2.1 Core principle

IAS 23 requires borrowing costs to be capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset (whether or not the funds have been borrowed specifically). These borrowing costs are included in the cost of the asset; all other borrowing costs are recognised as an expense in the period in which they are incurred. [IAS 23.1, 8].

2.2 Scope

An entity should apply IAS 23 in accounting for borrowing costs. [IAS 23.2]. IAS 23 deals with the treatment of borrowing costs in general, rather than solely focusing on capitalising borrowing costs as part of the carrying value of assets.

The standard does not deal with the actual or imputed costs of equity used to fund the acquisition or construction of an asset. [IAS 23.3]. This means that any distributions or other payments made in respect of equity instruments, as defined by IAS 32 – Financial Instruments: Presentation, are not within the scope of IAS 23. Conversely, interest and dividends payable on instruments that are legally equity but classified as financial liabilities under IAS 32 appear to be within the scope of the standard (see 5.5.4 below).

An entity is not required to apply the standard (i.e. application is optional) to borrowing costs directly attributable to the acquisition, construction or production of:

• a qualifying asset measured at fair value (see 3.2 below); or
• inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis (see 3.1 below). [IAS 23.4].

3.1 Inventories

Inventories are within the scope of IAS 23 as long as they meet the definition of a qualifying asset and require a substantial period of time to bring them to a saleable condition. This means inventories that are manufactured, or otherwise produced, over a short period of time are not qualifying assets and are out of scope of IAS 23. However, even if inventories meet the definition of a qualifying asset and take a substantial period of time to get ready for sale, an entity is not required to apply the standard to borrowing costs directly attributable to the acquisition, construction or production of inventories if these are routinely manufactured or otherwise produced in large quantities on a repetitive basis. [IAS 23.4(b), BC6].

Therefore, an entity may choose whether to apply the requirements of IAS 23 to such inventories as a matter of accounting policy. This optional scope exemption has been allowed because of the difficulty of calculating and monitoring the amount to be capitalised, i.e. the costs of capitalisation are likely to exceed the potential benefits. [IAS 23.BC6]. There are many examples of such inventories, including large manufactured or constructed items that take some time to complete but are basically sold as standard items, such as aircraft and large items of equipment, or food and drink that take a long time to mature, such as cheese or alcohol that matures in bottle or cask.

Conversely, IAS 23 is required to be applied to bespoke inventories (i.e. those made according to the unique specifications of a particular customer) that are occasionally manufactured or produced on a single item by item basis and take a substantial period of time to get ready for sale.

See also further discussion in Chapter 29 at 2.5.2.G.

3.2 Assets measured at fair value

IAS 23 does not require entities to capitalise borrowing costs directly attributable to the acquisition, construction or production of assets measured at fair value that would otherwise be qualifying assets, for example, biological assets within the scope of IAS 41 – Agriculture. [IAS 23.4(a)]. If the assets are held under a fair value model (or a fair value less costs to sell model) with all changes going to profit or loss, then capitalisation would not affect measurement in the statement of financial position and would involve no more than a reallocation between finance costs and the fair value movement in profit or loss. However, this scope exemption is optional and would still allow an entity to choose whether to apply the requirements of IAS 23 to such assets as a matter of accounting policy.

IAS 23 does not restrict the exemption to assets where the fair value movement is taken to profit or loss. Assets measured at fair value that fall under the revaluation model of IAS 16 – Property, Plant and Equipment – are also eligible for this scope exemption even though the revaluation gain or loss goes to other comprehensive income, not profit or loss (see Chapter 18 at 4.1.2). While such assets may be subject to the scope exemption, the revaluation model in IAS 16 is only applied subsequent to initial recognition. [IAS 16.31]. Therefore, such assets might be qualifying assets at initial recognition, but subject to the scope exemption subsequently.

For example, assume that an entity borrows specific funds to construct a building, that the building is a qualifying asset and that the entity has a policy of revaluing all its land and buildings. When the constructed building is initially recognised, it will be measured at cost, which would include the directly attributable borrowing costs. [IAS 16.15, 16(b)]. Assume that the entity subsequently renovates the building, that the renovation takes a substantial amount of time to complete and that those costs qualify for capitalisation under IAS 16. Since the asset is being revalued it would fall under the scope exemption in IAS 23. Therefore, the entity would not be required to capitalise any directly attributable borrowing costs relating to this subsequent renovation even if it takes a substantial amount of time to complete.

