Enjoy the first edition of our bi-weekly newsletter discussing interesting insights into accounting standards.
Dear reader,
welcome to the first edition of my newsletter! It's been a busy week getting everything ready, but I'm excited to finally share this with you. Let's dive in.
This week, I'm covering:
To illustrate any accounting concept I tend to research financial statements of companies which might include relevant disclosures. For example, a company creating games can be a good source of information concerning intangible assets.
Last week I was looking up companies investing into long-term construction projects to illustrate the concept of borrowing costs in accordance with IAS 23 Borrowing costs.
Of all constructors, manufacturers, ship builders and tech companies I looked up, a football club beat them all.
While most companies provided a cookie-cutter disclosure, FC Real Madrid let their readers know in just the right amount of detail how their stadium makes use of borrowing costs:
"The new Santiago Bernabéu Stadium will be a modern, cutting-edge stadium,.....a venue where fans can feel one-of-a-kind sensations. The borrowing costs of the stadium remodeling project financing in either of the last two financial years did not have any impact on the income statement since it was capitalized as an increase in the cost of the investment since the project is still underway."
International Financial Reporting Standard IAS 23 Borrowing Costs permits capitalization of borrowing costs such as: interest on borrowed funds, interest on lease arrangements, even foreign exchange differences arising from those borrowings.
The prerequisite? A qualifying asset that necessarily takes substantial period of time to get ready for its intended use or sale (property, plant an equipment, investment properties, intangible assets or inventories).
Consequently, entities will recognize lower interest expense during the period of capitalization of expenditures on a qualifying asset. Capitalization ceases when the qualifying asset is completed and ready for use, sale or value appreciation. Capitalized borrowing costs increase depreciation or amortization, cost of sales or carrying value of the qualifying asset.
US GAAP (ASC 835-20) allows for capitalization of borrowing costs, with an exception of routinely manufactured inventories or inventories manfuactured at a large scale, and internally generated intangibles.
SWISS GAAP FER 22 provides a policy choice to either expense interest in the period or capitalize them into the cost of an asset.
IAS 21: The Effects of Changes in Foreign Exchange Rates:
International Accounting Standards Board (IASB) issued an amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates. The amendment clarifies translation requirements for non- hyperinflationary functional currency into hyperinflationary functional currency.
In one sentence: an entity translates assets, liabilities, equity, items of profit and loss and past period comparables of non- hyperinflationary functional currency into hyperinflationary functional currency using the foreign exchange rate as of the closing date.
Foreign exchange rate differences were also the topic of my Quiz on Sunday! (Nov 16th):
I tested your knowledge of the topic by using an example of a Turkish entity that presents its financial statements in other than the functional currency (Turkish Lira).
Are financial statements of the Turkish entity IFRS compliant?
The answer is - yes - IFRS reporters are free to choose presentation currency other than functional currency for their financials - this may be especially useful for multinational groups. In such case the financial statements are IFRS compliant if they comply with all the requirements of IFRS including the translation methods set out by IAS 21.
One of the readers pointed out that most challenging issues in practice is the application and consistency of conversion methodology in accordance with IAS 21.
What is in the pipeline at EFRAG:
EFRAG (European Financial Reporting Advisory Group) invited investors and users of financial statements to an open panel discussion past week. The discussion was centered around new types of intangible assets such as marketing & customer related intangibles and intellectual property.
In focus were needs of users and investors and questions emerging around potential recognition of new types of intangibles. For example, would recognition trigger more detailed disclosures of sensitive data such as customer churn, retention rates or break down of costs of intellectual properties? This and similar questions are expected to be answered by the current research project of the IASB targeting IAS 38 Intangible Assets.
Have a good accounting week.
Best,
Barbora