with IFRS 11 and the operators are accounting for their own share of the assets,
liabilities, revenue and expenses of the joint operation, then the operators should
capitalise borrowing costs incurred that relate to their share of any qualifying asset.
Borrowing costs eligible for capitalisation would be based on the operator’s obligation
for the loans of the joint operation together with any direct borrowings of the operator
itself if the operator funds part of the acquisition of the joint operation’s qualifying asset.
6
COMMENCEMENT, SUSPENSION AND CESSATION OF
CAPITALISATION
6.1
Commencement of capitalisation
IAS 23 requires that capitalisation of borrowing costs as part of the cost of a qualifying
asset commences when the entity first meets all of the following conditions:
(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for its intended use
or sale. [IAS 23.17].
The standard is explicit that only that expenditure on a qualifying asset that has resulted
in payments of cash, transfers of other assets or the assumption of interest-bearing
liabilities, may be included in determining borrowing costs (see 5.3.3 above). Such
expenditure must be reduced by any progress payments and grants received in
connection with the asset (see 5.3 above). [IAS 23.18].
The activities necessary to prepare an asset for its intended use or sale can include more
than the physical construction of the asset. Necessary activities can start before the
commencement of physical construction and include, for example, technical and
administrative work such as the activities associated with obtaining permits prior to the
commencement of the physical construction. [IAS 23.19]. However, this does not mean that
borrowing costs can be capitalised if the permits that are necessary for the construction
are not expected to be obtained. Borrowing costs are capitalised as part of the cost of an
asset when it is probable that they will result in future economic benefits to the entity and
the costs can be measured reliably. [IAS 23.9]. Therefore, in assessing whether borrowing
costs can be capitalised in advance of obtaining permits – assuming the borrowing costs
otherwise meet the criteria – a judgement must be made, at the date the expenditure is
incurred, as to whether it is sufficiently probable that the relevant permits will be granted.
Conversely, if during the application and approval process of such permits it is no longer
expected that the necessary permits will be granted, capitalisation of borrowing costs
should cease, any related borrowing costs that were previously capitalised should be
written off in accordance with IAS 36 – Impairment of Assets – and accordingly, the
carrying amount of any related qualifying asset subject to development or redevelopment
(or, if appropriate, the cash generating unit where such an asset belongs) should be tested
for impairment, where applicable (see 6.2.1 below).
Borrowing costs may not be capitalised during a period in which there are no activities
that change the condition of the asset. For example a house-builder or property
Capitalisation of borrowing costs 1569
developer may not capitalise borrowing costs on its ‘land bank’ i.e. that land which is
held for future development. Borrowing costs incurred while land is under development
are capitalised during the period in which activities related to the development are being
undertaken. However, borrowing costs incurred while land acquired for building
purposes is held without any associated development activity represent a holding cost
of the land. Such costs do not qualify for capitalisation and hence would be considered
a period cost (i.e. expensed as incurred). [IAS 23.19].
An entity may make a payment to a third party contractor before that contractor
commences construction activities. It is unlikely to be appropriate to capitalise
borrowing costs in such a situation until the contractor commences activities that are
necessary to prepare the asset for its intended use or sale.
In its accounting policy, KAZ Minerals describes the period during which borrowing
costs are capitalised, as well as noting that it uses either an actual rate or a weighted
average cost of borrowings.
Extract 21.1: KAZ Minerals PLC (2017)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [extract]
35. Summary of significant accounting policies [extract]
(r) Borrowing
costs
Borrowing costs directly relating to the acquisition, construction or production of a qualifying capital project under
construction are capitalised and added to the project cost during construction until such time as the assets are considered substantially ready for their intended use, i.e. when they are capable of commercial production. Where funds are borrowed specifically to finance a project, the amount capitalised represents the actual borrowing costs incurred. Where surplus
funds are available for a short period of time from money borrowed specifically to finance a project, the income generated from the temporary investment of such amounts is also capitalised and deducted from the total capitalised borrowing
costs. Where the funds used to finance a project form part of general borrowings, the amount capitalised is calculated
using a weighted average of rates applicable to relevant general borrowings of the Group during the year. All other
borrowing costs are recognised in the income statement in the period in which they are incurred using the effective interest rate method.
