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All assets (excluding land) will eventually all be written off to the income statement, however, that can take from one to several years.

Translate the Income Statement

A leaving IC thought…


And now with bated breath, IAS 23, Borrowing costs, seriously… Actually one of the shortest and simplest of IASs but that does not mean you can omit reading the standard, always a requirement.

Like many financial accounting standards, the IASB will codify what you can and cannot capitalize. Again like many, it is designed to prevent a manipulation of the income statement by loading the balance sheet i.e. assets with what are legitimate expenses. As we clearly understand by now, all assets (excluding land of course from prior articles) will eventually all be written off to the income statement, however, that can take from one to several years. Meanwhile, of course, the concept of faithful representation effectively has been violated. IAS 23, in reality, is a matching standard in which the borrowing costs of financing a qualifying asset is matched against the asset in question i.e. manufacturing plants or 7(b).

Thus, according to the IASB, para: 1, 5, 7 and 12


Borrowing costs that are directly attributable to the acquisition, construction or production, of a qualifying asset form part of the cost of that asset. Other borrowing, costs are recognised as an expense. [Refer: paragraphs 8 and 9]

5 A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

7 Depending on the circumstances, any of the following may be qualifying assets

a. inventories

b. manufacturing plants

c. power generation facilities

d. intangible assets

e. investment properties

f. bearer plants.

12 To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset the entity shall determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.


Now let’s consider some examples:



You have a qualifying asset, which is a chemical plant.

80% of your firm’s borrowings are attributable to this asset. The remainder is not used for qualifying assets. All borrowings are at the same interest cost.

The total interest charge for the year was 2.000.

Capitalise the cost of 80% of borrowings (1.600) to the asset, and treat the other 20% as borrowing costs of the period (400).


Eligible borrowing costs are those that are incurred especially for securing the qualifying asset. (These would not have been incurred if the assets had not been bought.)



You are building a sports stadium. You issue a bond, secured on the stadium, to finance 40% of the cost of the stadium. The funds are used exclusively in the construction of the stadium. Annual interest costs are 750.

The interest costs of 750 are eligible borrowing costs and will be capitalised.


IFRS Workbook 2017 IAS 23


And now a question:

On 1st May 20X1, DEF took a loan of CU 1 000 000 from a bank at the annual interest rate of 5%. The purpose of this loan was to finance the construction of a production hall.

The construction started on 1 June 20X1. DEF temporarily invested CU 800 000 borrowed money during the months of June and July 20X1 at the rate of 2% p.a.

What borrowing cost can be capitalized in 20X1? (Assume all interest was paid).

The answer:

Although the funds were withdrawn on 1st May, the capitalization can start only on 1st June 20X1 when all criteria were met (the construction had not started until 1st June).

Interest expense:CU 1 000 000 x 5% x 7/12 = CU 29,167
Note: this is a very simplified calculation and if the loan is repayable in instalments, then you need to take the real interest incurred (by the effective interest method).

Less investment income:CU 800 000 x 2% x 2/12 = CU 2,667

Total borrowing cost to capitalize in 20X1: CU 26 500

Just don’t forget that the borrowing cost in May 20X1 is expensed in profit or loss, as the capitalization criteria were not met in that period.

                      Courtesy of IFRSbox


And now let us conclude with IAS 24, Related Party Disclosures:

Primarily, this codification requires the disclosure of all related parties, if any, that could potentially have had an effect upon the financial statements. To a degree, there is a similarity with conflict of interest in which fiduciary responsibilities could be tainted from a biased perspective. By imposing disclosures it forces management to open its doors, disclose such related parties, and, by definition, risk facing penalties in the event of a deliberate omission. Such statements effectively are the equivalent of assigning accountability. Sarbanes-Oxley 404 and actually the IASB itself (financial statements have been prepared in full compliance with IFRS) have requirements for similar statements.


According to IASB, para: 3

This Standard requires disclosure of related party relationships, transactions and outstanding balances, including commitments, in the consolidated and separate financial statements of a parent or investors with joint control of, or significant influence over, an investee presented in accordance with IFRS 10/ IAS 27.


And, 2015 Interpretation and Application of IFRS (PKF) Chapter 29 Introduction:

The rationale for compelling such disclosures is the concern that entities

which are related to each other, whether by virtue of an ability to control or to exercise significant influence or a person is a member of key management of a reporting entity (all as defined under IFRS), usually have leverage in the setting of prices to be charged and on other transaction terms. If these events and transactions were simply mingled with transactions conducted with other nonrelated parties on normal arms-length terms or negotiated terms, the users of the financial statements would likely be impeded in their ability to project future earnings and cash flows for the reporting entity, given that related-party transaction terms could be arbitrarily altered at any time.

Emile Woolf Publishing Ltd, P2 Int Study Text 2012(85-86)


Next week, IAS 27, Separate Financial Statements


Lucubrate Magazine, Issue 45, November 2nd, 2018

The photo on top: stanciuc



Business money in hand.  Photo: Kryuchka Yaroslav

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Peter Welch
Peter Welch

GlobalCfo.LLC is an expert at developing entrepreneurs and building 3-5 year business plans and cash flow projections as a prerequisite for accessing financing sources. GlobalCfo.LLC targets accounting standards compliance and theory, sound infrastructure /process mapping and COSO 2013-17/solid internal controls, ERM, and last but not least documentation /Policy and Procedures and other manuals. Additionally, interim CFO services (or Rent-a-CFO by the hour/day) are offered locally or remotely as well as training at all levels and all functions, not just accounting; e.g., management and leadership skills. Pre/Post-M&A is also offered.

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