Year 3 · Topic 16 of 20

IAS 23: Borrowing costs

Adding interest to the cost of an asset while it is being built: specific loans, general borrowings and when to start and stop.

ACCA exams this helps with: FR Financial Reporting See the ACCA map

New to this topic?

What it is: When a company borrows to build a big asset, such as a factory, the interest during construction is part of the asset’s cost.

The key idea: interest paid while a qualifying asset is being built is capitalised (added to its cost), not charged as an expense.

Example. A company borrows £2 million at 8% to build a warehouse over 9 months. Interest of £2m × 8% × 9/12 = £120,000 is added to the warehouse’s cost.

Key words

Borrowing costs
Interest and other costs of borrowing money.Example: Interest on a bank loan taken out to build a factory.
Qualifying asset
An asset that takes a substantial period of time to get ready for use or sale.Example: A factory, a power station, or whisky that matures for years.
Capitalise
Add a cost to an asset in the statement of financial position, instead of treating it as an expense.Example: Interest during construction is added to the building’s cost.
Capitalisation rate
The weighted average interest rate on general borrowings, used when no specific loan funds the asset.Example: Loans at 6% and 9% averaging 7.2%.

Learn

What must be capitalised

Borrowing costs directly attributable to building a qualifying asset must be capitalised as part of its cost. Other borrowing costs are expensed.

Specific loans

Capitalise the actual interest on the loan during construction, less any investment income earned by temporarily investing the loan money before it is spent.

General borrowings

If the asset is funded from general borrowings, use the weighted average rate on those loans and apply it to the amount spent on the asset.

Capitalisation rate = total interest on general borrowings ÷ total general borrowings

Start, pause, stop

When
StartSpending on the asset has begun, borrowing costs are being incurred and work to prepare the asset is in progress (all three)
SuspendDuring long periods when active work stops
StopWhen the asset is substantially complete and ready for use or sale

Watch it explained

Press play to watch the animation, or step through it at your own pace with the arrows.

Videos from YouTube tutors

These videos are made by independent tutors on YouTube, not by Trial Balance. Some use US terms or older exam names (for example F7 for FR), but the principles are the same.

Worked example

On 1 April a company borrows £2,000,000 at 8% a year specifically to build a warehouse. Building starts on 1 April and finishes on 31 December. Before it was spent, some of the loan was invested and earned £10,000.

Working£
Interest during construction: 2,000,000 × 8% × 9/12120,000
Less: investment income on unspent funds(10,000)
Borrowing costs capitalised110,000

Interest after 31 December is an expense, because the warehouse is complete.

Practice questions

Type or choose your answers, then press Check answer. Questions with a New numbers button can be repeated with different figures.