Username:
Password:
Forgot Password?

AASB 123 - Borrowing Costs

Print this Article Print this Article
Email this Article

Text of the Standard 
Summary 
AIFRS compared to IFRS and old AGAAP 
Interpretations and guidance 
Questions and answers 
Articles 

 
Comparison between AASB 123 and IAS 23 
Comparison by Jeffrey Knapp 
 
Background 
 
AASB 123 ‘Borrowing Costs’ is the Australian equivalent to IAS 23 of the same name. It was made by the AASB on 15 July 2004 as part the AASB’s program to adopt International Financial Reporting Standards by 2005. 
 
AASB 123 Compared to IAS 23 
 
Additions 
 
Paragraph Description 
 
Aus 1.1 Which entities AASB 123 applies to, ie. reporting entities and general purpose financial reports. 
 
Aus 1.2 The application date of AASB 123, ie. annual reporting periods beginning 1 January 2005. 
 
Aus 1.3 Prohibits early application of AASB 123. 
 
Aus 1.4 Makes the requirements of AASB 123 subject to AASB 1031 ‘Materiality’. 
 
Aus 1.5 Explains which Australian Standards have been superseded by AASB 123. 
 
Aus 1.6 Clarifies that the superseded Australian Standards remain in force until AASB 123 applies. 
 
Aus 1.7 Notice of the new Standard published on 22 July 2004. 
 
Aus 1.8 Clarifies that an entity must recognise and disclose all of its borrowing costs using either the benchmark treatment (expense in period incurred) or the allowed alternative treatment (expense except to the extent that they are directly attributable to a qualifying asset). 
 
Aus 1.9 Clarifies that adoption of the new Standard and continued use of the allowed alternative treatment does not constitute a change in accounting policy for Australian entities. 
 
Aus 21.1 Clarifies that a grant received by a not-for-profit entity in respect of a qualifying asset does not reduce the carrying amount of the qualifying asset because AASB 120 is restricted to for-profit entities. 
 
Deletions 
 
Paragraph Description 
 
2 Reference to superseded IAS 23. 
 
30 Transitional provisions for change in accounting policy on first time application.  
 
31 Effective date of IAS 23. 
 
 
 
Differences Between AASB 123 and AASB 1036 
Comparison from the Australian Accounting Standards Board 
 
This section identifies differences between AASB 1036 Borrowing Costs and AASB 123 Borrowing Costs under the following headings. 
 
A: Incompatibilities between AASB 1036 and AASB 123 
B: AASB 1036 is more detailed or restrictive  
C: AASB 123 is more detailed or restrictive  
D: AASB 1036 disclosures are more extensive 
E: AASB 123 disclosures are more extensive 
 
The analysis of differences should not be taken as providing an exhaustive list of differences.  
 
Introduction 
 
Borrowing costs are defined in both AASB 123 and AASB 1036 as interest and other costs incurred by an entity in connection with the borrowing of funds. The primary difference between two is that this Standard permits a choice between two treatments of borrowing costs. The benchmark treatment in this Standard requires all borrowing costs to be expensed in the period incurred. The treatment prescribed in AASB 1036 (requiring capitalisation of borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset and expensing in the reporting period other borrowing costs incurred in that period) is continued in this Standard as the alternative to the benchmark treatment. Both AASB 123 and AASB 1036 define a qualifying asset as an asset that necessarily takes a substantial period of time to get ready for its intended use or sale and contain consistent requirements in respect of the commencement, suspension and cessation of the capitalisation of borrowing costs.  
 
Differences 
 
A. Incompatibilities between AASB 1036 and AASB 123 
 
A.1 Exchange rate differences arising from foreign currency borrowings 
 
Borrowing costs are defined in both AASB 123.4 and AASB 1036.11.1 as interest and other costs incurred by an entity in connection with the borrowing of funds. AASB 123.5(e) comments that borrowing costs include exchange differences arising from foreign currency borrowings, but only to the extent that they are regarded as an adjustment to interest costs. AASB 1036.11.1.2(e) comments that all exchange differences arising from foreign currency borrowings, net of the effects of any hedge of the borrowings, are included within the definition of borrowing costs. Therefore: 
  • to the extent that exchange differences arising from foreign currency borrowings are not regarded as an adjustment to interest costs, they would be excluded from borrowing costs under AASB 123 but included in borrowing costs under AASB 1036, net of the effects of any hedge of the borrowings; and 
  • to the extent that exchange differences arising from foreign currency borrowings are regarded as an adjustment to interest costs, they would be included in borrowing costs under both AASB 123 and AASB 1036. The amount included in borrowing costs under AASB 1036 would be adjusted for the effects of any hedge of the borrowings. Based on a literal reading of AASB 123.5(e), the amount included in borrowing costs would not be adjusted for the effects of any hedge of the borrowings.
 
A.2 Funds borrowed generally – calculation of borrowing costs 
 
To the extent that funds are borrowed generally, AASB 1036.5.2 requires the amount of borrowing costs capitalised to qualifying assets to be determined by applying a capitalisation rate to the weighted average accumulated expenditures relating to qualifying assets during the reporting period. To the extent that funds are borrowed generally, AASB 123.17 requires the amount of borrowing costs capitalised to qualifying assets to be determined by applying a capitalisation rate to the expenditures on that asset. AASB 123.21 notes that the average carrying amount of the asset during a period is normally a reasonable approximation of the accumulated expenditures to which the capitalisation rate is applied. This implies that there may be instances in which the average carrying amount of a qualifying asset during a period is not a reasonable approximation of the accumulated expenditures to which the capitalisation rate should be applied. Therefore, in these instances, the amount of borrowing costs capitalised in respect of the asset under AASB 123 will differ from the amount capitalised under AASB 1036. 
 
