The three elements of commencement

Learning objectives

• Determine the commencement date for capitalisation (expenditures incurred, borrowing costs incurred, activities to prepare the asset in progress).L1, L2, L3

Normative references

• IAS 23 §17Commencement of capitalisation: expenditures for the asset are being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset are in progress.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

4 questions

• Hélios draws a specific borrowing of 6,000,000 on 1 January, dedicated to the construction of a warehouse. Its nominal rate is 4.5%, but its effective interest rate, which includes the issue costs, is 6% (case data). Expenditure, borrowing costs and preparation activities are all in place from 1 March; the year ends on 31 December and no funds are temporarily invested. What amount of borrowing costs is eligible for capitalisation for the year?L4
• When can the capitalisation of borrowing costs begin for a qualifying asset?L1
• Landry draws a loan of {principal} on 1 January at {annual_rate} a year. Expenditure, borrowing costs and preparation activities are all in place only {months_before_start} later, on 1 May. The year ends on 31 December and no funds are temporarily invested. Calculate the interest eligible for capitalisation for the year and the interest recognised as an expense.L2
• Fontan is building a warehouse. It draws its loan on 15 March and pays the first contractor invoice on 1 April, but earthworks only begin on 20 April (the preparation activities start only on that date, case data). In three to five sentences, justify the commencement date of capitalisation of borrowing costs.L3