IAS 23 Borrowing Costs
IAS 23 requires companies to capitalize borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are expensed.
Related Standards
Explanation
A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale – for example, a production plant, a data center, or a large custom-built system.
Borrowing costs include interest calculated using the effective interest method, interest on lease liabilities, and certain exchange differences. Capitalization starts when expenditures and borrowing costs are incurred and activities to prepare the asset have begun, is suspended during extended periods of inactivity, and ends when the asset is substantially ready.
Under US GAAP, comparable rules are found in ASC 835-20 (capitalization of interest).
Why It Matters
Capital-intensive businesses – such as infrastructure providers building data centers or manufacturers building equipment for leasing – may need to capitalize interest. This affects asset values, depreciation, and the interest expense reported, and requires a link between financing data and asset accounting.
Related Terms
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