An Executive Guide to IFRS: Content, Costs and Benefits to Business

Interest expense

IAS 23 Borrowing Costs is another of the standards that gives the IASB more trouble than the subject would seem to merit. While generally it requires interest incurred to be expensed, the main area of contention is what to do with any interest cost that is incurred during the construction of a non-current asset. In theory, the book value of an asset is all of the costs incurred to bring it into service, and where an entity borrows money to build an asset, the cost of borrowing is part of the cost of the asset, up to the point it enters service.

As originally written, IAS 23 left a choice; you could either expense the interest as incurred or you could capitalize into the cost of the asset. Most people tended to choose expensing because that is the most efficient from a tax perspective. If you expense the interest, it is immediately deductible, whereas if you roll it up into the book value of the asset, it is only deducted through depreciation over a number of years.

However, US GAAP requires that the interest is capitalized into an asset under construction. Consequently the IASB decided to remove the expensing option as part of its convergence programme. This means that, if you are a continental European country where the interest has to be in the accounts as an expense to be deducted, you would need to expense it in a subsidiary using local GAAP to get the tax benefit and then re-state for IFRS consolidated accounts. Evidently it is a disincentive to using IFRS ...