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Emerging Issues Capitalisation Of Borrowing Costs:
1 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
Introduction
This report focuses on companies that have capitalised borrowing costs and
assesses the extent to which they follow minimal requirements to disclose
the amount of borrowing costs capitalised and the capitalisation rate used.
Our sample consists of 14 European companies drawn from the S&P Europe
250 index that report under International Financial Reporting Standards.
Their reporting periods range from December 2009 to December 2010 and
all have been reviewed previously in a CR Monitor.
Summary
Our analysis of financial statements during 2010 has shown that companies
began to capitalise borrowing costs that they had previously expensed. This
was driven by revised IAS 23 “Borrowing costs” that required capitalisation of
borrowing costs directly attributable to the acquisition, construction or
production of a qualifying asset.
As the disclosure requirements of IAS 23 are entirely straightforward, we
believe it would have been reasonable to expect all companies to comply.
This expectation was not fulfilled. Whilst two out of our sample stated there
had been no significant impact, only six published what we considered to be
full disclosure.
Reporting framework
Previously, the benchmark treatment of IAS 23 was for borrowing costs to be
recognised as an expense in the period in which there were incurred. An
allowed alternative treatment was for capitalisation where they were
attributable to qualifying assets. Revisions were made to IAS 23 as part of
the convergence project conducted jointly by the International Accounting
Standards Board (IASB) and the US Financial Accounting Standards Board.
The IASB considered that application of only one treatment would enhance
comparability and, in a move that achieved convergence in principle with US
GAAP, decided to eliminate the previous benchmark treatment. For
accounting periods beginning on or after 1 January 2009, IAS 23 requires
that all borrowing costs directly attributable to the acquisition, construction or
production of a qualifying asset be capitalised as part of the cost of that
asset. Its disclosure requirements are minimal in that a company is required
only to disclose the amount of borrowing costs capitalised during the period
and the capitalisation rate used to determine the amount of borrowing costs
eligible for capitalisation.
CR Emerging Issues
summarise changes in
companies' reporting
practice and collate
changes identified
previously in our CR
Monitors. These reports
address the most
immediate issues facing
companies reporting under
IFRS, identify trends and
highlight areas of evolving
or divergent practices. The
sample of companies
covered reflects a mix of
country, auditor and
industrial classification. An
Extract focusing on each
company’s disclosure
accompanies the report.
This report examines the
extent to which companies
follow disclosure
requirements when
capitalising interest costs.
Our conclusion is that we
are puzzled as to why
some companies are
unable to comply with
what are minimal
disclosure requirements.
Emerging Issues Capitalisation Of Borrowing Costs:
2 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
Companies under review
Early in the year, we noted that Danish biotechnology company Novozymes had adopted revised IAS 23 and
disclosed both the amount of interest capitalised and the rate used. Swiss pharmaceutical company Novartis
previously indicated that it did not expect revised IAS 23 to have a significant impact. It discloses $1 million costs have
been capitalised but does not specify a capitalisation rate. Finnish engineering company Wärtsilä states that there has
been no significant impact. Swedish paper manufacturer Holmen discloses amounts capitalised and that they have
been classified as work in progress and advance payments and the rate used. In contrast, whilst Swedbank states
that it has applied IAS 23, it omits any disclosure of amounts capitalised and the rate applied. French retailer Casino,
Guichard-Perrachon identifies that, although it continues to expense interest on projects that commenced before 1
January 2009, it has adopted revised IAS 23 prospectively. It discloses interest capitalised of €3 million and an
average rate of 7.43%. Although Austrian steel manufacturer voestalpine discloses that the costs capitalised during
the year are immaterial, it does disclose the average rate. Telecoms company BT and utility company Severn Trent,
both of the UK, follow IAS 23 in full by disclosing the amounts capitalised and the rates. In contrast, neither
broadcaster British Sky Broadcasting nor building materials supplier Wolseley make any disclosure. Meanwhile, UK
technology company Smiths indicates there has been no material impact while food producer Associated British
Foods discloses the amount capitalised but not the rate. Most recently, Danish Wind Turbine manufacturer Vestas
Wind Systems discloses that it has capitalised €1 million borrowing costs at a rate of 3.9%.
Conclusion
The requirement of IAS 23 that companies disclose the amount of borrowing costs capitalised during the period and
the capitalisation rate used is not onerous. Nevertheless, we are puzzled as to why not all companies covered by our
review have been able to follow this and it is not at all clear why they fail to make these minimal disclosures.
Emerging Issues Capitalisation Of Borrowing Costs:
3 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
NOVOZYMES A/S
Period End: 31 December 2009 Industry classification (ICB): 4573 Biotechnology
Line of business: Production of enzymes for industrial applications
Listing status: S&P Europe 350
Auditors: PricewaterhouseCoopers, Bagsvaerd
Novozymes has also adopted revised IAS 23 which eliminates the option to expense borrowing costs eligible for
capitalisation. Its previous policy was to expense these costs. The company indicates that it commenced capitalisation
in 2009, costs capitalised during the year amount to DKK7 million (para 26(a)) and that the capitalisation rate used is
3.4%.