Borrowing costs that represent avoidable costs not related to the financing arrangements of the development projects and
are therefore not directly attributable to the construction of these respective assets are expensed in the period as incurred.
These borrowing costs generally arise where the funds are drawn down under the Group’s financing facilities, whether
specific or general, which are in excess of the near term cash flow requirements of the development projects for which
the financing is intended, and the funds are drawn down ahead of any contractual obligation to do so.
6.1.1
Expenditures on a qualifying asset
In June 2018, the Interpretation Committee received a request about the amount of
borrowing costs eligible for capitalisation when an entity uses general borrowings to
obtain a qualifying asset. In the fact pattern described in the request:
• an entity constructs a qualifying asset;
• the entity has no borrowings at the start of the construction of the qualifying asset;
• partway through construction, it borrows funds generally and uses them to finance
the construction of the qualifying asset; and
• the entity incurs expenditures on the qualifying asset both before and after it incurs
borrowing costs on the general borrowings.
1570 Chapter 21
The request asked whether an entity includes expenditures on a qualifying asset
incurred before obtaining general borrowings in determining the amount of borrowing
costs eligible for capitalisation.
The Interpretation Committee observed that an entity applies paragraph 17 of IAS 23 in
determining the commencement date for capitalising borrowing costs. This paragraph
; requires an entity to begin capitalising borrowing costs when it meets all of the following
conditions:
• it incurs expenditures for the asset;
• it incurs borrowing costs; and
• it undertakes activities that are necessary to prepare the asset for its intended use
or sale (see also 6.1 above). [IAS 23.17].
Applying paragraph 17 of IAS 23 to the fact pattern described in the request, the entity
would not begin capitalising borrowing costs until it incurs borrowing costs.
The Interpretation Committee also observed that in determining the expenditures on a
qualifying asset to which an entity applies the capitalisation rate (as described in
paragraph 14 of IAS 23 – see 5.3 above), the entity does not disregard expenditures on
the qualifying asset incurred before the entity obtains the general borrowings.
The Interpretation Committee concluded that the principles and requirements in IFRS
standards provide an adequate basis for an entity to determine the amount of borrowing
costs eligible for capitalisation in the fact pattern described in the request.
Consequently, the Interpretation Committee decided not to add this matter to its
standard-setting agenda.9
6.2
Suspension of capitalisation
An entity may incur borrowing costs during an extended period in which it suspends the
activities necessary to prepare an asset for its intended use or sale. In such a case, IAS 23
states that capitalisation of borrowing costs should be suspended during extended periods
in which active development is interrupted. [IAS 23.20, 21]. Such costs are costs of holding
partially completed assets and do not qualify for capitalisation. However, the standard
distinguishes between extended periods of interruption (when capitalisation would be
suspended) and periods of temporary delay that are a necessary part of preparing the asset
for its intended purpose (when capitalisation is not normally suspended). [IAS 23.21].
An entity does not normally suspend capitalising borrowing costs during a period when
it carries out substantial technical and administrative work. Also, capitalising borrowing
costs would not be suspended when a temporary delay is a necessary part of the process
of getting an asset ready for its intended use or sale. For example, capitalisation would
continue during the extended period in a situation where construction of a bridge is
delayed by temporary adverse weather conditions or high water levels, if such
conditions are common during the construction period in the geographical region
involved. [IAS 23.21]. Similarly, capitalisation continues during periods when inventory is
undergoing slow transformation – the example is given of inventories taking an
extended time to mature (presumably such products as Scotch whisky or Cognac,
although the relevance of this may be limited as these products are likely to meet the
optional exemption for ‘routinely manufactured’ products – see 3.1 above).
Capitalisation of borrowing costs 1571
Borrowing costs incurred during extended periods of interruption caused, for example,
by a lack of funding or a strategic decision to hold back project developments during a
period of economic downturn are not considered a necessary part of preparing the asset
for its intended purpose and should not be capitalised.
6.2.1 Impairment
considerations
When it is determined that capitalisation is appropriate, an entity continues to capitalise
borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset as part of the cost of the asset even if the capitalisation
causes the expected ultimate cost of the asset to exceed its recoverable amount or net
realisable value.
