Revised accounting standard on borrowing costs

 

By Fanny Hsiang  
- Professional Practice

In June 2007, the Hong Kong Institute of Certified Public Accountants issued Hong Kong Accounting Standard 23 (HKAS 23) (revised) Borrowing Costs. Entities that currently have the accounting policy of expensing all borrowing costs will be required to change their accounting policies. The revised standard will become effective for annual accounting periods beginning on or after 1 January 2008, but earlier application is permitted.

What changes have been made?
Under the existing HKAS 23, entities have the accounting policy choice of either:
 

expensing borrowing costs in the period in which they are incurred; or

capitalising borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset.

The key change introduced by the revised standard is to eliminate the accounting policy choice of expensing borrowing costs. This means that entities are required to capitalise borrowing costs if these costs are directly attributable to the acquisition, construction or production of a qualifying asset.

The revised standard retains the same definition of qualifying asset. Depending on the circumstances, examples of qualifying assets include manufacturing plants, intangible assets and investment properties. However, HKAS 23 (revised) has a different scope of application from the existing standard. It does not require entities to apply the revised standard if:
 

the qualifying asset is measured at fair value; or

inventories are manufactured, or otherwise produced, in large quantities on a repetitive basis even if they take a substantial period of time to get ready for sale (HKAS 23 (revised) BC6).

Transitional provisions
HKAS 23 (revised) has transitional provisions for changes in accounting policy arising from the adoption of this revised standard. The new policy should be applied only to those qualifying assets for which the commencement date for capitalisation is on or after the effective date of the policy (i.e. annual accounting periods beginning on or after 1 January 2008). The following example illustrates this requirement.
 

An entity has its financial year beginning on 1 January and does not early adopt the revised standard. It has two qualifying assets: Asset A meets the conditions for commencement of capitalisation in 2007 whereas the other asset, Asset B, meets the conditions in 2008. In preparing its 2008 financial statements, this entity should continue to use its previous accounting policy to account for Asset A. No restatement of comparatives is necessary. The new accounting policy under HKAS 23 (revised) only applies to Asset B.

Note that HKAS 23 (revised) allows entities to designate any date before the effective date and apply the revised standard to borrowing costs relating to all qualifying assets for which the commencement date for capitalisation falls on or after that date. The designated date need not be the first day of the financial period. Such a designation would effectively result in a (partial) retrospective application of the new accounting policy. The following example illustrates this scenario:
 

To continue the above example, let us assume that the entity designates 1 January 2007 as the date to apply the new accounting policy on the first adoption of HKAS 23 (revised) when preparing its 2008 annual financial statements. The new accounting policy under HKAS 23 (revised) applies to both Asset A and Asset B. The comparatives relating to borrowing costs on Asset A would be restated. 

 

fanny.hsiang@gthk.com.hk

   

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