However, for disclosure purposes, an entity will still need to monitor the carrying amount of such an asset, including those borrowing costs that would have been recognised had such an asset been carried under the cost model.

In May 2014 the Interpretations Committee received a request for clarification as to whether an entity is required to reflect the capitalisation of borrowing costs to meet the disclosure requirement of IAS 16 for assets stated at revalued amounts (see Chapter 18 at 8.2) and for which borrowing costs are not capitalised. Since, as discussed above, the capitalisation of borrowing costs for such assets is not required, the determination of the amount of borrowing costs that would have been capitalised under a cost model – solely to meet a disclosure requirement – might be considered burdensome.

The Interpretations Committee noted that the requirements in paragraph 77(e) of IAS 16 are clear. This paragraph requires an entity to disclose the amount at which assets stated at revalued amounts would have been stated had those assets been carried under the cost model. The amount to be disclosed includes borrowing costs capitalised in accordance with IAS 23.

The Interpretations Committee determined that, in the light of the existing IFRS requirements, neither an interpretation nor an amendment to a standard was necessary and consequently decided not to add this issue to its agenda.²

3.3 Financial assets

IAS 23 excludes all financial assets (which we consider include equity accounted investments) from the definition of qualifying assets. [IAS 23.7].

3.4 Over time transfer of constructed good

In its November 2018 meeting, the Interpretations Committee discussed a request it received about the capitalisation of borrowing costs in relation to the construction of a residential multi-unit real estate development (building). In the fact pattern described in the request:

• A real estate developer (entity) constructs the building and sells the individual units in the building to customers.
• The entity borrows funds specifically for the purpose of constructing the building and incurs borrowing costs in connection with that borrowing.
• Before construction begins, the entity signs contracts with customers for the sale of some of the units in the building (sold units).
• The entity intends to enter into contracts with customers for the remaining part-constructed units (unsold units) as soon as it finds suitable customers.
• The terms of, and relevant facts and circumstances relating to, the entity's contracts with customers (for both the sold and unsold units) are such that, applying paragraph 35(c) of IFRS 15 – Revenue from Contracts with Customers, the entity transfers control of each unit over time and, therefore, recognises revenue over time (see Chapter 30 at 2.3). The consideration promised by the customer in the contract is in the form of cash or another financial asset.

The request asked whether the entity has a qualifying asset as defined in IAS 23 and, therefore, capitalises any directly attributable borrowing costs.

Applying paragraph 8 of IAS 23, an entity capitalises borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset (see 5.1 below). Paragraph 5 of IAS 23 defines a qualifying asset as ‘an asset that necessarily takes a substantial period of time to get ready for its intended use or sale’ (see 3 above).

Accordingly, the entity assesses whether, in the fact pattern described in the request, it recognises an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Depending on the particular facts and circumstances, the entity might recognise a receivable, a contract asset and/or inventory.³

The Interpretations Committee concluded that, in the fact pattern described in the request:

• A receivable that the entity recognises is not a qualifying asset. Paragraph 7 of IAS 23 specifies that financial assets are not qualifying assets (see 3.3 above).
• A contract asset that the entity recognises is not a qualifying asset. The contract asset (as defined in Appendix A to IFRS 15 – see Chapter 27 at 2.5) would represent the entity's right to consideration that is conditioned on something other than the passage of time in exchange for transferring control of a unit. The intended use of the contract asset – to collect cash or another financial asset – is not a use for which it necessarily takes a substantial period of time to get ready.
• Inventory (work-in-progress) for unsold units under construction that the entity recognises is not a qualifying asset. In the fact pattern described in the request, this asset is ready for its intended sale in its current condition (such asset is not a qualifying asset, see 3 and 3.1 above) – i.e. the entity intends to sell the part-constructed units as soon as it finds suitable customers and, on signing a contract with a customer, will transfer control of any work-in-progress relating to that unit to the customer.