When the carrying amount of the qualifying asset exceeds its recoverable amount
or net realisable value (depending on the type of asset), the carrying amount of the
asset must be written down or written off in accordance with the relevant IFRSs. In
certain circumstances, the amount of the write-down or write-off is written back in
accordance with those relevant IFRSs. If the asset is incomplete, this assessment is
performed by considering the expected ultimate cost of the asset. [IAS 23.16]. The
expected ultimate cost, which will be compared to recoverable amount or net
realisable value, must include costs to complete and the estimated capitalised
interest thereon.
IAS 36 will apply if the qualifying asset is property, plant and equipment accounted for
in accordance with IAS 16 or if the asset is otherwise within the scope of IAS 36 (see
Chapter 20). For inventories that are qualifying assets, the requirements of IAS 2 –
Inventories – on net realisable value will apply (see Chapter 22).
6.3
Cessation of capitalisation
The standard requires capitalisation of borrowing costs to cease when substantially all
the activities necessary to prepare the qualifying asset for its intended use or sale are
complete. [IAS 23.22].
An asset is normally ready for its intended use or sale when the physical construction
of the asset is complete, even though routine administrative work might still
continue. If minor modifications, such as the decoration of a property to the
purchaser’s or user’s specification, are all that are outstanding, this indicates that
substantially all the activities are complete. [IAS 23.23]. In some cases there may be a
requirement for inspection (e.g. to ensure that the asset meets safety requirements)
before the asset can be used. Usually ‘substantially all the activities’ would have been
completed before this point in order to be ready for inspection. In such a situation,
capitalisation would cease prior to the inspection.
When the construction of a qualifying asset is completed in parts and each part is
capable of being used while construction continues on other parts, capitalisation
should cease for the borrowing costs on the portion of borrowings attributable to
that part when substantially all the activities necessary to prepare that part for its
intended use or sale are completed. [IAS 23.24]. An example of this might be a business
park comprising several buildings, each of which is capable of being fully utilised
individually while construction continues on other parts. [IAS 23.25]. This principle
1572 Chapter 21
also applies to single buildings where one part is capable of being fully utilised even
if the building as a whole is incomplete (for example, individual floors of a high-rise
office building).
For a qualifying asset that needs to be complete in its entirety before any part can be
used as intended, it would be appropriate to capitalise related borrowing costs until all
the activities necessary to prepare the entire asset for its intended use or sale are
substantially complete. An example of this is an industrial plant, such as a steel mill,
involving several processes which are carried out in sequence at different parts of the
plant within the same site. [IAS 23.25].
However, other circumstances may not be as straightforward. As neither IAS 23 nor
IAS 16 provide guidance on what constitutes a ‘part’, it will therefore depend on
particular facts and c
ircumstances and may require the exercise of judgement as to what
constitutes a ‘part’. Disclosure of this judgement is required if it is significant to the
understanding of the financial statements (see 7.2 below).
6.3.1
Borrowing costs on ‘land expenditures’
In June 2018, the Interpretation Committee received a request about when an entity
ceases capitalising borrowing costs on land. In the fact pattern described in the request:
• an entity acquires and develops land and thereafter constructs a building on that
land – the land represents the area on which the building will be constructed;
• both the land and the building meet the definition of a qualifying asset; and
• the entity uses general borrowings to fund the expenditures on the land and
construction of the building.
The request asked whether the entity ceases capitalising borrowing costs incurred in
respect of expenditures on the land (‘land expenditures’) once it starts constructing the
building or whether it continues to capitalise borrowing costs incurred in respect of land
expenditures while it constructs the building.
The Interpretation Committee observed that in applying IAS 23 to determine when to
cease capitalising borrowing costs incurred on land expenditures an entity considers:
• the intended use of the land; and
• in applying paragraph 24 of IAS 23, whether the land is capable of being used for
its intended purpose while the construction continues on the building.
Land and buildings are used for owner-occupation (and therefore recognised as
property, plant and equipment applying IAS 16); rent or capital appreciation (and
therefore recognised as investment property applying IAS 40 – Investment Property);
or for sale (and therefore recognised as inventory applying IAS 2). The intended use of
the land is not simply for the construction of a building on the land, but rather to use it
for one of these three purposes.
If the land is not capable of being used for its intended purpose while construction
continues on the building, the entity considers the land and the building together to
assess when to cease capitalising borrowing costs on the land expenditures. In this
situation, the land would not be ready for its intended use or sale until substantially all
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 310
