The International Accounting Standards Board (IASB) issued a revised version of IAS 23 Borrowing Costs (IAS 23) in March 2007. In the revised standard, the previous benchmark treatment of recognising borrowing costs as an expense has been eliminated. Instead, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset will form part of the cost of that asset. The revised IAS 23 is effective for annual periods beginning on or after 1 January 2009 with earlier application permitted.
The new standard will represent a change in accounting policy for entities that applied the benchmark treatment under the previous standard. These entities will now need to develop procedures to calculate the amount of borrowing costs to be capitalised. Although the concept of capitalising borrowing costs is simple and familiar to many, putting that concept into practice frequently leads to questions.
Issues that often take up management time, and may therefore need to be considered early, include :
- which of the entity’s loans are specific borrowings?
- how does an entity reflect the fluctuation of borrowings and interest rates during the period when calculating the borrowing costs to capitalise?
- how does an entity take into account the effect of exchange differences in determining the amount of borrowing costs to capitalise?
These and many other common questions are considered in : Grant Thornton – Capitalisation of Borrowing Costs, from theory to practice.