Explanatory Statement
Accounting Standard AASB 2009-1 Amendments to Australian Accounting Standards – Borrowing Costs of
Not-for-Profit Public Sector Entities
April 2009
EXPLANATORY STATEMENT
Standards Amended by AASB 2009-1
This Standard makes amendments to the following Australian Accounting Standards:
- AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards;
- AASB 111 Construction Contracts; and
- AASB 123 Borrowing Costs (2007, as amended).
The amendments effected through this Standard arise from the Australian Accounting Standards Board’s (AASB’s) short-term review of the requirement in AASB 123 to 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. Following that review, the AASB decided to reintroduce the option for not-for-profit public sector entities to expense those borrowing costs pending the outcome of:
(a) the work of the New Zealand Financial Reporting Standards Board (FRSB) on the relationship between depreciated replacement cost and borrowing costs, in which the AASB agreed to participate;
(b) the AASB and FRSB work on developing a Process for Modifying, or Introducing Additional Requirements to, IFRSs for PBE/NFP; and
(c) the International Public Sector Accounting Standard Board’s (IPSASB’s) Borrowing Costs project.
Main Features of this Standard
Application Date
This Standard is applicable to annual reporting periods beginning on or after 1 January 2009 that end on or after 30 April 2009, with early adoption permitted for annual reporting periods beginning on or after 1 January 2009 that end before 30 April 2009 provided AASB 123 is also adopted for the same period. This Standard is required to be applied when AASB 123 is applied.
Main Requirements
In respect of not-for-profit public sector entities, this Standard amends AASB 123 by reintroducing the option to expense borrowing costs in the period in which they are incurred and thereby allow, subject to the requirements in AASB 1049 Whole of Government and General Government Sector Financial Reporting, an entity to choose whether it expenses or capitalises borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. Consequential disclosures about the accounting policy adopted are also specified.
As a consequence of reintroducing the option, this Standard also amends AASB 111 to specify that costs which may be attributable to contract activity in general and can be allocated to specific contracts include borrowing costs only when the contractor capitalises borrowing costs in accordance with AASB 123.
Consultation Prior to Issuing AASB 2009-1
The AASB issued AASB 2009-1 after a due process, which included the issue of ED 176 Proposed Amendments to Australian Accounting Standards – Borrowing Costs of Not-for-Profit Public Sector Entities in February 2009. The AASB received six submissions on ED 176. In general, those submissions were supportive of ED 176.
A Regulation Impact Statement has not been prepared in connection with the issue of AASB 2009-1 as the amendments only apply to not-for-profit public sector entities and, as such, do not have a substantial direct or indirect impact on business or competition.
Overview
Accounting Standard AASB 2009-1, enacted in April 2009, amends existing Australian Accounting Standards to address the issue of borrowing costs for not-for-profit public sector entities. This legislative amendment was introduced by the Australian Accounting Standards Board (AASB) to provide flexibility for these entities in how they account for borrowing costs related to qualifying assets. The AASB determined that these entities should be given the option to either capitalise or expense borrowing costs, pending the outcomes of ongoing projects and research on the relationship between depreciated replacement cost and borrowing costs, as well as broader international public sector accounting standards. The policy objective is to align the accounting practices of not-for-profit public sector entities with their unique operational needs and to ensure consistency with international standards as they evolve.
This amendment allows not-for-profit public sector entities to choose their accounting policy for borrowing costs, subject to the requirements of AASB 1049, and mandates that any such policy choice be disclosed in the financial reports. The changes introduced by AASB 2009-1 are applicable from annual reporting periods beginning on or after 1 January 2009, with early adoption permitted for periods ending before 30 April 2009. The AASB undertook a consultation process and received generally supportive feedback before issuing this amendment.
Scope and Application
The AASB 2009-1, Amendments to Australian Accounting Standards – Borrowing Costs of Not-for-Profit Public Sector Entities, applies specifically to not-for-profit public sector entities within Australia. This Standard amends AASB 123 Borrowing Costs to reintroduce the option for these entities to expense borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset. This applies to annual reporting periods starting on or after 1 January 2009, with early adoption permitted for periods ending before 30 April 2009, provided AASB 123 is also adopted for the same period. The Standard necessitates the application of AASB 123 and requires consequential disclosures regarding the accounting policy adopted. The AASB made this decision following a short-term review of AASB 123, pending the outcomes of related projects by the New Zealand FRSB and the IPSASB. This Standard ensures that these entities can choose whether to expense or capitalise borrowing costs, subject to the requirements in AASB 1049.
Key Provisions
AASB 2009-1 amends certain Australian Accounting Standards, including AASB 1 (First-time Adoption of Australian Equivalents to International Financial Reporting Standards), AASB 111 (Construction Contracts), and AASB 123 (Borrowing Costs). The changes arise from the Australian Accounting Standards Board’s review of the requirement in AASB 123 that borrowing costs be capitalised as part of the cost of a qualifying asset. AASB 2009-1 reintroduces the option for not-for-profit public sector entities to expense these borrowing costs instead of capitalising them, pending the outcomes of related projects by the New Zealand Financial Reporting Standards Board, the AASB and FRSB, and the International Public Sector Accounting Standards Board. The amendments apply to annual reporting periods beginning on or after 1 January 2009 that end on or after 30 April 2009, with early adoption permitted.
Under AASB 2009-1, not-for-profit public sector entities have the choice to either expense or capitalise borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset. This choice must be made in accordance with the requirements in AASB 1049 (Whole of Government and General Government Sector Financial Reporting). The amendments also specify that borrowing costs can be included in contract activity costs and allocated to specific contracts only if the contractor capitalises borrowing costs in accordance with AASB 123. Entities must provide consequential disclosures about the accounting policy they adopt for these borrowing costs.
The AASB issued AASB 2009-1 following a consultation process that included the release of Exposure Draft 176 (Proposed Amendments to Australian Accounting Standards – Borrowing Costs of Not-for-Profit Public Sector Entities) in February 2009. The AASB received six submissions on ED 176, with the majority being supportive of the draft amendments. Given that the amendments only apply to not-for-profit public sector entities and do not have a substantial direct or indirect impact on business or competition, a Regulation Impact Statement was not prepared in connection with the issuance of AASB 2009-1.
In terms of penalties and consequences, AASB 2009-1 does not specify particular offences or penalties for non-compliance. However, entities that fail to properly apply the amendments and disclose their chosen accounting policy may face scrutiny from auditors, financial regulators, or other stakeholders. Such non-compliance could potentially lead to financial reporting issues, including the misstatement of expenses and asset values, which could have broader implications for the entity’s financial statements and compliance with other accounting standards and regulations.