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6.14 Property, plant, and equipment—borrowing costs
Publication date: 30 Nov 2020
us IFRS & US GAAP guide
Borrowing costs under IFRS are broader and can include more components than interest costs under US GAAP.
US GAAP allows for more judgment in the determination of the capitalization rate, which could lead to differences in the amount of costs capitalized.
IFRS does not permit the capitalization of borrowing costs in relation to equity-method investments, whereas US GAAP may allow capitalization in certain circumstances.
US GAAP | IFRS |
Capitalization of interest costs is required while a qualifying asset is being prepared for its intended use.
The guidance does not require that all borrowings be included in the determination of a weighted-average capitalization rate. Instead, the requirement is to capitalize a reasonable measure of cost for financing the asset’s acquisition in terms of the interest cost incurred that otherwise could have been avoided.
Eligible borrowing costs do not include exchange rate differences from foreign currency borrowings. Also, generally, interest earned on invested borrowed funds cannot offset interest costs incurred during the period.
An investment accounted for by using the equity method meets the criteria for a qualifying asset while the investee has activities in progress necessary to commence its planned principal operations, provided that the investee’s activities include the use of funds to acquire qualifying assets for its operations.
| Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset are required to be capitalized as part of the cost of that asset.
The guidance acknowledges that determining the amount of borrowing costs directly attributable to a qualifying asset may require judgment. IAS 23, Borrowing costs, first requires the consideration of any specific borrowings and then requires consideration of all general borrowings outstanding during the period.
In broad terms, a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. Investments accounted for under the equity method would not meet the criteria for a qualifying asset.
Eligible borrowing costs may include exchange rate differences from foreign currency borrowings.
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