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Questions and Answers
What is the core principle of IAS 23 Borrowing Costs?
What is the core principle of IAS 23 Borrowing Costs?
- Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset are included in the cost of that asset. (correct)
- Borrowing costs are only capitalized when they are incurred in foreign currency.
- All borrowing costs are recognized as an expense.
- Borrowing costs are only recognized as an expense when they are incurred in connection with lease liabilities.
Which of the following is NOT a component of borrowing costs as defined by IAS 23?
Which of the following is NOT a component of borrowing costs as defined by IAS 23?
- Interest expense calculated using the effective interest method
- Depreciation expense on fixed assets (correct)
- Exchange differences arising from foreign currency borrowings
- Interest in respect of lease liabilities recognized under IFRS 16
Which of the following assets are considered qualifying assets under IAS 23?
Which of the following assets are considered qualifying assets under IAS 23?
- Prepaid expenses
- Inventory (correct)
- Accounts receivable
- Cash and cash equivalents
What is the accounting treatment for borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset?
What is the accounting treatment for borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset?
How does IAS 23 differ from the previous standard, IAS 23 Capitalisation of Borrowing Costs?
How does IAS 23 differ from the previous standard, IAS 23 Capitalisation of Borrowing Costs?
When does an entity recognize other borrowing costs (not directly attributable to qualifying assets) as an expense?
When does an entity recognize other borrowing costs (not directly attributable to qualifying assets) as an expense?
If an entity applies IAS 29 Financial Reporting in Hyperinflationary Economies, how does it treat borrowing costs?
If an entity applies IAS 29 Financial Reporting in Hyperinflationary Economies, how does it treat borrowing costs?
Which of the following is an example of a qualifying asset under IAS 23?
Which of the following is an example of a qualifying asset under IAS 23?
When can an entity begin to capitalize borrowing costs associated with a qualifying asset?
When can an entity begin to capitalize borrowing costs associated with a qualifying asset?
If an entity borrows funds specifically for a qualifying asset, how is the borrowing cost eligible for capitalization determined?
If an entity borrows funds specifically for a qualifying asset, how is the borrowing cost eligible for capitalization determined?
What is the primary factor determining whether borrowing costs are eligible for capitalization?
What is the primary factor determining whether borrowing costs are eligible for capitalization?
When funds are borrowed generally and used for a qualifying asset, how are the borrowing costs eligible for capitalization determined?
When funds are borrowed generally and used for a qualifying asset, how are the borrowing costs eligible for capitalization determined?
What is the significance of 'investment income' in determining borrowing costs eligible for capitalization?
What is the significance of 'investment income' in determining borrowing costs eligible for capitalization?
What does the term 'qualifying asset' refer to in the context of borrowing cost capitalization?
What does the term 'qualifying asset' refer to in the context of borrowing cost capitalization?
In cases where an entity borrows funds generally and uses them for multiple qualifying assets, how are the borrowing costs allocated?
In cases where an entity borrows funds generally and uses them for multiple qualifying assets, how are the borrowing costs allocated?
Which of the following is NOT a requirement for an entity to begin capitalizing borrowing costs?
Which of the following is NOT a requirement for an entity to begin capitalizing borrowing costs?
Flashcards
IAS 23 Borrowing Costs
IAS 23 Borrowing Costs
An accounting standard governing the treatment of borrowing costs in financial reporting.
Qualifying Asset
Qualifying Asset
An asset that takes a substantial time to prepare for use or sale, eligible for capitalized borrowing costs.
Capitalization of Borrowing Costs
Capitalization of Borrowing Costs
The process of adding borrowing costs to the cost of a qualifying asset, instead of expensing them immediately.
Immediate Recognition
Immediate Recognition
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Effective Interest Method
Effective Interest Method
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Borrowing Costs Examples
Borrowing Costs Examples
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Recognition Criteria
Recognition Criteria
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Inflation Adjustment
Inflation Adjustment
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Borrowing Costs Definition
Borrowing Costs Definition
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Directly Attributable Borrowing Costs
Directly Attributable Borrowing Costs
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Temporary Investment of Funds
Temporary Investment of Funds
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Capitalization Rate Use
Capitalization Rate Use
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Commencement of Capitalization
Commencement of Capitalization
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Conditions for Capitalization
Conditions for Capitalization
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Weighted Average of Borrowing Costs
Weighted Average of Borrowing Costs
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Study Notes
Borrowing Costs (IAS 23)
- IAS 23 was adopted in April 2001 by the International Accounting Standards Board (IASB).
- It replaced an earlier standard, issued in March 1984.
- The 2007 revision eliminated the option of immediately recognizing borrowing costs.
- Borrowing costs directly linked to asset creation (acquisition, construction, production) are added to the asset's cost.
- Other borrowing costs are expensed.
- Borrowing costs include interest and expenses connected to obtaining funds.
- Qualifying assets must take a considerable time to prepare for use or sale.
- Qualifying assets can include inventories, manufacturing plants, power generation facilities, intangible assets, investment properties and bearer plants.
Core Principle
- Borrowing costs associated with acquiring, constructing, or producing a qualifying asset are part of that asset's cost.
- Other borrowing costs are treated as expenses.
- Borrowing costs are defined as any interest and other costs linked to borrowing funds.
Borrowing Costs Eligible for Capitalization
- Borrowing costs directly linked to a qualifying asset are those that would have been avoided if the asset wasn't acquired.
- If funds are specifically borrowed for an asset, the directly applicable borrowing costs are identified and calculated.
- The calculation involves the actual borrowing costs minus any investment income earned on those borrowed funds.
- Temporarily investing borrowed funds prior to using them to finance an asset is a scenario in which funds are often temporarily invested until their expenditure on the qualifying asset.
Cessation of Capitalization
- Capitalization stops when actions to prepare the qualifying asset for its intended use or sale are complete.
- In cases where an asset has parts ready for use while production for other parts continues, the capitalization ceases once the part in question is largely ready for its proposed use.
Commencement of Capitalization
- Capitalization of borrowing costs starts when the entity:
- Incurred expenditures on the asset.
- Incurred borrowing costs.
- Completed necessary preparatory actions for the asset's intended use or sale.
Disclosure Requirements
- The amount of capitalized borrowing costs in the period must be disclosed, along with the capitalization rate used for calculation of the amount of eligible costs.
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Description
This quiz covers the essential elements of IAS 23, which deals with borrowing costs related to asset creation. It explores the core principles and classifications of borrowing costs as defined by the International Accounting Standards Board. Review your knowledge of how borrowing costs are added to asset costs and recognized as expenses.
