The guidelines for capitalizing borrowing costs in IAS 23 and US GAAP relate closely at an extreme level. But, there are still noticeable differences that Audit firms in Dubai and other entities should know before choosing a standard to use. In this article, Audit Firms in Dubai highlights some crucial differences.
US GAAP focuses in specific industry guidance while IFRS standards don’t
US GAAP offers guidance for various sectors such as gas, oil, and real estate activities, resulting in different qualifying. IAS 23, on the other hand, applies to all firms in Dubai, UAE. But, there are individual guidance evaluations and exploration of mineral resources.
Some inventory can be qualifying asset in IAS, but US GAAP does not
Inventory that takes longer to produce, but production is done in large amounts, such as cheese or wine, can be considered a qualifying asset under IFRS as accounting policy. However, this is not recognized as a qualifying asset in US GAAP since it is not produced to be used by the company or as a discrete project.
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Internally created intangible asset are qualifying assets in IAS 23 but not in US GAAP
Under US GAAP, both development expenditures and internal research are recorded as incurred and are not qualifying assets. But in IFRS standards, development expenditures may be capitalized if they fulfill some criteria and maybe a qualifying asset.
IAS 23 does not recognize equity method investments as qualifying assets
Generally, a qualified asset is classified as one that is accounted for by the equity method when (1) the investee is engaged in activities necessary to commence its principal operations, and (2) the investee is using funds to acquire qualified assets.
All leases accounted for under IAS 23 are included in interest on leases, but only Finance Leases are included in interest on leases
Lessees, through their company audit team, are now required under IFRS to recognize all lease liabilities on balance sheets and capitalize interest on lease liabilities. According to US GAAP, interest costs for finance leases can only be determined using ASC 842.5, updated annually.
The gain or loss on foreign exchange may be considered interest under IAS 23, but not under US GAAP
In certain cases, foreign currency borrowings are secured – for example, to offset the impact of currency exposure on the qualification asset. Those foreign exchange differences regarded as interest cost adjustments are included in borrowing costs under IAS 23. The determination of which foreign exchange differences constitute eligible interest requires judgment.
IAS 23 does not prescribe any guidance for derivative gains and losses under US GAAP
Managing interest rate risk on borrowings is common with derivative instruments like interest rate swaps. The IAS 23 does not address whether derivatives used to hedge interest rate risk are considered eligible interest. Interest payments under interest rate swaps may be capitalized if they serve as economic hedges of eligible borrowing costs. Interest rate swap changes, however, are not capitalized.
IAS 23 deducts current income earned on specific borrowings of funds, but US GAAP does not
To determine the capitalization rates or limit the amount of interest to be capitalized, interest income on temporary investments pending expenditure of funds on the asset is not generally offset by interest costs. If the borrowings are restricted externally, there is an exception.
The IASB standard allows the statement of cash flows to be presented in a choice of ways; US GAAP does not
Cash flows related to capitalized interest can be classified in one of the following ways under IFRS Standards:
Amounts for other cash payments to acquire the qualifying asset that is reflected in investing cash flows
It is consistent with the non-capitalized interest cash flows, whether operating cash flows or financing cash flows.
Investing cash flows must be classified as capitalized interest paid according to US GAAP
IAS 23 has different disclosure requirements compared to US GAAP
In both GAAPs, capitalized borrowing costs need to be disclosed. Moreover, under IAS 23, borrowing costs must be declared as a capitalization rate, while under US GAAP, interest costs must be disclosed as a total expense.
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What to Take Away from This
The US GAAP and IFRS are similar in treating borrowing costs. Yet, they differ in calculating borrowing costs, qualified assets, and capitalization figures.
To calculate determine the amount to be capitalized based on accounting modules, dual reporting firms should consider their methodologies keenly. Accounting policies can be selected under both frameworks so that companies in Dubai can achieve maximum consistency.
Are you looking for help from the best Audit firms in Dubai?
Distinguishing the difference between US GAAP and IAS 23 has been challenging for some companies in Dubai and UAE. If you would like further assistance with understanding the IAS 23 and how to implement it, we would be glad to help you. Contact Audit Firms in Dubai today and schedule a meeting.
Theshani is a Senior auditor and has experience of 4+ years in providing audit assurance and advisory services to a wide range of industry clients. She continues to stay on top of ever-changing industry dynamics by continuously learning and developing expertise.