Emerging Issues Capitalisation Of Borrowing Costs:
4 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
NOVARTIS AG
Period End: 31 December 2009 Industry classification (ICB): 4577 Pharmaceuticals
Line of business: Pharmaceuticals and consumer health
Listing status: S&P Europe 350
Auditors: PricewaterhouseCoopers, Basel
Novartis discloses that, from 1 January 2009, it has commenced capitalising borrowing costs associated with the
construction of property, plant and equipment, although such costs relating to projects commencing before that date
have been expensed. Prospective application follows revised IAS 23, though retrospective application is also
permitted.
Last year, the company stated that it did not expect adoption of revised IAS 23 to have a significant impact on its
financial statements. The company discloses that $1 million such costs are capitalised in the current year, but not the
capitalisation rate.
Emerging Issues Capitalisation Of Borrowing Costs:
5 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
WÄRTSILÄ CORPORATION
Period End: 31 December 2009 Industry classification (ICB): 2757 Industrial Machinery
Line of business: Marine and energy power propulsion systems
Listing status: S&P Europe 350
Auditors: KPMG, Helsinki
Wärtsilä adopts revised IAS 23 and commences capitalising borrowing costs directly attributable to the acquisition,
construction or production, and completion of assets where this requires a considerable length of time. However, it
states that the change has no significant impact. We recently noted Novozymes and Novartis adopt revised IAS 23,
which is effective for periods beginning on or after 1 January 2009, with similar small scale effects in increased
capitalisation.
Basis of preparation
......
Emerging Issues Capitalisation Of Borrowing Costs:
6 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
HOLMEN AB
Period End: 31 December 2009 Industry classification (ICB): 1737 Paper
Line of business: Production of paper, paperboard and timber
Listing status: S&P Europe 350
Auditors: KPMG, Stockholm
Holmen has adopted amended IAS 23 and commenced capitalisation prospectively from 1 January 2009. It discloses
in the note on property, plant and equipment that SEK1 million costs have been capitalised in the year, classified as
work in progress and advance payments to suppliers and that an interest rate of 3% has been used to determine the
amount.
Note 11 Property, plant and equipment
……
Emerging Issues Capitalisation Of Borrowing Costs:
7 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
SWEDBANK AB
Period End: 31 December 2009 Industry classification (ICB): 8355 Banks
Line of business: Bank
Listing status: S&P Europe 350
Auditors: Deloitte, Stockholm
Swedbank states that the European Union approved in 2009 revised IAS 23, applicable from 1 January 2009 and it
has applied the Standard this year. This requires capitalisation of borrowing costs on qualifying assets. However,
there is no disclosure of the amount capitalised or of the capitalisation rate, falling short of the required disclosures.
CASINO, GUICHARD-PERRACHON SA
Period End: 31 December 2009 Industry classification (ICB): 5337 Food Retailers & Wholesalers
Line of business: Food and drug retailers
Listing status: S&P Europe 350
Auditors: Ernst & Young, Lyon and Didier Kling, Paris
Casino, Guichard-Perrachon (Casino) adopts revised IAS 23 prospectively from the start of the current year. The
company states that it now capitalises borrowing costs as part of the cost of an assets where they are directly
attributable to the acquisition, construction or production of a qualifying asset. However, it adds that interest
capitalised in the current year was only €3 million and that an average interest rate of 7.43% was applied. Casino
states that it continues to expense interest on projects with commencement dates prior to 1 January 2009. We have
recently seen Novozymes and Wärtsilä adopt revised IAS 23 from the start of 2009.
Emerging Issues Capitalisation Of Borrowing Costs:
8 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
VOESTALPINE AG
Period End: 31 March 2010 Industry classification (ICB): 1757 Iron & Steel
Line of business: Production, working and distribution of steel products
Listing status: S&P Europe 350
Auditors: Grant Thornton, Vienna
voestalpine discloses that application of revised IAS 23 constitutes a change in its policy for borrowing costs directly
attributable to the acquisition, construction, or production of a qualifying asset. It states that these costs are now
capitalised whereas previously they were expensed and that 1 April 2009, the start of its current annual period, was
the commencement date for capitalisation. In contrast, we have seen some companies adopt revised IAS 23 and
designate a commencement date earlier than the beginning of their annual periods in which the adoption was made.
These include Diageo which applied revised IAS 23 in the annual period ending 30 June 2009 but designated July
2007 as the commencement date. voestalpine discloses that immaterial borrowing costs have been capitalised during
the year and that the average capitalisation rate is 4.4%.
