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I went through IAS 23 and answered questions over here, but I am still not sure about the capitalization of borrowing costs. Please could you advise me?

Our company purchased internet domain, this purchase was financed from 60 months loan, loan was used solely for this purchase. Bank provided us with money in 3/2016, from that time we incurred some interest costs, purchase itself happened in 5/2016 and domain is officially used from 6/2016.

If I understand it well we should capitalize only the interest costs incurred between 3/2016, ie the moment when the loan was provided, and 6/2016, when substantially all activities necessary to prepare asset are completed, is it? Therefore we should capitalize only 3 months interest costs, the remaining part (57 months interest costs) should be expensed to P&L?

Is my interpretation of IAS 23 correct? I somehow cannot understand why we cannot capitalize in time all the interest costs that will be charged over loan period as the loan was withdrawn solely for the purchase of the internet domain...

Thank you,

closed with the note: The question was answered. Thank you.
in IAS 23 - Borrowing Costs by Level 1 Member (1.3k points)
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Thank you for your useful replies. I will proceed in this direction.

Have a great Christmas time!


3 Answers

0 votes
Your treatment is correct as per IAS 23. You cant charge the full interest cost since the intended use was started later. You should have earned some interest during the period it was not used which might set of the interest expense to some extent.
by Level 2 Member (2.8k points)
Website is a qualifying intangible asset. Purchasing a domain is the fist stage of a website development. I think we can capitalize the interest cost during the development stage.
0 votes
In order to capitalize borrowing cost, the asset has to be 'Qualifying Asset'. meaning - it takes substantial amount of time to build. Assets purchased outright may not be considered 'Qualifying Asset', unless they are made to order & take substantial amount of time to get ready for its intended use.

If it is so, then capitalization of borrowing cost of even two months will not be appropriate.
0 votes

under IAS-23, one of the condition for capitalization of interest cost is that is should be incurred in relation to a "qualifying asset" i.e. as asset that takes a substantial period of time to get ready for its intended use or sale. In my opinion purchase of domain does not take a substantial period of time for its acquisition. Hence, no borrowing cost should be capitalized. 

The gap between obtaining the loan and acquisition of the domain in your case is irrelevant for application of IAS-23 (capitalization of borrowing cost). Therefore, all the interest cost should be charged to the PnL in the respective periods. 

by Level 3 Member (7.2k points)