On 25 May 2006 the International Accounting Standards Board (IASB) published for public comment proposals to improve the accounting treatment for borrowing costs. The proposals are set out in an Exposure Draft of proposed amendments to International Accounting Standard (IAS) 23 Borrowing Costs.
The proposals mark another step towards convergence of international and national standards by continuing the IASB’s work in its joint short-term convergence project with the US Financial Accounting Standards Board (FASB). The objective of the project is to reduce differences between the IASB’s International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP).
The Exposure Draft results from the IASB’s comparison of IAS 23 Borrowing Costs with the US standard SFAS 34 Capitalization of Interest Cost. The proposed amendments to IAS 23 would remove a major difference between the accounting treatments for borrowing costs under the two standards.
The Exposure Draft proposes to require an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The option of immediately recognising those borrowing costs as an expense would be removed.
The IASB believes that the elimination of one of the two options in accounting for borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset would improve financial reporting and would result in information that is more comparable between entities.
Introducing the Exposure Draft, Sir David Tweedie, IASB Chairman, said:
The proposals in the Exposure Draft continue our work to eliminate major differences between IFRSs and US GAAP and to improve financial reporting. If confirmed, these proposed changes will align international and US standards by requiring companies to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. We believe that the proposals offer benefits to users of financial statements, at little extra system cost to those who prepare them, by improving the comparability of financial information between entities applying IFRSs as well as with entities using US GAAP.
The Exposure Draft was open for comment until 29 September 2006.