The Interpretations Committee concluded that the principles and requirements in IAS 23 provide an adequate basis for an entity to determine whether to capitalise borrowing costs in the fact pattern described in the request. Consequently, in its March 2019 meeting, the Interpretations Committee decided not to add this matter to its standard-setting agenda.⁴

See also further discussion in Chapter 29 at 2.5.2.G.

4.1 The definition of borrowing costs in IAS 23

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. [IAS 23.5]. Borrowing costs are defined in the standard to include:

• interest expense calculated using the effective interest method as described in IFRS 9 – Financial Instruments;
• interest in respect of liabilities 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 (see 5.4 below). [IAS 23.6].

The standard addresses whether or not to capitalise borrowing costs as part of the cost of the asset. [IAS 23.8, 9]. The identification and measurement of finance costs are not dealt with in IAS 23 (see 4.2 below).

In determining whether interest expense arising from a customer contract (i.e. a contract within the scope of IFRS 15) with a significant financing component can be considered as borrowing costs eligible for capitalisation, see discussion in Chapter 29 at 2.5.2.G.

4.2 Other finance costs

IAS 23 does not address many of the ways in which an entity may finance its operations or other finance costs that it may incur. For example, the standard does not address any of the following:

• the many derivative financial instruments such as interest rate swaps, floors, caps and collars that are commonly used to manage interest rate risk on borrowings;
• gains and losses on derecognition of borrowings, for example early settlement of directly attributable borrowings that have been renegotiated prior to completion of an asset in the course of construction; and
• dividends payable on shares classified as financial liabilities (such as certain redeemable preference shares) that have been recognised as an expense in profit or loss.

The eligibility of these other finance costs for capitalisation under IAS 23 is discussed at 5.5 below.

IAS 23 does not preclude the classification of costs, other than those it identifies, as borrowing costs. However, they must meet the basic criterion in the standard, i.e. that they are costs that are directly attributable to the acquisition, construction or production of a qualifying asset, which would, therefore, preclude treating the unwinding of discounts as borrowing costs. Many unwinding discounts are treated as finance costs in profit or loss. These include discounts relating to various provisions such as those for onerous leases and decommissioning costs. These finance costs will not be borrowing costs under IAS 23 because they do not arise in respect of funds borrowed by the entity that can be attributed to a qualifying asset. Therefore, they cannot be capitalised. In addition, as in the case of exchange differences, capitalisation of such costs should be permitted only ‘to the extent that they are regarded as an adjustment to interest costs’ (see 5.4 below). [IAS 23.6(e)].

5.1 Directly attributable borrowing costs

Borrowing costs are eligible for capitalisation as part of the cost of an asset if they are directly attributable to the acquisition, construction or production of a qualifying asset, it is probable that such costs will result in future economic benefits to the entity and the costs can be measured reliably. [IAS 23.8, 9].

The standard starts from the premise that borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those that would have been avoided if the expenditure on the qualifying asset had not been made. [IAS 23.10]. Recognising that it may not always be easy to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings that could otherwise have been avoided, the standard includes separate requirements for specific borrowings and general borrowings (see 5.2 and 5.3 below).

5.2 Specific borrowings

When an entity borrows funds specifically to obtain a particular qualifying asset, the borrowing costs that are directly related to that qualifying asset can be readily identified. [IAS 23.10]. The borrowing costs eligible for capitalisation would be the actual borrowing costs incurred on that specific borrowing during the period. [IAS 23.12].

Entities frequently borrow funds in advance of expenditure on qualifying assets and may temporarily invest the borrowings. The standard makes it clear that any investment income earned on the temporary investment of those borrowings needs to be deducted from the borrowing costs incurred and only the net amount capitalised (see Example 21.2 below). [IAS 23.12, 13].

There is no restriction in IAS 23 on the type of investment in which the funds can be invested but, in our view, to maintain the conclusion that the funds are specific borrowings, the investment must be of a nature that does not expose the principal amount to the risk of not being recovered. The riskier the investment, the greater is the likelihood that the borrowing is not specific to the qualifying asset. If the investment returns a loss rather than income, such losses are not added to the borrowing costs to be capitalised.

