29 May 2008

Commission Effect Study on IAS 23 - Borrowing Costs

The report analyses the potential effects of adopting the revised IAS 23 in the EU. It concludes that the adoption of IAS 23 would have positive cost-benefit effects and recommends its endorsement in the EU.

The report analyses the potential effects of adopting the revised IAS 23 in the EU. It concludes that the adoption of IAS 23 would have positive cost-benefit effects and recommends its endorsement in the EU.

 

IAS 23 allows two principal alternatives to account for borrowing costs: either considering borrowing costs as an expense in the income statement, or capitalising them as part of the cost of the asset in the balance sheet. The current revision will eliminate one of the options in the existing standard and, therefore, will make the capitalisation method mandatory.

 

In particular, the report concludes that:

• The consultation carried out by the Commission Services showed that a majority of respondents prefer the capitalisation method and/or support the endorsement of the standard.

• The elimination of one of the current options will increase the comparability of the financial statements.

• Technical discussions in the IASB and EFRAG as well as research done by the Commission Services indicate that in a historical cost basis the capitalisation of borrowing costs and their inclusion in the cost of the assets is a better conceptual approach than the expensing of borrowing costs.

• Despite the fact that the majority of the European companies are currently applying the expensing method, the implementation of the revised IAS 23 is not expected to have a significant impact on several of them as they may not have any qualifying assets or borrowing costs. The capitalisation of borrowing costs is of relevance only for those companies that are asset capital-intensive. Our consultation and other reports reveal that these companies generally prefer to apply the capitalisation method.

• The revision of IAS 23 will result in some initial implementation costs and will add some complexity as the expensing method is simpler to apply than the capitalisation method. The main part of these costs will be related to the first implementation of the revised standard and therefore not recurring. The report concludes that the benefits from using the standard are more important than the implementation costs.

• Discussions in the EFRAG User Panel showed that the elimination of an option will enhance comparability which was considered as a significant benefit. The discussions also showed that the importance of borrowing costs can vary from industry to industry and that these are obviously more relevant for capital intensive industries. Some analysts pointed out that borrowing costs are normally not key for their analysis. From a cost perspective, users may have additional costs to adjust the figures for analysis purposes but will also benefit from some savings resulting from the elimination of one option.

• The IASB has the intention to produce an ex-post effect study after two years of application of the standard. Such a review should particularly look into the areas highlighted by commentators during the consultations.

 

Full report

Responses to the public consultation

© European Commission