Emerging issues and practical guidance*
Supplement – September 2008
IAS 23R – Q&As, part 2
This is the second in a series of two supplements providing Q&As on IAS 23R. Olivier Scherer, partner in Global ACS, looks at some of the issues arising from the application of the revised standard that PwC’s Global Accounting Consulting Services has addressed. IFRS 23R is effective for annual periods beginning on or after 1 January 2009 (in the EU, subject to EU endorsement). Earlier application is permitted. General scope and definitions The IASB has amended the list of costs that can be included in borrowing costs, as part of its 2008 minor improvement project. Will this change anything in practice? The amendment should eliminate inconsistencies between interest expense as calculated under IAS 23R and IAS 39. IAS 23R refers to the effective interest rate method as described in IAS 39. The calculation includes fees, transaction costs and amortisation of discounts or premiums relating to borrowings. These components were already included in IAS 23. However, IAS 23 also referred to ‘ancillary costs’ and did not define this term. This could have resulted in a different calculation of interest expense than under IAS 39. No significant impact is expected from this change. Alignment of the definitions means that management only uses one method to calculate interest expense. Can an intangible asset be a ‘qualifying asset’ under IAS 23R? Yes. An intangible asset that takes a substantial period of time to get ready for its intended use or sale is a ‘qualifying asset’. This would be the case for an internally generated intangible asset in the development phase when it takes a ‘substantial period of time’ to complete, such as software. The interest capitalisation rate is applied only to costs that themselves have been capitalised. Should management’s intention be taken into account to assess the ‘substantial period of time to get ready for its intended use or sale’? Yes. When an asset is acquired, management should assess whether, at the date of acquisition, it is ‘ready for its intended use or sale’. Depending on how management intends to use the asset, it may be a qualifying asset under IAS 23R.
IFRS supplement – September 2008
For example, when an acquired asset can only be used in combination with a larger group of fixed assets or was acquired specifically for the construction of one specific qualifying asset, the assessment of whether the acquired asset is a qualifying asset is made on a combined basis.
either as a financial asset or an intangible asset depending on the terms of the agreement. An operator that recognises an intangible asset in exchange for the construction capitalises the associated borrowing costs incurred during the construction phase. However, an operator that recognises a financial asset expenses the associated borrowing costs as incurred. Property under construction or development for future use as an investment property is in the scope of amended IAS 40 (May 2008) and should be measured at fair value also during the construction period, if fair value is the accounting policy of the entity for investment property. Can borrowing costs attributable to investment property measured at fair value be capitalised? Yes. IAS 23R does not mandate the capitalisation of borrowing costs for assets measured at fair value as, on a net basis, the measurement of the asset would not be affected. But management can still elect to capitalise those borrowing costs. An entity that elects to do so reduces its interest expense incurred during the period by the amount of borrowing costs capitalised and adjusts the carrying amount of the investment property accordingly. Re-measurement of the investment property to fair value has a direct effect on the gain or loss arising from a change in the fair value of investment property recorded in profit or loss for the period....