PROXIMITY & REMOTENESS: IAS 23 Vs IFRS for SMEs (Section 25) Vs IPSAS 5

PROXIMITY & REMOTENESS: IAS 23 Vs IFRS for SMEs (Section 25) Vs IPSAS 5 BORROWING COSTS INTRODUCTION         Borrowing cost- simply say, the cost an entity incurs for borrowing funds. IAS 23, IFRS for SMEs (Sec 25) and IPSAS 5 under different financial reporting frameworks all given the same title “Borrowing costs” deals with how an entity should account for the cost incurred in connection with the borrowing of funds. Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. Borrowing costs include: (a)       interest expense calculated using the effective interest method (b)       finance charges in respect of finance leases (c)       exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. RECOGNITION DIFFERENCES The three frameworks are somewhat or extensively different in their accounting treatment for borrowing costs. IAS 23  & IFRS for SMEs allows a single accounting policy choice for the entities that have adopted it, while IPSAS 5 allows an entity to choose between two available accounting policies for borrowing costs. IFRS – IAS 20 Capitalisation model IFRS for SMEs (SEC 25) Expense model only IPSAS 5 Choice: Expense or Capitalisation Model IFRS – IAS 20 Any borrowing cost incurred by an entity in connection with the borrowing of funds should be capitalised if and only if i.                     It is incurred on the acquisition, construction or production of  a Qualifying asset and ii.                    Pertain to the capitalisation period                Borrowing costs that do not meet the above should be recognised as expenses in the period in which they are incurred. CLARIFICATION OF TERMS Qualifying Assets – These are assets that necessarily take a substantial period to get ready for its intended use or sale. The time frame of the word “substantial” is not given by the standard; professional judgement needs to be applied. The following are not qualifying assets (borrowing costs incurred on them should be expensed in the periods in which they arose): i.                     Financial assets, and inventories that are manufactured, or otherwise produced, over a short period of time ii.                    Assets that are ready for their intended use or sale when acquired. Capitalisation Period – is the period from the commencement date to the cessation date after excluding any suspension period. Commencement date – This refers to the date in which the entity meets all of the following conditions: (a) it incurs expenditures for the asset (qualifying); (b) it incurs borrowing costs; and (c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. Suspension period – refers to extended periods in which an entity suspends active development of a qualifying asset. Cessation date – this is the date when the entity has substantially completed all the activities necessary to prepare the qualifying asset for its intended use or sale. In Summary Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset.  Other borrowing costs are recognised as an expense. See the article on IAS 23 - Borrowing costs for more on the treatment of borrowing costs. IFRS for SMEs (SEC 25) Section 25 of the IFRS for SMEs deals with the accounting for borrowing costs. As part of its intention to simplify the treatment of transactions by SMEs, this framework requires entities to use only the expense model. This means all borrowing costs incurred by an entity shall be recognised as an expensed in the period in which it was incurred.  Borrowing cost should not be capitalised. IPSAS 5       IPSAS 5 allows an entity to make an accounting policy choice for the treatment of borrowing costs by choosing between i.                     The Benchmark treatment (Expense model) ii.                    Allowed Alternative Treatment (Capitalisation model)     Expense model: For entities that opt to adopt the expense model, the accounting treatment is to charge all borrowing costs as an expenses in the period when they are incurred;     Capitalisation model: The treatment under this model is similar to the treatment under IAS 20. The entity shall capitalise borrowing costs which are directly attributable to the acquisition or construction of a qualifying asset. All other borrowing costs that do not satisfy the conditions for capitalisation are to be expensed when incurred.                Thank you for taking your time and hope this little piece was useful?