9. Property, plant and equipment
……
Emerging Issues Capitalisation Of Borrowing Costs:
9 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
BT GROUP PLC
Period End: 31 March 2010 Industry classification (ICB): 6535 Fixed Line Telecommunications
Line of business: Supply of telecommunication services and equipment
Listing status: S&P Europe 350, FTSE 100
Auditors: PricewaterhouseCoopers, London
Last year, BT expensed borrowing costs in the income statement as incurred. This year the company commences
capitalisation of borrowing costs relating to qualifying assets which take more than 12 months to complete, from 1
April 2009. This follows the adoption of revised IAS 23. The company discloses that it has capitalised £3 million
borrowing costs in the current year and that the assets concerned were property, plant and equipment under
construction and software development costs. It shows the amount as a deduction in its analysis of net finance
expense and discloses that the weighted average capitalisation rate on general borrowings was 7.9%.
Emerging Issues Capitalisation Of Borrowing Costs:
10 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
SEVERN TRENT PLC
Period End: 31 March 2010 Industry classification (ICB): 7577 Water
Line of business: Supply of water, treatment and disposal of sewage
Listing status: S&P Europe 350, FTSE 100
Auditors: Deloitte, London
Severn Trent has adopted revised IAS 23 and changes from expensing borrowing costs on qualifying assets to
capitalising such costs. It designates 1 April 2009 as the commencement date for capitalisation and discloses that
£2.6 million borrowing costs on its property, plant and equipment have been capitalised, using a 5.65% rate.
Emerging Issues Capitalisation Of Borrowing Costs:
11 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
BRITISH SKY BROADCASTING GROUP PLC
Period End: 30 June 2010 Industry classification (ICB): 5553 Broadcasting & Entertainment
Line of business: Operation of pay television services
Listing status: S&P Europe 350, FTSE 100
Auditors: Deloitte, London
Last year, British Sky Broadcasting expensed borrowing costs. This year, the company adopts revised IAS 23 and
explains that it capitalises borrowing costs directly attributable to the acquisition of qualifying assets. It explains that, to
the extent that the financing of a qualifying asset is part of its general borrowings, it calculates interest to be
capitalised based on its weighted average cost of borrowing, excluding any specific borrowings. However, no figures
are disclosed.
SMITHS GROUP PLC
Period End: 31 July 2010 Industry classification (ICB): 2727 Diversified Industrials
Line of business: Manufacture of security and medical equipment and seals
Listing status: S&P Europe 350, FTSE 100
Auditors: PricewaterhouseCoopers, London
Smiths has adopted revised IAS 23 “Borrowing costs” in the year. Whilst it notes that this had not yet had a material
impact, the company discloses that development projects expected to take a substantial period of time and which
commenced on or after the start of the current year will include attributable borrowing costs. The company currently
has £87 million development costs on its balance sheet.
Accounting policies
Basis of preparation
......
Emerging Issues Capitalisation Of Borrowing Costs:
12 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
WOLSELEY PLC
Period End: 31 July 2010 Industry classification (ICB): 2797 Industrial Suppliers
Line of business: Distribution of plumbing and other building materials
Listing status: S&P Europe 350, FTSE 100
Auditors: PricewaterhouseCoopers, London
This year, Wolseley states that borrowing costs directly attributable to long-term construction or production of an asset
are capitalised. Last year, it stated that borrowing costs attributable to assets under construction were charged to the
income statement as incurred. This coincides with revision to IAS 23, though the company does not refer to this.
Emerging Issues Capitalisation Of Borrowing Costs:
13 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
ASSOCIATED BRITISH FOODS PLC
Period End: 18 September 2010 Industry classification (ICB): 3577 Food Products
Line of business: Processing of food and retailing of textiles
Listing status: S&P Europe 350, FTSE 100
Auditors: KPMG, London
Associated British Foods discloses that it has changed accounting policy prospectively to capitalise interest on
qualifying assets from the current year. This follows revision to IAS 23 which requires interest to be capitalised as part
of the cost where conditions are met. The company discloses in the note on property, plant and equipment that £1
million interest is capitalised, but not the interest rate applied. We recently noted Severn Trent in 2010 commence
capitalising interest from the current year, disclosing also the interest rate applied; whilst Diageo in 2009 designated a
2007 commencement date.
Emerging Issues Capitalisation Of Borrowing Costs:
14 www.companyreporting.com
Monitors ♦ Common Practices ♦ Emerging Issues ♦ Alerts ♦ Benchmarking Reports
© Company Reporting Ltd, 11 John’s Place, Edinburgh. EH6 7EL Scotland, UK
Published on 4 September 2011. For more information, please email [email protected]
VESTAS WIND SYSTEMS A/S
Period End: 31 December 2010 Industry classification (ICB): 0583 Renewable Energy Equipment
Line of business: Development, manufacture and sale of wind power turbines
Listing status: S&P Europe 350
Auditors: PricewaterhouseCoopers, Copenhagen
The company discloses that it has capitalised €1 million borrowing costs relating to property, plant and equipment and
development projects at a rate of 3.9%. This follows IAS 23.