When calculating the costs of an asset, a majority of standards instruct all attributes to be directly included. You may be asking how interest and other borrowing costs are handled. Well, here is a thought- did you know if you have AED 100 in your pocket and have no debt, you are wealthier than most people in the world? The same is true in the corporate world. Some costs are incurred when you borrow money. Sometimes the amount could be significant in the sense of quantifiable items like interest rates and the likes since they are ordinarily inherent to the acquisition of assets and, as such, must be capitalized.
A while ago, the standard IAS 23 borrowing costs gave Dubai and UAE audit services a choice:
You could either put all borrowings costs into profit/loss and forget about capitalizing them, or you can capitalize viable borrowing costs. Sadly, these options were eliminated several years ago. Now audit services in Dubai and UAE have to capitalize. In this piece, Audit Firms In Dubai explains several fundamental rules regarding capitalizing on borrowing. We are addressing the three most burning questions we have come across from internal audit and external audit experts across the UAE.
The main concept of IAS 23 Borrowing Costs is that audit firms in Dubai and UAE should capitalize on borrowing costs if they are directly linked to the acquisition, production, or construction of a qualifying asset. Other borrowing costs are included in the profit/loss statement.
These are items that take a long time to get ready for sale or use. However, IAS 23 does not explicitly highlight that it should be an item of equipment, property, or plant in IAS 16. It could have some intangibles or inventories, as well.
IAS 23 does not define this statement, meaning audit services should apply some judgment. Often, if an asset takes more than 12 months to be ready, then it qualifies.
There are three types of borrowing costs that can be capitalized under IAS 23:
There is some question about whether certain expenses are borrowing costs or not, for example:
Here again, UAE audit experts should apply their knowledge of IFRS standards to make a judgment.
In IAS 23, capitalizing borrowing costs differ for general and specific borrowings. Most standards state that audit services must include all directly attributable items when determining the value of your assets.
You can quickly capitalize a loan taken to acquire a qualifying asset:
In addition to these other purposes, general borrowings can be used to acquire a qualifying asset. Suppose you are borrowing funds on that asset. In that case, you must apply a capitalization rate based on the weighted average of borrowing costs across the global pool.
Audit firms in Dubai and UAE can capitalize interest in separate financial statements of the borrowing firm. Be careful about the consolidated financial statements because the intercompany loan may not be included based on the intercompany relationship. Furthermore, intercompany loans are sometimes interest-free.
As per IFRS 9, most financial instruments should be recognized at their fair value, in addition to transaction costs, but if a subsidiary gets a subsidy interest-free, it's the nominal amount would not be recognized at fair value. Thus, the Dubai/UAE audit expert should determine the loan's fair value using market interest rates and book the resulting difference (based on the substance of the transaction) in profit or loss. The effective interest method is then applied to calculate interest expense. There is no interest on the loan, but you still have to capitalize on some borrowing costs.
Are you facing any difficulties with borrowing costs? We can help you out. Get in touch with audit experts at Audit Firms In Dubai for professional assistance. We are a renowned audit firm in UAE dedicated to ensuring individuals and companies not only understand and execute the latest accounting standards but also ensure financial success through accounting and auditing. Lets discuss more.
Kasun Liyanage is an Audit Manager with over 7 years of experience dealing with diversified corporate clients. He not only manages the team’s work schedule but also is an expert in handling audit areas such as external audits and fraud investigation, Internal control benchmarking and best practices and well as preparation of financial statements and IFRS compliance.