5.3 General borrowings

IAS 23 concedes that there may be practical difficulties in identifying a direct relationship between particular borrowings and a qualifying asset and in determining the borrowings that could otherwise have been avoided. [IAS 23.11]. This could be the case if the financing activity of an entity is co-ordinated centrally, for example, if an entity borrows to meet its funding requirements as a whole and the construction of the qualifying asset is financed out of general borrowings. Other circumstances that may cause difficulties are identified by the standard as follows:

• a group has a treasury function that uses a range of debt instruments to borrow funds at varying rates of interest and lends those funds on various bases to other entities in the group; or
• loans are denominated in or linked to foreign currencies and the group operates in highly inflationary economies or there are fluctuations in exchange rates. [IAS 23.11].

In these circumstances, determining the amount of borrowing costs that are directly attributable to the acquisition of a qualifying asset may be difficult and require the exercise of judgement. [IAS 23.11].

When general borrowings are used in part to obtain a qualifying asset, IAS 23 requires the application of a capitalisation rate to the expenditure on that asset in determining the amount of borrowing costs eligible for capitalisation. However, the amount of borrowing costs capitalised during a period cannot exceed the amount of borrowing costs incurred during that period. [IAS 23.14].

The capitalisation rate applied should be the weighted average of the borrowing costs applicable to all borrowings of the entity that are outstanding during the period, excluding borrowing costs applicable to borrowings made specifically for the purpose of obtaining a qualifying asset until substantially all the activities necessary to prepare that asset for its intended use or sale are complete (see 5.3.1.A below). [IAS 23.14]. The capitalisation rate is then applied to the expenditure on the qualifying asset.

Expenditure on a qualifying asset includes only that expenditure resulting in the payment of cash, the transfer of other assets or the assumption of interest-bearing liabilities. Such expenditure must be reduced by any progress payments and grants received in connection with the asset (see IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance – and Chapter 24). The standard accepts that, when funds are borrowed generally, the average carrying amount of the asset during a period, including borrowing costs previously capitalised, is normally a reasonable approximation of the expenditure to which the capitalisation rate is applied in that period. [IAS 23.18].

The standard does not provide specific guidance regarding interest income earned from temporarily investing excess general funds. However, any interest income earned is unlikely to be directly attributable to the acquisition or construction of a qualifying asset. In addition, the capitalisation rate required by IAS 23 focuses on the borrowings of the entity outstanding during the period of construction or acquisition and does not include temporary investments. As such, borrowing costs capitalised should not be reduced by interest income earned from the investment of general borrowings nor should such income be included in determining the appropriate capitalisation rate.

In some circumstances, it is appropriate for all borrowings made by the group (i.e. borrowings of the parent and its subsidiaries) to be taken into account in determining the weighted average of the borrowing costs. In other circumstances, it is appropriate for each subsidiary to use a weighted average of the borrowing costs applicable to its own borrowings. [IAS 23.15]. It is likely that this will largely be determined by the extent to which borrowings are made centrally (and, perhaps, interest expenses met in the same way) and passed through to individual group companies via intercompany accounts and intra-group loans. The capitalisation rate is discussed further at 5.3.2 below.

5.4 Exchange differences as a borrowing cost

An entity may borrow funds in a currency that is not its functional currency e.g. a US dollar loan financing a development in a company which has the Russian rouble as its functional currency. This may have been done on the basis that, over the period of the development, the borrowing costs, even after allowing for exchange differences, were expected to be less than the interest cost of an equivalent rouble loan.

IAS 23 defines borrowing costs as including exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. [IAS 23.6(e)]. The standard does not expand on this point. In January 2008, the Interpretations Committee considered a request for guidance on the treatment of foreign exchange gains and losses and on the treatment of any derivatives used to hedge such foreign exchange exposures. The Interpretations Committee decided not to add the issue to its agenda because:

• the standard acknowledges that judgement will be required in its application and appropriate disclosure of accounting policies and judgements would provide users with the information they need to understand the financial statements; and
• the IASB had considered this issue when developing the new IAS 23 and had decided not to provide any guidance.⁹

In our view, as exchange rate movements are partly a function of differential interest rates, in many circumstances the foreign exchange differences on directly attributable borrowings will be an adjustment to interest costs that can meet the definition of borrowing costs. However, care is needed if there are fluctuations in exchange rates that cannot be attributed to interest rate differentials. In such cases, we believe that a practical approach is to limit exchange losses taken as borrowing costs such that the total borrowing costs capitalised do not exceed the amount of borrowing costs that would be incurred on functional currency equivalent borrowings, taking into consideration the corresponding market interest rates and other conditions that existed at inception of the borrowings.

