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ACCA Strategic Professional · Strategic Business Reporting (International) · Non-current assets

Sigma plc's finance director proposes expensing all borrowing costs on a long-term property development to improve interim asset growth ratios, and wishes to capitalise interest on routinely manufactured inventory made over a few weeks to boost profit. Which statement is consistent with IAS 23?

Borrowing costs on the long-term property development must be capitalised because it is a qualifying asset, while costs on routinely manufactured inventory produced over a short period need not be capitalised. IAS 23 gives no free choice to expense, so the director's motives raise ethical concerns about manipulating reported ratios.

  1. ABoth proposals are acceptable as accounting policy choices
  2. BBorrowing costs on the property development must be capitalised, and those on routinely manufactured inventory made over a short period are not required to be capitalisedCorrect
  3. CCapitalisation is only permitted for property, plant and equipment, never inventories
  4. DCapitalisation is optional for qualifying assets but mandatory for all inventories

Explanation

Since the allowed-treatment option was removed, IAS 23 requires capitalisation for qualifying assets, which take a substantial period to get ready; a long property development qualifies. Inventories manufactured routinely and in large quantities on a repetitive basis are not required to be capitalised. The proposal to expense is also an ethical concern as it is aimed at manipulating ratios.

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