Commission Regulation (EC) No 1260/2008 of 10 December 2008 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Accounting Standard (IAS) 23 (Text with EEA relevance)
Date: 2008-12-10
Institutions: European Commission
Subjects: accounting, capital market, financial transaction, information, international standard, standardised accounting system

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COMMISSION REGULATION (EC) No 1260/2008

of 10 December 2008

amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in
accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council
as regards International Accounting Standard (IAS) 23

(Text with EEA relevance)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty
Community,

establishing the European

the
Having regard to Regulation (EC) No 1606/2002 of
European Parliament and of the Council of 19 July 2002 on
the application of international accounting standards (1), and in
particular Article 3(1) thereof,

Whereas:

(1)

(2)

(3)

By Commission Regulation (EC) No 1126/2008 (2)
certain international standards and interpretations that
were extant at 15 October 2008 were adopted.

International Accounting
the
On 29 March 2007,
Standards Board (IASB) published a revised International
Accounting Standard (IAS) 23 Borrowing costs, here­
inafter ‘revised IAS 23’. The revised IAS 23 eliminates
the option in IAS 23 of recognising borrowing costs
immediately as an expense to the extent that they are
directly attributable to the acquisition, construction or
production of a qualifying asset. All such borrowing
costs shall be capitalised and form part of the cost of
the asset. Other borrowing costs should be recognised as
an expense. The revised IAS 23 supersedes IAS 23
Borrowing costs revised in 1993.

The consultation with the Technical Expert Group (TEG)
the European Financial Reporting Advisory Group
of
(EFRAG) confirms that the revised IAS 23 meets the
technical criteria for adoption set out in Article 3(2) of
Regulation (EC) No 1606/2002.
In accordance with
Commission Decision 2006/505/EC of 14 July 2006

Financial

setting up a Standards Advice Review Group to advise
the Commission on the objectivity and neutrality of the
Reporting Advisory Group’s
European
(EFRAG’s) opinions (3),
the Standards Advice Review
Group considered EFRAG’s opinion on endorsement
and advised the European Commission that it is well-
balanced and objective.

(4)

(5)

Regulation (EC) No 1126/2008 should therefore be
amended accordingly.

The measures provided for in this Regulation are in
accordance with the opinion of
the Accounting
Regulatory Committee,

HAS ADOPTED THIS REGULATION:

Article 1

In the Annex to Regulation (EC) No 1126/2008, International
Accounting Standard IAS 23 (revised 1993) Borrowing costs is
replaced by International Accounting Standard IAS 23 (revised
2007) Borrowing costs as set out
in the Annex to this
Regulation.

Article 2

Each company shall apply IAS 23 (revised 2007), as set out in
the Annex to this Regulation, at
the latest, as from the
commencement date of
financial year starting after
31 December 2008.

its first

Article 3

This Regulation shall enter into force on the third day following
its publication in the Official Journal of the European Union.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, 10 December 2008.

For the Commission

Charlie McCREEVY
Member of the Commission

(1) OJ L 243, 11.9.2002, p. 1.
(2) OJ L 320, 29.11.2008, p. 1.

(3) OJ L 199, 21.7.2006, p. 33.

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ANNEX

INTERNATIONAL ACCOUNTING STANDARDS

IAS 23

IAS 23 Borrowing costs (Revised 2007)

Reproduction allowed within the European Economic Area. All existing rights reserved outside the EEA, with
the exception of the right to reproduce for the purposes of personal use or other fair dealing. Further infor­
mation can be obtained from the IASB at www.iasb.org

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INTERNATIONAL ACCOUNTING STANDARD 23

Borrowing Costs

CORE PRINCIPLE

1 Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form

part of the cost of that asset. Other borrowing costs are recognised as an expense.

SCOPE

2 An entity shall apply this Standard in accounting for borrowing costs.

3 The Standard does not deal with the actual or imputed cost of equity, including preferred capital not classified as a

liability.

4 An entity is not required to apply the Standard to borrowing costs directly attributable to the acquisition,

construction or production of:

(a) a qualifying asset measured at fair value, for example a biological asset; or

(b) inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis.

DEFINITIONS

5 This Standard uses the following terms with the meanings specified:

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

6 Borrowing costs may include:

(a)

interest on bank overdrafts and short-term and long-term borrowings;

(b) amortisation of discounts or premiums relating to borrowings;

(c) amortisation of ancillary costs incurred in connection with the arrangement of borrowings;

(d) finance charges in respect of finance leases recognised in accordance with IAS 17 Leases; and

(e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an

adjustment to interest costs.

7 Depending on the circumstances, any of the following may be qualifying assets:

(a)

inventories

(b) manufacturing plants

(c) power generation facilities

(d) intangible assets

(e)

investment properties.

Financial assets, and inventories that are manufactured, or otherwise produced, over a short period of time, are not
qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

RECOGNITION

8 An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset as part of the cost of that asset. An entity shall recognise other borrowing costs as an expense in
the period in which it incurs them.

