Monday, September 1, 2008

IAS 23 versus SFAS 34 – several main differences

The Basis for Conclusions on IAS 23 Borrowing Costs which accompanies, but not as part of IAS 23, revealed out several major differences between IAS 23 and FASB Statement of Financial Accounting Standards (SFAS) No. 34 Capitalization of Interest Cost.

Definition of borrowing costs

IAS 23 uses the term ‘borrowing costs’ whereas SFAS 34 uses the term ‘interest costs’. ‘Borrowing costs’ reflects the broader definition in IAS 23, which encompasses interest and other costs, such as : (a) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs; and (b) amortization of ancillary costs incurred in connection with the arrangement of borrowings.

EITF issues No. 99-9 concludes that derivative gains and losses (arising from the effective portion of a derivative instrument that qualifies as a fair value hedge) are part of the capitalized interest cost. IAS 23 does not address such derivative gains and losses.

Definition of a qualifying asset

The main differences are as follows:

(a) IAS 23 defines a qualifying asset as one that takes a substantial period of time to get ready for its intended use or sale. The SFAS 34 definition does not include the term substantial.

(b) IAS 23 excludes from its scope qualifying assets that are measured at fair value. SFAS 34 does not address assets measured at fair value.

(c) SFAS 34 includes as qualifying assets investments in investees accounted for using the equity method, in some circumstances. Such investments are not qualifying assets according to IAS 23.

(d) SFAS 34 does not permit the capitalization of interest costs on assets acquired with gifts or grants that are restricted by the donor or grantor in some situations. IAS 23 does not address such assets.


When an entity borrows funds specifically for the purpose of obtaining a qualifying asset:

(a) IAS 23 requires an entity to capitalize the actual borrowing costs incurred on that borrowing. SFAS 34 states that an entity may use the rate of that borrowing.

(b) IAS 23 requires an entity to deduct any income earned on the temporary investment of actual borrowings from the amount of borrowing costs to be capitalized. SFAS 34 does not generally permit this deduction, unless particular tax-exempt borrowings are involved.

SFAS 34 requires an entity to use judgement in determining the capitalization rate to apply to the expenditures on the asset-an entity selects the borrowings that it considers appropriate to meet the objective of capitalizing the interest costs incurred that otherwise could have been avoided.

When an entity borrows funds generally and uses them to obtain a qualifying assets, IAS 23 permits some flexibility in determining the capitalization rate, but requires an entity to use all outstanding borrowings other than those made specifically to obtain a qualifying asset.

Disclosure requirements

IAS 23 requires disclosure of the capitalization rate used to determine the amount of borrowing costs eligible for capitalization. SFAS 34 does not require this disclosure.

SFAS 34 requires disclosure of the total amount of interest cost incurred during the period, including the amount capitalized and the amount recognized as an expense. IAS 23 requires disclosure only of the amount of borrowing costs capitalized during the period. IAS 1 Presentation of Financial Statements requires the disclosure of finance costs for the period.

(Source of this article : IAS 23 BC - Basis for Conclusions on IAS 23 Borrowing Costs)

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