Capitalisation of borrowing costs: An investigation into technical uncertainties in IAS 23

Abstract

Those who are not experts in the field of accounting will most probably be of the opinion that interest should be expensed and therefore reduce profits. However, for financial periods beginning on or after 1 January 2009, the capitalisation of borrowing costs (interest) incurred on certain qualifying assets became mandatory for companies applying International Financial Reporting Standards (IFRS). Apart from the practical implications of this change, some technical questions remain unanswered by IAS 23 Borrowing Costs, and since it is now mandatory to capitalise borrowing costs, it might be worthwhile to take a deeper look at the requirements of this standard. The study reveals that knowledgeable Financial Accounting academics were quite divided in their opinions regarding the finer technical details of the revised standard, for example the period that constitutes a “substantial period of time” as mentioned in the standard when defining qualifying assets. These differences in opinion might prove that accountants with equal knowledge may interpret the standard differently, which might lead to confusion and inconsistency in external reporting; to at least some degree a possible infringement of the modern plea towards accounting harmonisation. The findings of this research could prompt standard-setters to provide clearer guidance in the revision of future standards on borrowing costs in various different accounting frameworks, or even of other standards with similar uncertainties. In the instances where participants did agree on the correct accounting treatment, the findings in this research could also be used as guidance for what the correct accounting treatment should be for various scenarios. This could be useful, amongst others, to accountants in practice, auditors, textbook and guidance document authors, university lecturers and providers of continuing professional development (CPD) training.

Key Words:

• Borrowing costs
• Capitalisation
• IAS 23
• Interest
• International Financial Reporting Standards (IFRS)
• Qualifying asset
• Technical uncertainties
• United States Generally Accepted Accounting Principles (US GAAP)