IAS 23 is one of the shortest standards in your syllabus, and one of the most consistent sources of lost marks. In my library of ICAG papers it appears in nine papers across eight sittings, usually as a three-to-ten mark part of a bigger question. This article gives you the five-rung sequence for answering any IAS 23 question, with real ICAG numbers worked through in tables.
The rule in one sentence
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of its cost. Every other borrowing cost is an expense. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.
The IAS 23 ladder
| Rung | Question to ask | Exam cue |
|---|---|---|
| 1. Qualify | Does the asset take a substantial period to get ready? | Factory, warehouse, head office |
| 2. Commence | Are expenditure, borrowing costs and activities all under way? | Spend date is usually the binding date |
| 3. Suspend / cease | Has active development been interrupted for an extended period? Is the asset substantially ready? | Wording of any “break” or “completed” |
| 4. Measure | Specific loan: actual cost less investment income. General pool: weighted rate × expenditure | Is the loan “specifically” for the asset? |
| 5. Cap and disclose | Is the amount more than interest actually incurred? | Disclose amount and rate |
The three conditions at rung 2 are given by the Nov 2017 and March 2025 schemes: expenditure is being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset are in progress.
Worked example 1: Chofi Ltd (Financial Reporting, Nov 2020, Q2(c), 4 marks)
Chofi borrowed GH¢15m at 6% on 1 April 2018 to partly fund a building. Construction began 1 July. GH¢10m was paid to the contractor on 1 October and a further GH¢10m on 1 December. Year end 31 March 2019.
| Capitalised on | Amount borrowed and spent (GH¢’000) | Rate | Months | Capitalised (GH¢’000) |
|---|---|---|---|---|
| 1 Oct 2018 payment | 10,000 | 6% | 6/12 | 300 |
| 1 Dec 2018 payment (only 5,000 of the loan left) | 5,000 | 6% | 4/12 | 100 |
| Total (scheme answer) | 400 |
Capitalisation began on 1 October because that is the first date all three conditions were met together. The examiner accepted both readings of whether the loan was solely for the building. State your assumption.
Worked example 2: Banda Ltd (Financial Reporting, Nov 2023, Q2(a), 5 marks)
“Calculate the maximum amount that could potentially be capitalised.”
| Item | GH¢’000 | Capitalise? |
|---|---|---|
| Overdraft interest | 14.40 | Yes |
| Foreign currency loan interest | 100.80 | Yes |
| Exchange differences on equity | 168.00 | No (nil in the scheme) |
| Effective interest on loan (2,400 − 24) × 6.88% | 163.44 (scheme) | Yes |
| Maximum | 278.64 |
The examiner said the part was poorly answered, with most candidates scoring 2 out of 5. The scheme’s 163.44 is a rounded figure; the exact product of 2,376 × 6.88% is about 163.47, so show the working clearly. The same structure appears in Corporate Reporting, May 2020, Q2(b): (2,000 − 20) × 6.88% = 136.2, total GH¢232.2 thousand.
Worked example 3: Nanniama Ltd (Corporate Reporting, May 2016, Q1(b), 10 marks)
A GH¢800,000 loan at 9%, outstanding nine months, specific to the warehouse, with unspent funds invested at 6%. Payments: 31 Jan 200 (from the general pool), 31 Mar 450, 30 Jun 100, 31 Oct 200, 30 Nov 250 (GH¢’000).
| Component | Working | GH¢ |
|---|---|---|
| Specific loan interest | 800,000 × 9% × 9/12 | 54,000 |
| Less investment income Apr–Jun | (800,000 − 450,000) × 6% × 3/12 | (5,250) |
| Less investment income Jul–Oct | (800,000 − 550,000) × 6% × 4/12 | (5,000) |
| Less investment income Nov | (800,000 − 750,000) × 6% × 1/12 | (250) |
| Net on specific loan | 43,500 | |
| General pool rate | 933,800 ÷ 9,750,000 | 9.58% |
| 31 Jan payment from pool | 200,000 × 11/12 × 9.58% | 17,563 |
| 30 Nov payment from pool | 200,000 × 1/12 × 9.58% | 1,597 |
| Total capitalised | 62,660 |
The examiner: candidates made a good effort, but very few got all the calculations right, and many did not time-apportion the interest. A three-week halt in May was not treated as a suspension in the scheme because substantial technical and administrative work continued.
Two quick checks from other papers
Frafraha Ltd (Financial Reporting, May 2019, Q3): general borrowings of GH¢4m at 6% and GH¢6m at 4.5% give a weighted rate of 5.1%. GH¢9m × 5.1% × 7/12 = about GH¢0.27m. The scheme used “say 5%” and showed GH¢0.26m, so show the 5.1% working.
Fausty PLC (Financial Reporting, March 2025, Q2(b)): GH¢40m × 5% × 9/12 = GH¢1.5m. August and September 2023 (before construction began) and the two half-month breaks were removed.
EXAM TIP: Write the three conditions on one line, then find the first date all three are true. In Nov 2020 that date was the first payment to the contractor, not the date of the loan or the start of construction.
Mistakes that cost marks
1. Starting capitalisation on the loan date or construction start date instead of the first date all three conditions are met.
2. Using the coupon rate on a loan with fees, instead of the effective rate on the net amount.
3. Including exchange differences on capital or equity.
4. Forgetting to time-apportion (May 2016).
5. Applying the pool rate to a specific loan, or ignoring investment income on unspent specific funds.
Conclusion
IAS 23 is short, repeated and rewarded for method. Learn the ladder, practise the papers above, and write your assumptions down.
Ready to Go Deeper?
Full live classes with me cover this and every IFRS calculation. Join the live classes here.
Join the Profs Accountancy Solutions newsletter for free weekly study tips, exam breakdowns and insider strategies. The hardcopy and digital textbook is available too.
