However, there are exceptions for fixed-rate debt designated as the hedged item in a fair value hedge. Also, amounts in accumulated other comprehensive income related to cash flow hedges of borrowings whose interest is capitalized are reclassified to earnings over the useful life of the asset — which would be the same period over which the associated capitalized interest is amortized. Under US GAAP, interest income on any temporary investment of funds pending expenditure on the asset is not generally offset against interest costs in determining either the capitalization rates or limitations on the amount of interest to be capitalized.
An exception exists for circumstances involving tax-exempt borrowings that are restricted externally. ABC Corp. Expenditure on the equipment starts January 1 and is not complete at year-end. Under US GAAP, the amount capitalized is calculated by applying the rate of the specific borrowing to the average expenditure and is not reduced by the interest earned from the temporary investment of funds. Under IFRS Standards, a company may make a policy choice for classifying cash flows related to capitalized interest as either:.
Both GAAPs require disclosure of capitalized borrowing costs. Additionally, IAS 23 requires disclosure of the capitalization rate for borrowing costs, while US GAAP requires disclosure of total interest costs incurred and charged to expense during the period.
While IFRS Standards and US GAAP are converged at a high level on the accounting for borrowing costs, complexities arise when determining qualifying assets, eligible borrowing costs and the amount to be capitalized. Dual reporting companies should closely assess their methodologies to determine what and how much to capitalize under both accounting frameworks.
Companies may take the benefit of the accounting policy elections available under both frameworks to achieve consistency to the extent possible. Amit Singh. Valerie Boissou. Understanding the guidance in IFRS 16 on accounting for lease modifications by both lessees and lessors. Step 1: Identify qualifying assets Qualifying assets are those that necessarily take a substantial period of time to get ready for their intended use or sale. Recent developments The IFRS Interpretations Committee recently clarified in an Agenda Decision how IAS 23 applies to the construction of a residential multi-unit real estate development if the developer is selling units to customers before and during construction and recognizes the related revenue over time as it transfers control to customers.
Step 2: Identify eligible costs Not all amounts classified as interest costs qualify for capitalization. Step 3: Determine the capitalization rate for general borrowings and calculate the costs to be capitalized The capitalization rate considers the weighted-average interest cost applicable to general borrowings outstanding during the period.
Step 4: Determine the period of capitalization Capitalization begins when expenditure and borrowing costs for the asset are being incurred and activities that are necessary to prepare the asset for its intended use are in progress. Scope 1. Qualifying assets 2. Certain inventory may be a qualifying asset under IAS 23, but not under US GAAP Inventory that takes a long time to produce but is otherwise produced in large quantities on a repetitive basis e.
Equity method investments are not qualifying assets under IAS 23, but may be under US GAAP US GAAP allows an investment accounted for by the equity method to be a qualifying asset, if 1 the investee has activities in progress necessary to commence its planned principal operations and 2 the investee's activities include the use of funds to acquire qualifying assets for its operations.
Borrowing costs eligible for capitalization 5. US GAAP has prescriptive guidance on derivative gains and losses; IAS 23 does not Derivative instruments such as interest rate swaps are commonly used to manage interest rate risk on borrowings. Outreach revealed that the prevalent accounting treatment is to include all expenditures—both pre- and post-borrowing. In the staff's view, assessing whether to include expenditures on a qualifying asset before obtaining general borrowings for the purpose of determining borrowing cost eligible for capitalisation requires judgement and depends on the particular facts and circumstances.
In making this assessment, the entity considers:. In the fact pattern described in the submission, the entity would not start capitalising borrowing costs until it obtains general borrowings and incurs borrowing costs. The staff concluded that the requirements in IAS 23 provide an adequate basis for an entity to determine the borrowing costs eligible for capitalisation.
Instead, the staff recommend to publish an Agenda Decision in relation to the application of the requirements in IAS The Committee discussed the application of IAS , which states that an entity would normally, but not always, use an average carrying amount of the asset as a reasonable approximation of the expenditures to which the capitalisation rate is applied in that period. The Committee concluded that expenditures may include all expenditures incurred before and after the borrowings were made.
Before taking the vote the Chair suggested clarifying in the Agenda Decision that in accordance with IAS , the entity would not capitalise the borrowing costs for the first six months for the case set out in the Appendix B of the staff paper because there were no borrowings during that time. She also suggested that the analysis of IAS is not required. The Agenda Decision should simply state that an entity does not disregard expenditure incurred before the general borrowings were made in arriving at the capitalisation rate.
The Committee decided, by a majority vote, that an Interpretation is not required and that it would publish for public comment a tentative Agenda Decision to that effect. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected.
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