IAS 23 provides guidance on how to account for borrowing costs, which are the costs incurred by an entity in connection with obtaining and using borrowings. Here are some examples of borrowing costs and how they should be accounted for under IAS 23:
Example 1: Company A borrows $10 million from a bank to finance the construction of a new factory. The loan has an interest rate of 6% per year, and the construction period is expected to last for two years. How should Company A account for the borrowing costs?
Under IAS 23, Company A should capitalize the borrowing costs that are directly attributable to the construction of the factory. In this case, the borrowing costs that are directly attributable to the construction include the interest expense on the loan during the construction period. Company A should therefore capitalize the interest expense of $600,000 ($10 million x 6% x 2 years) as part of the cost of the factory.
Example 2: Company B has a revolving credit facility with a bank that it uses to finance its working capital needs. The interest rate on the credit facility is 5% per year. How should Company B account for the borrowing costs?
Under IAS 23, Company B should expense the borrowing costs that are incurred in connection with the revolving credit facility. In this case, the borrowing costs include the interest expense on the credit facility, as well as any fees and commissions paid to the bank. Company B should therefore recognize the interest expense and fees and commissions as an expense in the period in which they are incurred.
Example 3: Company C borrows $5 million to finance the acquisition of a business. The loan has an interest rate of 7% per year. The acquisition is completed in six months. How should Company C account for the borrowing costs?
Under IAS 23, Company C should capitalize the borrowing costs that are directly attributable to the acquisition of the business. In this case, the borrowing costs that are directly attributable to the acquisition include the interest expense on the loan during the six-month period. Company C should therefore capitalize the interest expense of $175,000 ($5 million x 7% x 6/12) as part of the cost of the acquisition. Any borrowing costs that are not directly attributable to the acquisition should be expensed as incurred.