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IAS 23 Borrowing Costs This article does not deal with assets constructed for lease or sale. The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs. Borrowing costs include interest on bank overdrafts and borrowings, amortisation of discounts or premiums on borrowings, amortisation of ancillary costs incurred in the arrangement of borrowings, finance charges on finance leases and exchange differences on foreign currency borrowings where they are regarded as an adjustment to interest costs. A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use. In our industry, this is most likely to be a diamond factory Section 7 states that all borrowing costs should be expensed in the period in which they are incurred. There is an alternative treatment, sections10 and 11, that costs in relation to the acquisition, construction and production of a qualifying asset should be treated as part of the cost of the relevant asset. Whichever approach is used, the company must be consistent. Where there is specific financing, such as a direct loan for building, then the actual costs incurred are identifiable. However, where the company’s general debt financing is used, then the capitalisation rate will be weighted average of the borrowing costs of the pool of finance. If a project is developed in stages and there are interruptions, then the capitalisation of the interest charges should be suspended for the duration of the interruption. Also, the capitalisation ends when substantially all of the activities necessary to prepare the asset for its intended use or sale are complete. The alternatives are available until the end of 2008. However, the IASB issued a revised IAS 23 on 29 March this year and the alternative not to capitalise falls away and companies will be obligated to capitalise borrowing costs on qualifying assets. US GAAP in SFAS 34 is much tighter in its definition of a qualifying asset on "accumulated production expenditures", although confusingly, the IRS in Notices 88 and 89 is more lenient than SFAS 34, to include pre- production planning and design activities and pre-production acquisition of land and raw materials. And, SFAS is based on cashflow and excludes land, while the IRS approach is based on the capitalised amounts and includes land. In fact there was some opposition in the US accounting profession to the revision of IAS 23 as it impedes the convergence between IFRS and US GAAP. Relevance to the Diamond Industry Diamond companies who submit their financial statements to the banks, and more specifically, for sightholders who have to submit consolidated financials to the DTC, the capitalisation of financing charges when building a factory can have a significant effect on the financials of the group. Moving some of the finance expense from the Profit & Loss statement to the Balance Sheet improves:
This is especially germaine as the depreciation only starts to hit the P & L after the fixed assets comes into use. |
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