HKFRS News 

IAS 23 Borrowing Costs currently gives management a choice of how to account for borrowing costs that are attributable to qualifying assets.  These borrowing costs are recorded as an expense when incurred under the benchmark treatment.  The allowed alternative treatment permits capitalising borrowing costs to the extent that they are directly attributable to the acquisition, construction or production of a qualifying asset.  The capitalised borrowing costs are included in the cost of that asset.
 
A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale.  Examples are factories, land, machines, licence-related assets and other assets that require a substantial period of time to prepare for their intended use or sale.
 
A number of companies have anticipated the convergence with US GAAP and have chosen to capitalise borrowing costs as part of their self-constructed assets.  Companies that have a policy to expense all borrowing costs as incurred will need to consider the implications for their systems.
 
The proposed transition provisions allow prospective or retrospective adoption.  An entity can apply the amendments to qualifying assets for which it begins capitalisation on or after the effective date.  Management may also apply this amendment by designating an earlier date.  These proposed transition provisions would allow entities to go back - for example, 10 or 15 years - to collect information to determine the effect of this amendment on opening equity.
 
A few consequential amendments are proposed to other standards and interpretations.  The most significant amendment is made to IFRS 1 First-time Adoption of IFRS.  This change is made in order to add an exemption allowing first-time adopters to use the transition arrangements of the ED.
 
The Board believes that the elimination of one of the two options in accounting for borrowing costs directly attributable to a qualifying asset would improve financial reporting and result in more comparable information.

ED 8 would require an entity to adopt the 'management approach' in reporting the financial performance of its operating segments.  Generally, the information to be reported would be what management uses internally for evaluating segment performance and deciding how to allocate resources to operating segments.  Such information may be different from what is used to prepare the income statement and balance sheet.  The proposals would therefore require explanations the basis on which the segment information is prepared and reconciliations to the amounts recognised in the income statement and balance sheet.
 
The IASB believes that adopting the management approach would improve financial reporting.  Firstly, it allows users of financial statements to review the operations through the eyes of management.  Secondly, because the information is already used internally by management, there are few costs for preparers and the information is available on a timely basis.  This means that interim reporting of segment information can be extended beyond the current requirements.
 
Main features of ED 8
 
The proposed IFRS set out in the Exposure Draft would require an entity to report financial and descriptive information about its reportable segments.  Reportable segments would be operating segments or aggregations of operating segments that meet specified criteria.  Operating segments would be components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.  Generally, financial information would be required to be reported on the basis that it is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments.
 
The proposed IFRS would:

• extend the scope of segment reporting to include entities that hold assets in a fiduciary capacity for a broad group of outsiders, as well as entities whose equity or debt securities are publicly traded and entities that are in the process of issuing equity or debt securities in public securities markets.
   
• require identification of operating segments based on internal reports that are regularly reviewed by the entity's chief operating decision maker in order to allocate resources to the segment and assess its performance.  This is because the requirements of the Exposure Draft are based on the information about the components of the entity that management uses to make decisions about operating matters.
   
• include a component of an entity that sells primarily or exclusively to other operating segments of the entity in the definition of an operating segment if the entity is managed that way.
   
• require the amount of each operating segment item reported to be the measure reported to the chief operating decision maker for the purposes of allocating resources to the segment and assessing its performance.
   
• require reconciliations of total reportable segment revenues, total profit or loss, total assets, and other amounts disclosed for reportable segments to corresponding amounts in the entity's financial statements.
   
• require an explanation of how segment profit or loss and segment assets are measured for each reportable segment.
   
• require an entity to report entity-wide information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets and about major customers, regardless of whether that information is used by management in making operating decisions.
   
• require an entity to give descriptive information about the way that the operating segments are determined, the products and services provided by the segments, the differences between the measurements used in reporting segment information and those used in the entity's financial statements, and the changes in the measurement of segment amounts from prior periods.