If this approach is used and the construction of the qualifying asset takes more than one accounting period, there could be situations where in one period only a portion of foreign exchange differences could be capitalised. However, in subsequent years, if the borrowings are assessed on a cumulative basis, foreign exchange losses previously expensed may now meet the recognition criteria. The two methods of dealing with this are illustrated in Example 21.3 below.

In our view, whether foreign exchange gains and losses are assessed on a discrete period basis or cumulatively over the construction period is a matter of accounting policy, which must be consistently applied. As alluded to above, IAS 1 – Presentation of Financial Statements – requires clear disclosure of significant accounting policies and judgements that are relevant to an understanding of the financial statements (see 7.2 below).

5.5 Other finance costs as a borrowing cost

5.6 Capitalisation of borrowing costs in hyperinflationary economies

In situations where IAS 29 – Financial Reporting in Hyperinflationary Economies – applies, an entity needs to distinguish between borrowing costs that compensate for inflation and those incurred in order to acquire or construct a qualifying asset.

IAS 29 states that ‘[t]he impact of inflation is usually recognised in borrowing costs. It is not appropriate both to restate the capital expenditure financed by borrowing and to capitalise that part of the borrowing costs that compensates for the inflation during the same period. This part of the borrowing costs is recognised as an expense in the period in which the costs are incurred.’ [IAS 29.21].

Accordingly, IAS 23 specifies that when an entity applies IAS 29, the borrowing costs that can be capitalised should be restricted and the entity must expense the part of borrowing costs that compensates for inflation during the same period in accordance with paragraph 21 of IAS 29 (as described above). [IAS 23.9].

For detailed discussion and requirements of IAS 29, see Chapter 16.

5.7 Group considerations

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:

1. it incurs expenditures for the asset;
2. it incurs borrowing costs; and
3. 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. Consistent with the general principle in capitalisation and recognition of an asset, 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 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. However, that would not preclude the payment being classified as a prepayment until such time as construction activities commence.

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.

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).

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.

6.3 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 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 circumstances 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).

7.1 The requirements of IAS 23

An entity shall disclose:

• the amount of borrowing costs capitalised during the period; and
• the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation. [IAS 23.26].

KAZ Minerals discloses in its ‘finance income and finance costs’ note its capitalisation rates used to determine its borrowing costs. The amount of borrowing costs capitalised during the period is also disclosed within the table that precedes this narrative disclosure and within the table of movements in the property, plant and equipment note.

7.2 Disclosure requirements in other IFRSs

In addition to the disclosure requirements in IAS 23, an entity may need to disclose additional information in relation to its borrowing costs in order to comply with requirements in other IFRSs. For example, disclosures required by IAS 1 include:

• the nature and amount of material items included in profit or loss; [IAS 1.97]
• the measurement bases used in preparing the financial statements and other accounting policies used that are relevant to an understanding of the financial statements (see an example at Extract 21.1 above); [IAS 1.117] and
• the significant judgements made in the process of applying an entity's accounting policies that have the most significant effect on the recognised amounts (e.g. criteria in determining a qualifying asset or a ‘part’ of a qualifying asset, including definition of ‘substantial period of time’). [IAS 1.122].

As noted in 5.4 above, the Interpretations Committee considered a request for guidance on the treatment of foreign exchange gains and losses and on the treatment of any derivatives used to hedge such foreign exchange exposures.

The Interpretations Committee decided not to add the issue to its agenda but concluded both that (i) how an entity applies IAS 23 to foreign currency borrowings is a matter of accounting policy requiring an entity to exercise judgement and (ii) IAS 1 requires disclosure of significant accounting policies and judgements that are relevant to an understanding of the financial statements.¹⁴ The requirements of IAS 1 are discussed in Chapter 3.