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9 Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are
included in the cost of that asset. Such borrowing costs are capitalised as part of the cost of the asset when it is
probable that they will result in future economic benefits to the entity and the costs can be measured reliably. When
an entity applies IAS 29 Financial Reporting in Hyperinflationary Economies, it recognises as an expense the part of
borrowing costs that compensates for inflation during the same period in accordance with paragraph 21 of that
Standard.

Borrowing costs eligible for capitalisation

10 The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset
are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been
made. When an entity borrows funds specifically for the purpose of obtaining a particular qualifying asset, the
borrowing costs that directly relate to that qualifying asset can be readily identified.

11 It may be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to
determine the borrowings that could otherwise have been avoided. Such a difficulty occurs, for example, when the
financing activity of an entity is coordinated centrally. Difficulties also arise when a group uses a range of debt
instruments to borrow funds at varying rates of interest, and lends those funds on various bases to other entities in
the group. Other complications arise through the use of loans denominated in or linked to foreign currencies, when
the group operates in highly inflationary economies, and from fluctuations in exchange rates. As a result, the
determination of the amount of borrowing costs that are directly attributable to the acquisition of a qualifying
asset is difficult and the exercise of judgement is required.

12 To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall
determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that
borrowing during the period less any investment income on the temporary investment of those borrowings.

13 The financing arrangements for a qualifying asset may result in an entity obtaining borrowed funds and incurring
associated borrowing costs before some or all of the funds are used for expenditures on the qualifying asset. In such
circumstances, the funds are often temporarily invested pending their expenditure on the qualifying asset. In deter­
mining the amount of borrowing costs eligible for capitalisation during a period, any investment income earned on
such funds is deducted from the borrowing costs incurred.

14 To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset,
the entity shall determine the amount of borrowing costs eligible for capitalisation by applying a capitalisation rate to
the expenditures on that asset. The capitalisation rate shall be the weighted average of the borrowing costs applicable
to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for
the purpose of obtaining a qualifying asset. The amount of borrowing costs that an entity capitalises during a period
shall not exceed the amount of borrowing costs it incurred during that period.

15 In some circumstances, it is appropriate to include all borrowings of the parent and its subsidiaries when computing a
it is appropriate for each subsidiary to use a
in other circumstances,

weighted average of the borrowing costs;
weighted average of the borrowing costs applicable to its own borrowings.

Excess of the carrying amount of the qualifying asset over recoverable amount

16 When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its recoverable amount or net
realisable value, the carrying amount is written down or written off in accordance with the requirements of other
Standards. In certain circumstances, the amount of the write-down or write-off is written back in accordance with
those other Standards.

Commencement of capitalisation

17 An entity shall begin capitalising borrowing costs as part of the cost of a qualifying asset on the commencement date.
The commencement date for capitalisation is the date when the entity first meets all of the following conditions:

(a)

it incurs expenditures for the asset;

(b) it incurs borrowing costs; and

(c)

it undertakes activities that are necessary to prepare the asset for its intended use or sale.

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18 Expenditures on a qualifying asset include only those expenditures that have resulted in payments of cash, transfers of
other assets or the assumption of interest-bearing liabilities. Expenditures are reduced by any progress payments
received and grants received in connection with the asset (see IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance). The average carrying amount of the asset during a period, including borrowing costs previously
capitalised, is normally a reasonable approximation of the expenditures to which the capitalisation rate is applied in
that period.

19 The activities necessary to prepare the asset

for its intended use or sale encompass more than the physical
construction of the asset. They include technical and administrative work prior to the commencement of physical
construction, such as the activities associated with obtaining permits prior to the commencement of the physical
construction. However, such activities exclude the holding of an asset when no production or development that
changes the asset’s condition is taking place. For example, borrowing costs incurred while land is under development
are capitalised during the period in which activities related to the development are being undertaken. However,
borrowing costs incurred while land acquired for building purposes is held without any associated development
activity do not qualify for capitalisation.

Suspension of capitalisation

20 An entity shall suspend capitalisation of borrowing costs during extended periods in which it suspends active

development of a qualifying asset.

21 An entity may incur borrowing costs during an extended period in which it suspends the activities necessary to
prepare an asset for its intended use or sale. Such costs are costs of holding partially completed assets and do not
qualify for capitalisation. However, an entity does not normally suspend capitalising borrowing costs during a period
when it carries out substantial technical and administrative work. An entity also does not suspend capitalising
borrowing costs when a temporary delay is a necessary part of the process of getting an asset ready for its
intended use or sale. For example, capitalisation continues during the extended period that high water levels delay
construction of a bridge, if such high water levels are common during the construction period in the geographical
region involved.

Cessation of capitalisation

22 An entity shall cease capitalising borrowing costs when substantially all the activities necessary to prepare the

qualifying asset for its intended use or sale are complete.