B. AASB 1036 is more detailed or restrictive  
 
B.1 Capitalisation of borrowing costs 
 
AASB 1036.4.1 to 4.2 require borrowing costs to be recognised as an expense in the reporting period in which they are incurred, except to the extent they are directly attributable to the acquisition, construction or production of a qualifying asset (in which case the borrowing costs were capitalised). AASB 123.Aus1.8 permits this treatment as the allowed alternative. Under the benchmark treatment in AASB 123, borrowing costs are recognised as an expense in the period in which they are incurred. 
 
B.2 Extractive industries 
 
AASB 1036.1.2 stipulates that the requirements of AASB 1036 override the requirements of AASB 1022 Accounting for the Extractive Industries, in relation to the treatment of borrowing costs. In addition, AASB 1036.11.1.13 comments that, where exploration and evaluation costs are carried forward under AASB 1022 on the basis that activities have not reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, such costs are not qualifying assets because the probability recognition criterion is not met in respect of these costs. Therefore, any related borrowing costs are recognised as an expense in the period incurred. AASB 123 does not address these issues as it is expected these will be addressed by the IASB as part of its project on the extractive industries.  
 
B.3 Identifying borrowing costs 
 
Both AASB 123.5 and AASB 1036.11.1.2 comment that borrowing costs include, amongst other things, interest on bank overdrafts and short-term and long-term borrowings, amortisation of discounts or premiums relating to borrowings, and amortisation of ancillary costs incurred in connection with the arrangement of borrowings. AASB 1036.11.1.3 to 11.1.6 provide additional guidance on some of the items that would be regarded as falling within these types of borrowing costs. For example, AASB 1036.11.1.3 comments that, when borrowings have been discounted to determine their carrying amounts, the increase in those carrying amounts resulting from the expiry of time is in the nature of interest. AASB 123 does not include this additional guidance in its text. 
 
B.4 Identifying qualifying assets 
 
AASB 1036.11.1.9 and 11.1.10 contain guidance on the identification of qualifying assets additional to that in AASB 123.6 and notes that: 
  • financial assets are not qualifying assets, even where they are equity securities in another entity that has a qualifying asset (paragraph 11.1.9); and 
  • a substantial period of time referred to in the definition of qualifying asset is generally regarded as more than twelve months elapsing from the time activities necessary to prepare the asset for its intended use or sale commence until the time when substantially all such activities are complete (paragraph 11.1.10).
 
B.5 Borrowing costs within an economic entity 
 
AASB 1036.5.2.2 contains guidance on circumstances in which the treatment of borrowing costs differs between entities within an economic entity. For example, where a parent entity borrows funds which it then lends to a subsidiary to construct a qualifying asset, AASB 1036.5.2.2 comments that the borrowing costs would be recognised as an expense in the parent entity’s financial report but capitalised to the qualifying asset in the subsidiary’s and economic entity’s financial reports. AASB 123 does not include similar guidance in its text. 
 
B.6 Progress payments, grants received and qualifying assets 
 
Both AASB 123.21 and AASB 1036.5.2.4 comment that, in determining the amount of borrowing costs to be capitalised where funds are borrowed generally, the expenditures against which the capitalisation rate is applied are reduced by any progress payments and grants received in connection with the qualifying asset. AASB 1036.5.2.4 further comments that it is only the cost elements of progress payments that are deducted from these expenditures. AASB 123 does not include this additional guidance in its text. 
 
B.7 Source and specific application of borrowed funds 
 
AASB 1036.5.3.1 provides guidance on identifying circumstances in which funds could be regarded as borrowed specifically for acquiring, constructing or producing a qualifying asset, and comments that it may only be in very simple or start-up operations or in relation to particular projects that a direct link can be drawn between the source and specific application of borrowed funds. AASB 123 does not include similar guidance in its text. 
 
B.8 Specific borrowings exceeding requirements 
 
AASB 1036.5.3.2 provides guidance on the amount of borrowing costs to be capitalised where an entity borrows specifically for a qualifying asset and, as part of the transaction, borrows more than it is expected will be used to acquire, construct or produce the asset. AASB 123 does not include this additional guidance in its text. 
 
C. AASB 123 is more detailed or restrictive  
 
No items noted. 
 
D. AASB 1036 disclosures are more extensive 
 
D.1 Borrowing costs expense 
 
AASB 1036.9.1(d) requires the following information to be disclosed: 
  • the amount of the borrowing costs recognised as an expense for the reporting period (paragraph 9.1(a)); and 
  • where funds are borrowed specifically for acquiring, constructing or producing a qualifying asset, disclosure of the amount of any investment revenue earned on those borrowed funds and deducted from the borrowing costs incurred in determining the amount of borrowing costs to be capitalised (paragraph 9.1(d)).
 
E. AASB 123 disclosures are more extensive 
 
No items noted.