The International Accounting Standards Board (IASB) has finalized amendments to its International Financial Reporting Standards (IFRS) after publishing proposals and considering input from various parties. One of the amendments revises IAS 23 – Borrowing Costs as part of its annual improvements to the 2015 to 2017 cycle.
The amendments to IAS 23 clarify which borrowing costs are eligible for capitalization. Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset form part of the cost of that asset, or are capitalized. Other borrowing costs are recognized as general expenses. Borrowing costs include interest, bond premiums, and any other expenses incurred to obtain the funds necessary to purchase the asset. A qualifying asset is one that takes a significant length of time before it’s produced or put to its intended use or sold. For example, a unique, one-of-a-kind HVAC system that’s awaiting installation in an unfinished building is a qualifying asset, but a machine designed for cleaning ducts in this and other buildings is not since it’s not specific to that building.
From an accounting perspective, the difference in the treatment of borrowing costs can be significant to accountants and clients. Capitalized expenses that you add to the cost of an asset can be realized over a long period of time as depreciation. With general borrowing costs, you expense them in the year they are incurred and deduct them from revenues. Deviating from this standard can produce dramatically different financial statement results since expenses have a direct impact on net revenues shown on the income statement. The amendments are intended to ensure that companies report borrowing costs consistently and financial results are reliable, and are effective from Jan. 1 2019, with early application permitted.