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Capitalize borrowing costs to asset under construction u2013 IAS23

Former Member
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Dear experts,

According to IAS 23 we are required to calculate interest on capital invested in an asset under construction.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Where funds are borrowed specifically, costs eligible for capitalization are the actual costs incurred less any income earned on the temporary investment of such borrowings. Where funds are part of a general pool, the eligible amount is determined by applying a capitalization rate to the expenditure on that asset. The capitalization rate will be the weighted average of the borrowing costs applicable to the general pool. The amount of borrowing costs that an entity capitalizes during a period shall not exceed the amount of borrowing costs it incurred during that period.

Detail scenario

The construction of a qualifying asset is controlled by an investment measures that are managed as projects - WBS elements and settled to an asset under construction periodically. The calculated interest shall update only the determine depreciation area set on the interest profile (OPIB).

The borrowing operations are managed by money market transaction on TRM (Prod. Category 550 Interest rate instrument).

Using the interest calculation function (CJZ2 - Individual Processing or CJZ1 - Collective Processing) we encountered several problems/ restrictions.

1 u2013 When funds are borrowed specifically to a qualifying asset for example, an interest rate instrument as a money market transaction on TRM should be capitalized according to the actual incurred borrowing cost and not by a capitalization rate. How to assign the value to the WBS element?

2 u2013 When funds are part of a general pool, although we can calculate and update the effective interest rate for each borrowing transaction (TMEZ) how to determine the weighted average capitalization rate by company code and define it on the Reference Interest Rates (OBAC) to be used in the interest calculation?

3 u2013 Even if the capitalization rate is defined and updated manually in the reference interest rate for the interest calculation, how to limit the amount of borrowing costs that will be capitalized during the period? The calculated interest in period shall not exceed the amount of borrowing costs it incurred during that period.

Is there any other functionality to support interest calculation and capitalization of borrowing costs to asset under construction according to IAS23 requirements?

Please advice.

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Answers (2)

Answers (2)

Former Member
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which paragraph of IAS21 are you referring to? the reason i'm asking is that FASB has recently reorganized US standards into ASC (accounting standard codification) and they do provide XBRL tags at that level. imho, there should be away to capitalize interest costs outside of PS module, maybe in Fixed Asset module?

Former Member
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Hi,

The interest rates for capitalization and for appropriation can be collected in separate cost centers and apportioned to WBS . If you incur interests at the group level,then using accrual apportion the relevant portion to the respective C/Codes.

For arriving the weighted average i assume you take the planned interest.For restricting the planned to the actual ones use the " Budget Manager" functionality,give the actual value,set zero tolerance.This will help restricting to the actuals.

Hope this helps.

Regards

Ramesh