IAS 23 — Meaning of 'general borrowings'

Date recorded:

The staff introduced the first issues relating to amended IAS 23 (2007) by noting that the IFRIC has received requests to clarify the meaning of general borrowings. The issue relates to the question whether a borrowing made to acquire a specific asset other than a qualifying asset could/should be excluded from general borrowings when assessing the amount of general borrowing costs that are to be capitalised.

The staff noted that two views have developed in practice. These were outlined in the staff paper as follows:

  • View A: The definition of general borrowings in paragraph 14 of IAS 23 means that all borrowings other than borrowing made specifically for the purpose of obtaining a qualifying asset have to be taken into account when calculating the capitalisation rate.
  • View B: The general principle in IAS 23 that the entity shall capitalise borrowing costs that would have been avoided if the expenditure on the asset had not been made allows allocation between general borrowings and other borrowings made specifically for the acquisition of other assets.

The staff believe that there is a conflict between specific and general principles of IAS 23 and support the view that the borrowings made specifically for the acquisition of other assets are excluded from the calculation of the capitalisation rate for general borrowings. The staff believe that the IFRIC should refer this issue to the Board to amend IAS 23 as a part of Annual Improvement process in this respect. They therefore recommended that the IFRIC should not add the issue to its agenda.

One IFRIC member disagreed with the staff analysis and noted that in the practice another method has developed based on opportunity costs allocation. Another IFRIC member noted that any guidance in this area would be of nature of implementation guidance only and that the standard has many issues to be addressed in this way as paragraph 14 is difficult to be applied in practice. Another IFRIC member noted that even though significant judgement of is required in determination of general borrowing the amounts concerned would generally not be material.

One IFRIC member responded that in her opinion the standard is sufficiently clear in what are the requirements for capitalisation but that the results it produces can be counterintuitive. The Chairman noted that the revised standard is relatively new and that it would require more time to assess how the constituents apply it. Another member disagreed as in her opinion there is already divergence in practice, nonetheless any guidance in this respect would be implementation guidance only.

The IFRIC members discussed the issue of potential divergence in practice. They concluded that even when the practitioners applied the requirements of IAS 23, they would end up with different capitalisation rate. Nonetheless, the majority of the members did not believe that this diversity would hamper comparability of financial statements. Finally, the IFRIC tentatively decided not to add the issue to its agenda as the members were unable to reach conclusion on the issue and did not expect significant diversity in the practice. The staff were asked to rewrite the agenda decision accordingly.

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