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Short-term Convergence: Borrowing Costs

Date recorded:

Whether to proceed with the amendments to IAS 23

The Board continued its redeliberations of planned amendments to IAS 23 Borrowing Costs. In particular, the Board discussed a staff recommendation that, notwithstanding the large-scale opposition from users, preparers, and other constituents, the Board should proceed with the amendments substantially as exposed and eliminate the option to expense interest as incurred, thereby mandating the capitalisation method.

The Chairman asked Board members whether any had changed their view on this essential question since the November meeting.

Ms O'Malley noted that she had changed he mind and now opposed continuing the project. She believed the ED had the correct answer and wanted to converge on the principle that capitalising interest was the correct approach, but she was concerned that the IASB had complicated the financial reporting of the very constituents it was trying to assist. Because it was not converging with US GAAP with respect to the definition of a 'qualifying asset' and measurement, it would force those IFRS entities filing in the US on Form 20F (or Form 18 for state-owned entities) to capitalise interest on two different bases and to reconcile material differences between them. This was unfair and unhelpful. She would vote for the amendment if the effective date is far enough in the future that this would not be an issue (that is, after the SEC's IFRS-US GAAP reconciliation is no longer required). Mr Cope and Mr Garnett noted that they still opposed the amendment, for various reasons.

Professor Barth was firmly in favour of the amendments: they removed an option in IAS 23, which would aid comparability, and moved IFRS closer to US GAAP in this area. Capitalising interest is consistent with the historical cost approach of measuring an asset at initial recognition at cost. She did not think that delaying the effective date would help. Mr McGregor thought the amendment would be an improvement, but was concerned about the disruption to IFRS preparers. However, if rejecting the staff's view would jeopardise the IASB's Memorandum of Understanding with the FASB, US Securities and Exchange Commission and the European Commission, he was prepared to vote in favour. Other Board members expressed this general view.

Senior staff suggested that it might be possible to ask the SEC whether they would require reconciliation of amounts of interest capitalised (at the moment, these amounts must be reconciled when material).

The Board voted by a majority of 10-4 to accept the staff recommendation and proceed with the amendments.

Amendments proposed by the staff

The Board considered two amendments proposed by the staff. The first was whether the revised IAS 23 should provide an exception from the general principle for certain inventories. The issue was raised by a constituent in the whisky and wine-making industry, who noted that while the effect on profit and loss was minimal, the effect on the balance sheet would be material because the inventories must mature for several years. Board members noted that it was exactly these types of inventories that should include interest cost in their carrying amount. However, having decided to converge in principle with US GAAP, the Board agreed to provide the same exception as in FAS 34 paragraph 10, such that 'interest cost shall not be capitalized for inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis'.

The Board also considered whether to amend the scope of the revised IAS 23 to include assets that are carried at fair value (except those within the scope of IAS 41 Agriculture). The issue concerns 'geography' within the statement of profit and loss and how the fair value adjustment is recorded: as the total change in fair value from period to period or the change between items (such as interest) included in the historical cost carrying amount and the fair value. After debating this issue at some length, the Board confirmed the position exposed in the ED (paragraph 3A) that there would be a scope exception for all assets measured at fair value, including biological assets.

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