Borrowing Costs – IAS 23

Date recorded:

Convergence Issues

The Board considered whether and how to amend IAS 23 Borrowing Costs. IAS 23 and FAS 34 Capitalization of Interest Cost, prescribe the accounting treatment for borrowing costs:

  • IAS 23 permits two possible treatments, either the capitalisation of borrowing costs, to the extent that are directly attributable to the acquisition, construction or production of a qualifying asset (as defined), or alternatively, immediately expensing the borrowing costs.
  • FAS 34 requires the capitalisation of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (as defined). Immediate expensing is not an option.

Not only is the fundamental approach different between IFRS and US GAAP, how the two sets of standards define a 'qualifying asset' is quite different.

The staff paper explored whether the Board should require capitalisation of interest on qualifying assets using what was termed an 'economic cost' model. In essence, this would result in an entity using the same discount rate as that used for testing for impairment in under the requirements of IAS 36 (a rate that reflects current market assessments of the risks specific to the asset being constructed). However, moving to this measurement approach would not result in convergence with US GAAP, unless the FASB agreed to adopt the same approach.

Some Board members welcomed the staff paper, saying that it was conceptually better than either IAS 23 or FAS 34. Others preferred expensing all interest costs as incurred, citing concerns about manipulation of profit or loss. A few Board members preferred an approach that would see constructed assets recognised on completion at fair value, with the gain or loss compared to costs of construction recognised (they did not say where, but probably in profit or loss).

The Board was reminded that this was a proposal related to a short-term convergence project and that such projects usually concentrated on eliminating alternatives. Some Board members noted that even eliminating the expensing option in IAS 23 would not achieve convergence with US GAAP because the definition of qualifying asset was different between the two sets of standards. One possibility would be to work on the capitalising approach based on economic cost, seeing whether there was any appetite on behalf of the FASB for change to their standard.


After a rather difficult debate, the Board agreed to proceed with a short-term convergence project on IAS 23 that would eliminate the alternative of immediate expense (as set out in IAS 23.7-9) (12 in favour; 2 opposed). It was noted that eliminating this alternative would not eliminate the SEC reconciling item for US registrants.

The staff was asked to return with an analysis of the definitions of 'qualifying assets' in IFRSs and US GAAP before the Board makes a decision on whether to seek convergence on this topic.

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