Amendments to IAS 23 Borrowing Costs
Comments from ACCA
September 2006
ACCA is pleased to comment on the above Exposure Draft (ED) which was considered by ACCA's Financial Reporting Committee.
Overall comments
The principal reason for the issuing of the ED is to further convergence between IFRS and US GAAP.
We note that convergence produces costs and difficulties. These arise principally from the additional changes to IFRS that are entailed and that give rise to:
- extra costs in preparation of financial statements by companies
- changes that have to be communicated and understood by preparers, auditors and users alike
- new translations of the standards into the many languages around the world in which IFRS are available
- pproval of the changes by the different endorsement authorities around the world.
On the other hand convergence may create benefits:
- The harmonisation of financial reporting around the world improves its usefulness to investors in global capital markets in particular.
- Potentially this is a benefit to the reporting companies by way of cost of capital and by way of lower preparation costs for those with listings in both the US and elsewhere.
- Harmonisation of requirements also assists accountants who may like to work in different countries or for different companies.
Changes to IFRS have therefore to be justified by the improvement in the quality of the resulting reporting. On balance we are not convinced that the changes proposed in this case represent such significant improvement, as we have set out in our answers to Q1 below. We also note that companies currently providing both IFRS and US GAAP information can report without creating a major reconciliation item in this regard by using the existing capitalisation option in IAS23.
ACCA responses to specific questions raised by IASB
Q1 Elimination of option to expense borrowing costs immediately
We note the arguments in paragraphs BC5-11 as to why this change represents an improvement to IFRS.
We have, however, a number of concerns about the capitalisation approach.
- In cases where funds are not raised specifically to finance the acquisition of particular assets, we are not clear that it is meaningful to attribute a part of general borrowing costs to such purchases.
- We note the argument advanced in BC10 of comparability between purchased and self-constructed assets. There will equally be cases where asset construction is financed in one case by equity and in another case by debt. Different asset values would be created as a result under these proposals for no very understandable reason.
- The capitalisation of borrowing costs risks creating inflated asset values that can only be corrected via impairment charges. Impairment is an imperfect instrument in this regard. Impairments are sometimes not recognised, as declines in value of assets may be cancelled out by unrealised gains on others within a cash generating unit.
- The interpretation of the interest charge in the income statement in comparison to the borrowings in the balance sheet may be made more difficult by the effect of capitalisation.
- The application in groups may be complicated by the different rates of interest attaching to borrowings from group companies (which might apply to the individual accounts of subsidiaries) as compared to the interest on group borrowings from third parties applicable to the consolidated accounts.
We are therefore unconvinced by the principle requiring borrowing costs to be capitalised. Reasonable arguments can be advanced for either treatment and these need to be considered at more length in the context of the measurement of assets generally. We consider that IAS23 should not be amended at this time and the current options should remain until the case for changing IAS23 can be justified on grounds of better financial reporting. In addition we have noted in our overall comments above some practical reasons, such as the costs of change, which would reinforce this position.
Q2. Transitional provisions
If, despite the arguments against removing the expense option, this change is pursued then we would support the proposed transitional arrangements.