IAS 23 Borrowing Costs

IAS 23 Borrowing Costs – When to Capitalise or Expense Interest

1️⃣ Introduction: Understanding IAS 23 Borrowing Costs

IAS 23 Borrowing Costs sets out how companies account for interest and similar financing costs.
The standard ensures that when borrowing directly supports the construction or acquisition of a qualifying asset, those costs are capitalised as part of the asset’s value.
For other borrowings, IAS 23 Borrowing Costs requires immediate expense recognition.

In Singapore, where many businesses finance office fit-outs, property, or system upgrades through bank loans, IAS 23 ensures consistent, transparent reporting of borrowing expenses.

IAS 21 Effects of Changes in Foreign Exchange Rates

2️⃣ Purpose and Scope

IAS 23 applies to all entities that incur borrowing costs, including:

Interest on bank loans and overdrafts.
Amortisation of discounts or premiums on borrowings.
Finance charges on lease liabilities (link to IFRS 16).
Exchange-rate differences on foreign-currency borrowings (to the extent treated as interest).

The objective is simple: match borrowing costs with the assets they finance to present faithful financial results.

3️⃣ Definition of a Qualifying Asset

A qualifying asset is one that takes a substantial period of time to be ready for its intended use or sale.
Examples include:

Construction of an office building or factory.
Development of internal-use software.
Large inventories requiring long maturation periods (e.g., wine or property development).

Routine purchases such as equipment or vehicles normally do not qualify.

4️⃣ When to Capitalise Borrowing Costs

IAS 23 Borrowing Costs requires capitalisation when all the following conditions exist:

Expenditures for the asset are being incurred.
Borrowing costs are being incurred.
Activities necessary to prepare the asset for use or sale are in progress.

Capitalisation starts when these three conditions are met and suspends during prolonged interruptions. It ceases when the asset is ready for intended use.

5️⃣ Capitalisation Rate

When funds are borrowed specifically for a qualifying asset, capitalise the actual borrowing costs incurred.
If borrowings are general, apply a weighted-average capitalisation rate to the asset’s expenditure.

Example:
uSafe Accounting Pte. Ltd. borrowed SGD 2 million at 5 % to build a new office. Construction took 12 months.
→ Total capitalised borrowing cost = SGD 100 000 (5 % × 2 million).
The amount forms part of the asset’s cost until completion.

6️⃣ Recognition as an Expense

Borrowing costs that do not relate to a qualifying asset are expensed immediately.
For example:

Loans used for working capital.
Financing trade receivables.
Interest during idle construction periods.

Timely expense recognition avoids overstating assets and improves comparability.

7️⃣ Disclosure Requirements

IAS 23 Borrowing Costs requires companies to disclose:

Accounting policy for capitalisation.
Capitalisation rate used during the period.
Total borrowing costs capitalised.

For Singapore entities, ACRA expects consistent disclosures across property, plant and equipment notes, while auditors check that capitalised interest reconciles with loan statements.

IAS 19 Employee Benefits – Accounting for Staff Costs

8️⃣ Common Errors

Capitalising interest after the asset is ready for use.
Failing to suspend capitalisation during project delays.
Using gross interest instead of the weighted-average rate.
Missing required note disclosures.

Applying IAS 23 correctly helps maintain audit readiness and compliance confidence.

9️⃣ Best Practices

To improve accuracy and readability:
✅ Maintain a project-financing schedule linking loans and expenditures.
✅ Document start, suspension, and completion dates.
✅ Reconcile interest calculations monthly.
✅ Use transition words—therefore, as a result, in addition—to improve clarity and reporting consistency.

These steps ensure smooth application of IAS 23 Borrowing Costs and transparent financial statements.

🔟 Conclusion

IAS 23 Borrowing Costs helps firms determine whether to capitalise or expense interest, ensuring fair presentation of asset costs.
For Singapore businesses undertaking major developments, consistent application of IAS 23 strengthens financial credibility and audit assurance.

Disclaimer: This article is for informational purposes only and does not constitute any professional advice. Feel free to contact us to consult with our professional advisors team for personalized advice and guidance.

Sources: https://www.ifrs.org/issued-standards/list-of-standards/ias-23-borrowing-costs/