May 6, 2013 IFRS Practical Guide: IAS 23 Capitalisation of borrowing costs Examples

Example 1

A property developer acquires a property, which management intends to develop into luxury apartments. Alternatively, the property could be sold or leased immediately after its acquisition.  Should management’s intention be taken into account?

Analysis

Yes. Assessing whether an asset is a qualifying asset takes into consideration its intended use. The property is determined to be a qualifying asset because management intends to develop the asset over a substantial period of time. This is not changed by the fact that the property could alternatively be sold immediately.

Example 2:

A telecom company has acquired a 3G licence. The licence could be sold or licensed to a third party. However, management intends to use it to operate a wireless network. Development of the network starts when the licence is acquired. Should borrowing costs on the acquisition of the 3G licence be capitalised until the network is ready for its intended use?

Analysis

Yes. The licence has been exclusively acquired to operate the wireless network. The fact that the licence can be used or licensed to a third party is irrelevant. The acquisition of the licence is the first step in a wider investment project (developing the network). It is part of the network investment, which meets the definition of a qualifying asset under IAS 23.

 

Example 3

A real estate company has incurred expenses for the acquisition of a permit allowing the construction of a building. It has also acquired equipment that will be used for the construction of various buildings. Can borrowing costs on the acquisition of the permit and the equipment be capitalised until the construction of the building is complete?

Analysis

Yes for the permit, which is specific to one building. It is the first step in a wider investment project. It is part of the construction cost of the building, which meets the definition of a qualifying asset. No for the equipment, which will be used for other construction projects. It is ready for its ‘intended use’ at the acquisition date. It does not meet the definition of a qualifying asset.

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