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IAS 23 — Borrowing costs on completed qualifying assets

Date recorded:

Agenda paper 7 — IAS 23 Borrowing Costs — Borrowing costs on completed qualifying assets

The Project manager introduced the agenda paper. He said that the Interpretations Committee  received a request seeking clarification on whether funds borrowed specifically to finance the construction of a qualifying asset, the construction of which had now been completed, must be included as part of general borrowings for the purposes of determining the capitalisation rate for other qualifying assets under IAS 23 Borrowing Costs. He said that the issue was discussed by the Interpretations Committee in May 2015 in which the Interpretations Committee noted that there was diversity in practice and it was agreed that an amendment to IAS 23 was needed, which would be incorporated in an Annual Improvement cycle. He said that the agenda paper included the wording of the proposed amendment which would clarify that the calculation of the capitalisation rate to be applied to expenditures incurred on a qualifying asset that had been funded from the general borrowings of an entity should include the weighted average of all borrowing costs other than those that have already been capitalised to a qualifying asset in accordance with the requirements of paragraph 12 of IAS 23. Finally, he said that the staff was suggesting requiring prospective application.

There was general agreement with the staff recommendation; although there were some concerns raised by some Interpretations Committee members that the wording of the amendment was not clear. Some Interpretations Committee members said that the principle was clear as discussed in the agenda paper but it was not properly reflected in the wording of the proposed amendment of paragraph 14 of IAS 23. It was suggested that the wording of the proposed paragraph BC2 be clearer and it should be taken into account in the standard.

One IASB observing Board member asked whether it would be necessary for an entity to demonstrate the re-allocation from specific borrowing to general borrowing. The Project manager responded that the general principle of IAS 23 was that it would be difficult to justify and that IAS 23 required inclusion of all general borrowing (unlike US GAAP which allows entities to make judgements as to which borrowings to include.)

The Chairman concluded that there was general consensus on the proposed amendments, acknowledging the improvements in the wording suggested by the Interpretations Committee members. In relation to the transition requirement there were no significant comment raised and the Interpretations Committee members agreed with the staff recommendation.

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