Professional Documents
Culture Documents
FOCUS
This session covers the following content from the ACCA Study Guide.
Session 10 Guidance
Know how to describe and identify qualifying assets as defined in IAS 23 (s.3.1).
Learn the advantages and disadvantages to expensing and capitalising interest (s.1.2).
Calculate the amount of interest which should be capitalised under IAS 23 (s.3).
IAS 23
Issue
Arguments
Scope
Terminology
ACCOUNTING TREATMENT
Recognition
Disclosure
CAPITALISATION ISSUES
Qualifying Assets
Borrowing Costs Eligible
Commencement
Suspension
Cessation
Session 10 Guidance
Comprehend that "Borrowing Costs" is a relatively straightforward topic. Some borrowing costs
may be capitalised as a direct cost of constructing a qualifying asset that is then accounted for
under IAS 16 (see Session 9).
1 IAS 23
1.1 Issue
Companies borrow to finance their activities. Companies pay
interest (finance charges) on the amounts borrowed.
How should such debits for interest be recognised in the
financial statements: *Capitalising an asset
always as an expense; or defers recognition in
the profit or loss to a
are there circumstances which justify capitalisation as
later period.
an asset?*
1.2 Arguments
CAPITALISATION OF INTEREST
Arguments for Arguments against
Accruals: Better matching Accruals: Benefit is use of
of cost (interest) to benefit money. Interest should be
(use of asset). reflected in profit or loss
in the period for which the
company has the use of the
cash.
Comparability is improved. Comparability is distorted.
Better comparison between Similar assets at different
companies which buy the costs depending on the
assets and those which method of finance.
construct.
Consistency: Interest Consistency: Interest
treated as any other costs. treated differently from
period to period.
Reported profit distorted.
1.3 Scope
IAS 23 is applied to account for borrowing costs.
The standard does not apply to qualifying assets which are
measured at fair value (e.g. under IAS 41 Agriculture).
Any inventories manufactured in large quantities and on a
repetitive basis are not qualifying assets. IAS 41 is examinable
with effect from
December 2014 (see
Session 7).
1.4 Terminology
2 Accounting Treatment
2.1 Recognition
2.2 Disclosure
The amount of borrowing costs capitalised in the period.
The capitalisation rate used.
3 Capitalisation Issues
Required:
(a) Calculate the appropriate capitalisation rate if all of the borrowings
are used to finance the production of qualifying assets but none of the
borrowings relate to a specific qualifying asset.
(b) If the seven-year loan is an amount which can be specifically identified
with a qualifying asset, calculate the rate which should be used on the
other assets.
Solution
(a) Capitalisation rate =
Session 10 Quiz
Estimated time: 10 minutes
2. Specify what would be included within the definition of borrowing costs. (1.4)
3. Describe the type of borrowing costs which may be capitalised according to the standard.
(3.1, 3.2)
5. Assume that a company is required to capitalise borrowing costs relating to the acquisition or
construction of a qualifying asset; state the point in time at which the borrowing costs can no
longer be capitalised. (3.5)
EXAMPLE SOLUTION