What is borrowing cost as per IAS 23?

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. IAS 23 provides guidance on how to measure borrowing costs, particularly when the costs of acquisition, construction or production are funded by an entity's general borrowings.

Objective of IAS 23

The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs. Borrowing costs include interest on bank overdrafts and borrowings, finance charges on finance leases and exchange differences on foreign currency borrowings where they are regarded as an adjustment to interest costs.

Scope of IAS 23

Two types of assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:

• qualifying assets measured at fair value, such as biological assets accounted for under IAS 41 Agriculture

• inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis and that take a substantial period to get ready for sale (for example, maturing whisky).

Borrowing cost may include:

• interest expense calculated by the effective interest method under IAS 39,

• finance charges in respect of finance leases recognised in accordance with IFRS 16 Leases, and

• exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs