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IAS 23

IAS 23. Borrowing Costs. Overview of U.S. GAAP. Capitalization of interest cost Qualifying asset When to capitalize Amount to capitalize Difference between expensing and capitalizing must be material. Qualifying asset – U.S. GAAP.

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IAS 23

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  1. IAS 23 Borrowing Costs

  2. Overview of U.S. GAAP • Capitalization of interest cost • Qualifying asset • When to capitalize • Amount to capitalize • Difference between expensing and capitalizing must be material

  3. Qualifying asset – U.S. GAAP • Require a period of time for preparation for intended use. • Usually: • Assets under construction for company’s own use • Assets intended for sale or lease produced as discrete projects • Equity method investments while the investee has qualifying activities in progress • Does NOT include inventories produced in large quantities on a routine basis

  4. Capitalization period – U.S. GAAP • Begins with presence of three conditions • Expenditures for the asset have been made • Activities necessary for preparation for use in progress • Interest expense being incurred • Continues as long as all three are present • Ends when asset is substantially complete and ready for use

  5. Amount to capitalize – U.S. GAAP • Avoided cost (ASC 835-20) The amount of interest cost to be capitalized for qualifying assets (designated property) is intended to be that portion of the interest cost incurred during the assets' acquisition periods (production period) that theoretically could have been avoided if expenditures for the assets had not been made.

  6. Disclosure – U.S. GAAP • When no interest cost is capitalized, disclose interest expense incurred • When some interest is capitalized, disclose total amount of interest cost and amount capitalized

  7. Example – U.S. GAAP On 1 July 2011, entity A entered into a $2.2 million contract for the construction of a building . The building was completed at the end of June 2012. The following information relating to company borrowing and contractor payments is available: Assume for purposes of this example that interest expenses equals borrowing costs. How much interest should be capitalized?

  8. Solution – U.S. GAAP Calculate weighted average expenditures

  9. Solution – U.S. GAAP Calculate weighted average interest rate of general debt: ($1,000/$2,500)x12.5% + ($1,500/$2,500)x10% = 11%

  10. Solution – U.S. GAAP Calculate amount of interest to capitalize:

  11. Overview of IAS 23 • Capitalization of borrowing cost • Definition • Qualifying asset • When to capitalize • Amount to capitalize

  12. Borrowing cost – IAS 23 • Borrowing cost can consist of the following items: • Interest expense • Finance charges incurred in finance leases For example, when a piece of heavy equipment is leased to construct a building finance charges on the lease can be capitalized until the building is complete. • Exchange rate differences Both gains and losses must be considered

  13. Qualifying asset – IAS 23 • An asset that takes a substantial period of time to get ready for its intended use or sale. • Substantial is not defined • Management defines class of assets and what substantial means – must be consistent • Can include: • Inventories • Intangible assets • Properties • Does not include asset measured at fair value or a financial asset

  14. Capitalization period – IAS 23 • Begins when all three of the following are present: • Expenditures for the asset have been incurred • Borrowing costs are incurred • Preparation activities have been undertaken • Ceases when activities necessary to prepare asset for use are substantially complete. • Suspended when activities are suspended for an extended period

  15. Amount to capitalize – IAS 23 • Avoided cost (IAS 23.10) 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.

  16. Disclosure – IAS 23 • Amount of capitalized borrowing cost during the period • Capitalization rate used to determine eligible borrowing costs

  17. Example – IAS 23 On 1 July 2011, entity A entered into a $2.2 million contract for the construction of a building . The building was completed at the end of June 2012. The following information relating to company borrowing and contractor payments is available: Assume for purposes of this example that interest expenses equals borrowing costs. How much interest should be capitalized?

  18. Solution – IAS 23 Calculate weighted average expenditures

  19. Solution – IAS 23 Calculate weighted average interest rate of general debt: ($1,000/$2,500)x12.5% + ($1,500/$2,500)x10% = 11%

  20. Solution – IAS 23 Calculate amount of borrowing cost to capitalize:

  21. Borrowing cost - IFRS-SME • For small and medium sized entities • Do not have public accountability • Publish general purpose financial statements for external users • Borrowing cost are expensed, never capitalized

  22. U.S. GAAP/IAS 23 Differences

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