HKFRS Accounting Standards vs HKFRS for Private Entities Accounting Standard
We came across this case recently:
Scenario
- Holding company borrows from a bank at 5% interest rate
- It then provides an intercompany loan to its subsidiary at 6% interest
- The subsidiary uses the loan to construct a warehouse
Under HKFRS / IFRS (IAS 23)
- Borrowing costs that are directly attributable to the acquisition or construction of qualifying assets are capitalised as part of the cost of that asset.
- A qualifying asset is any asset that necessarily takes a substantial period of time to get ready for intended use. This requires construction, or otherwise production of the asset.
- The subsidiary capitalises borrowing costs directly attributable to the construction of the warehouse.
- Since the subsidiary pays 6% interest on the intercompany loan, this rate is used for capitalisation.
- At group level, intercompany interest is eliminated in consolidation, and only the 5% external borrowing cost is capitalised.
Under HKFRS for Private Entities / IFRS for SMEs (Section 25)
- Borrowing costs are expensed as incurred, regardless of their connection to a qualifying asset.
- The subsidiary expenses the 6% interest, and the group expenses the 5% external interest.
- No capitalisation is permitted under this framework.
Key takeaway:
Under full IFRS, borrowing costs can be capitalised if they relate to a qualifying asset. Under IFRS for SMEs, all borrowing costs are expensed—regardless of their purpose. Understanding this distinction is crucial for accurate financial reporting and group consolidation.