Recent agenda decisions by the IFRS Interpretations Committee on capitalisation of borrowing costs

IFRS Interpretations Committee (Committee) agenda decisions are those issues that the Committee decided not to take onto its agenda. Although not authoritative guidance, in practice they are regarded as being highly persuasive, and all entities reporting under IFRS should be aware of these decisions because they could impact the way particular transactions and balances are accounted for.

At its September 2018 meeting, the IFRS Interpretations Committee (Committee) issued agenda decisions clarifying two issue relating to capitalisation of borrowing costs (IAS 23 Borrowing Costs). These are summarised briefly below.

Expenditures on qualifying assets

Issue:

Does an entity include expenditures on a qualifying asset incurred before general borrowings are obtained?

Agenda decision:

The Committee did not add this item to its standard-setting agenda because it considered current IFRS Standards to provide an adequate basis to determine the amount of borrowing costs eligible for capitalisation.

Rationale for agenda decision:

IAS 23, paragraph 17 requires borrowing costs to be capitalised only from the time that the entity incurs borrowing costs.

IAS 23, paragraph 14 requires the amount of borrowing costs eligible for capitalisation to be determined by applying a capitalisation rate to the expenditures on that asset.

Applying these two paragraphs together, what this means is:

Borrowing costs can only be capitalised as part of the carrying amount of a qualifying asset from the point in time when borrowing costs are incurred by the entity, and
When calculating the amount of borrowing costs to be capitalised, i.e. when applying the capitalisation rate to the ‘expenditures on the qualifying asset’, ‘expenditures’ include all expenditures on the qualifying asset (including those incurred prior to obtaining the borrowing), but are pro rata for the period for which the borrowing was outstanding.

Example:

XYZ Limited incurs $1 million on 1 January 2018 when constructing a qualifying asset. On 30 June 2018, XYZ Limited enters into a $1 million borrowing, incurring interest at 5% per annum. For the year ended 31 December 2018, XYZ Limited capitalises $25,000 borrowing costs as part of the qualifying asset because the $1 million expenditure is pro rata for six months during which the borrowing was outstanding (i.e. 6/12 X $1 million X 5%).

When to cease capitalising borrowing costs on land?

Issue:

When does an entity cease capitalising borrowing costs on land acquired on which a building is constructed, and general borrowings are used to fund expenditures on the land and the buildings?

Agenda decision:

The Committee did not add this item to its standard-setting agenda because it considered current IFRS Standards to provide an adequate basis to determine when to cease capitalising borrowing costs on land expenditures.

Rationale for agenda decision:

The intended use for land is not simply for the construction of a building on the land, but rather to use it either as PPE (owner-occupied), investment property (for rental or capital appreciation), or inventory (for sale).

When a qualifying asset is constructed in parts, with each part capable of being used while construction continues on other parts, IAS 23, paragraph 24 requires an entity to cease capitalising borrowing costs on a particular part when it completes substantially all activities necessary to prepare that part for its intended use.

In this fact pattern the land would not be ready for its intended use or sale until substantially all of the activities necessary to prepare both the land and buildings are complete. Therefore borrowing costs continue to be capitalised on land expenditures until construction of the building is complete.