23 An asset is normally ready for its intended use or sale when the physical construction of the asset is complete even
though routine administrative work might still continue. If minor modifications, such as the decoration of a property
to the purchaser’s or user’s specification, are all that are outstanding, this indicates that substantially all the activities
are complete.

24 When an entity completes the construction of a qualifying asset in parts and each part is capable of being used while
construction continues on other parts, the entity shall cease capitalising borrowing costs when it completes substan­
tially all the activities necessary to prepare that part for its intended use or sale.

25 A business park comprising several buildings, each of which can be used individually, is an example of a qualifying
asset for which each part is capable of being usable while construction continues on other parts. An example of a
qualifying asset that needs to be complete before any part can be used is an industrial plant involving several
processes which are carried out in sequence at different parts of the plant within the same site, such as a steel mill.

DISCLOSURE

26 An entity shall disclose:

(a)

the amount of borrowing costs capitalised during the period; and

(b) the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.

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TRANSITIONAL PROVISIONS

27 When application of this Standard constitutes a change in accounting policy, an entity shall apply the Standard to
borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after the
effective date.

28 However, an entity may designate any date before the effective date and apply the Standard to borrowing costs

relating to all qualifying assets for which the commencement date for capitalisation is on or after that date.

EFFECTIVE DATE

29 An entity shall apply the Standard for annual periods beginning on or after 1 January 2009. Earlier application is

permitted. If an entity applies the Standard from a date before 1 January 2009, it shall disclose that fact.

WITHDRAWAL OF IAS 23 (REVISED 1993)

30 This Standard supersedes IAS 23 Borrowing Costs revised in 1993.

Appendix

Amendments to other pronouncements

The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2009. If an entity applies this
Standard for an earlier period, the amendments in this appendix shall be applied for that earlier period. In the amended paragraphs,
new text is underlined and deleted text is struck through.

A1 IFRS 1 First-time Adoption of International Financial Reporting Standards is amended as described below.

Paragraphs 9, 12 and 13 are amended, after paragraph 25H a heading and paragraph 25I are inserted, and paragraph
47G is added as follows:

‘9

12

The transitional provisions in other IFRSs apply to changes in accounting policies made by an entity that
already uses IFRSs; they do not apply to a first-time adopter’s transition to IFRSs, except as specified in
paragraphs 25D, 25H, 25I, 34A and 34B.

This IFRS establishes two categories of exceptions to the principle that an entity’s opening IFRS balance sheet
shall comply with each IFRS:

(a) paragraphs 13–25I and 36A–36C grant exemptions from some requirements of other IFRSs.

(b) paragraphs 26–34B prohibit retrospective application of some aspects of other IFRSs.

13

An entity may elect to use one or more of the following exemptions:

(a) …

(l)

fair value measurement of financial assets or financial liabilities at initial recognition (paragraph 25G);

(m) a financial asset or an intangible asset accounted for in accordance with IFRIC 12 Service Concession

Arrangements (paragraph 25H); and

(n) borrowing costs (paragraph 25I).

An entity shall not apply these exemptions by analogy to other items.

Borrowing costs

25I A first-time adopter may apply the transitional provisions set out in paragraphs 27 and 28 of IAS 23
Borrowing Costs, as revised in 2007. In those paragraphs references to the effective date shall be interpreted
as 1 January 2009 or the date of transition to IFRSs, whichever is later.

47G An entity shall apply the amendments in paragraphs 13(n) and 25I for annual periods beginning on or after
1 January 2009. If an entity applies IAS 23 for an earlier period, these amendments shall be applied for that
earlier period.’

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A2 In IAS 1 Presentation of Financial Statements the last sentence of paragraph 110 is deleted.

A3 In IAS 7 Cash Flow Statements paragraph 32 is amended as follows:

‘32

The total amount of interest paid during a period is disclosed in the cash flow statement whether it has been
recognised as an expense in the income statement or capitalised in accordance with IAS 23 Borrowing Costs.’

A4 In IAS 11 Construction Contracts the last sentence of paragraph 18 is amended as follows:

‘18

Costs that may be attributable to contract activity in general and can be allocated to specific contracts also
include borrowing costs.’

A5 In IAS 16 Property, Plant and Equipment paragraph 23 is amended as follows:

‘23

The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If
payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total
payment is recognised as interest over the period of credit unless such interest is capitalised in accordance with
IAS 23.’

A6 In IAS 38 Intangible Assets paragraph 32 is amended as follows:

‘32

If payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash price equivalent.
The difference between this amount and the total payments is recognised as interest expense over the period of
credit unless it is capitalised in accordance with IAS 23 Borrowing Costs.’

A7 In IFRIC Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities paragraph 8 is amended

as follows:

‘8

The periodic unwinding of the discount shall be recognised in profit or loss as a finance cost as it occurs.
Capitalisation under IAS 23 is not permitted.’