.
Expensing borrowing costs
Expensing borrowing costs
 Recognise borrowing costs as an expense if;
1. It does not meet the conditions for capitalisation
2. It falls into the scope of exclusion
 the borrowing costs are expensed in profit and loss in the period in which they are incurred.
 the expense is measured at the amount charged by the lender according to the agreement.
 recognise the expense using the following journal;

Dr Finance cost or interest expense R xxxxxx
Cr Bank/ liability R xxxxxx
Capitalising Borrowing Costs
Overview - Question
What does it mean to

capitalise an item or
transaction?
Overview - Answer
To capitalise borrowing
costs means to include them
in the cost of the related
asset.
The definitions – Borrowing costs
 Borrowing costs does not include only the interest incurred or finance costs
 It also include other costs incurred in correction with borrowing funds
 Borrowing costs may include:

o interest expense recognised on lease liabilities (IFRS 16)
o interest expense calculated using the effective rate method (IFRS 9)
o exchange difference on foreign loan account to the extent that they relate to the
adjustment of interest rate on that loan
The definitions – Borrowing costs (continued)
 Borrowing costs may exclude:
o cost of raising share capital that is recognised as equity
- dividends on ordinary share capital
- dividends on non-redeemable preference shares
o cost of internal funds

- the opportunity cost of using the already existing funds (i.e. lost income that could have been generated using these funds)
Q: What about preference shares that are redeemable?

C: equity or debt?
C: financial instrument (IFRS 9)
Borrowing costs are defined as:

 interest and other costs
 that an entity incurs
 in connection with
 the borrowing of funds
 Other costs may include premium payable on redeemable preference shares, for example.
 Borrowing costs must be capitalised if, and only if, they:
 are directly attributable
 to the acquisition, construction or production of
 of a qualifying asset
 Directly attributable means that if the asset was not acquired, constructed or
produced, then these costs could have been avoided.
The definitions – Qualifying assets
 A qualifying asset is defined as:
 an asset
 that necessary takes
 a subsequent period of time
 to get ready for its intended use or sale.
 A qualifying asset requires a long time to get ready for its intended use or sale.
 it generally includes a variety of asset-types such as, plant and machinery, owner-occupied property or
investments property, intangible assets and even inventories.
The definitions – Qualifying assets (continued)
 Qualifying asset do not include:

o assets that are ready for their intended use or sale on acquisition
o financial assets (investment in shares, etc.)
o inventories that take a short period of time to manufacture.
The recognition criteria
 this means that costs meeting a definition of borrowing costs and are directly attributable to
the acquisition, construction or production of the qualifying asset must be capitalised to the
cost of the qualifying asset,
 But only if they meet the recognition criteria as per IAS 23.
 The recognition criteria states that:

 an inflow of future economic benefits must be probable; and
The cost must be measured reliable
Note: The recognition criteria above is still linked to the 2010 conceptual framework, however,
IAS Board concluded that this recognition criteria should continue to be used.

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Borrowing costs

To be conducted during business hours i.e. 08:30 to 17:00

In person consultation Monday:

By appointment via Microsoft Teams

“Those who complete the course will do so only because they do

Happy second term of 2024 Academic year.

1. Understand when borrowing costs can be capitalised.

1. Discuss when capitalisation of borrowing costs commences.

 Q: What is a borrowing cost?

 There are also few small disclosure requirements.

 An entity is not forced to apply IAS 23 if the qualifying asset is;

 Q: What could be the possible reason for this:

 recognise the expense using the following journal;

What does it mean to

 Borrowing costs may include:

o cost of internal funds

Q: What about preference shares that are redeemable?

Borrowing costs are defined as:

 Qualifying asset do not include:

 The recognition criteria states that:

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