Understanding AASB Treatment of Finance Costs

Finance costs, a significant expense for many businesses, are meticulously addressed under Australian Accounting Standards Board (AASB) guidelines. AASB standards, particularly AASB 123 *Borrowing Costs*, provide specific direction on when and how these costs should be treated.

The core principle is to differentiate between finance costs directly attributable to the acquisition, construction or production of a qualifying asset and those that are not. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. This distinction dictates whether the finance costs are expensed immediately or capitalised as part of the asset's cost.

Capitalisation of Finance Costs

AASB 123 allows the capitalisation of finance costs directly attributable to the acquisition, construction, or production of a qualifying asset. This means that instead of being recognised as an expense in the profit or loss in the period they are incurred, these costs are added to the asset's cost. This capitalisation continues until substantially all the activities necessary to prepare the asset for its intended use or sale are complete. Examples of qualifying assets include buildings, infrastructure projects, and certain manufactured goods.

The amount of finance costs eligible for capitalisation is determined by applying a capitalisation rate to the expenditures on the qualifying asset. This rate is often the weighted average of the borrowing costs applicable to the entity's borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. Specific borrowings dedicated to the asset use their actual interest rate.

Capitalisation ceases when the asset is substantially complete and ready for its intended use or sale, even if incidental technical modifications are still required. Once capitalisation stops, subsequent finance costs are expensed in the profit or loss.

Expensing Finance Costs

Finance costs that are not directly attributable to a qualifying asset are expensed in the period they are incurred. This applies to the majority of finance costs, including those related to general purpose borrowings not directly linked to a specific qualifying asset. Examples include interest expense on overdrafts, short-term loans, and finance leases related to non-qualifying assets. Bank charges and other ancillary costs associated with borrowing are also typically expensed.

It's crucial to accurately identify and allocate finance costs appropriately, as the treatment can significantly impact a company's reported financial performance and asset values. Incorrect capitalisation can lead to overstated asset values and understated expenses in the initial periods, followed by higher depreciation charges in subsequent periods. Therefore, meticulous record-keeping and a thorough understanding of AASB 123 are essential for accurate financial reporting.

Proper application of AASB regarding finance costs ensures that financial statements provide a true and fair view of a company's financial position and performance, giving stakeholders reliable information for making informed decisions.