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Transition exemptions
Section 35.10(o) allows an entity that adopts a policy of capitalising borrowing costs as part of the cost of a qualifying asset to treat the date of transition as the date on which capitalisation commences. This allows an entity the choice to retrospectively adjust or apply the policy going forward. However where a revaluation policy has been applied on transition no retrospective adjustment will be necessary.
Principal transition adjustments
The guidance in old GAAP is very similar to Section 25 so there is unlikely to be differences on transition. Adjustments will only arise where an entity changes its accounting policy in relation to borrowings as detailed below. However where income on borrowings were not netted against the borrowing costs capitalised, entities will need to assess whether an adjustment is required (depending on materiality).
- Revert from a policy of capitalising borrowing costs to expensing borrowing costs.
Where an entity previously adopted a policy of capitalising borrowing costs under old GAAP and choses to apply a policy of expensing borrowing costs under FRS 102 then a retrospective adjustment will need to be made on transition to derecognise all borrowing costs previously recognised.
Example 3: Change of policy on transition
Under old GAAP Company A adopted a policy of capitalising qualifying borrowing costs. On transition to FRS 102, the company elects to expense all borrowing costs going forward. The total borrowing costs included in the carrying amount on the date of transition was CU100,000 (i.e. Net book value after accumulated depreciation of CU50,000). The asset in which these borrowings were capitalised is depreciated over 10 years. Assume the date of transition is 1 January 2014 and the asset did not qualify for capital allowances. The transition adjustments required are:
Adjustments required to 1 January 2014 TB
| CU | CU | |
| Dr Profit and Loss Reserves | 100,000 | |
| Cr Fixed Assets | 100,000 |
Being journal to derecognise the borrowing costs previously capitalised.
Adjustments required in the year ended 31 December 2014 financial statements assuming the opening balance sheet journals are reposted
| CU | CU | |
| Dr Fixed Assets | 15,000 | |
| Cr Depreciation in P&L (cost of CU150,000 / 10 years) | 15,000 |
Being journal to reverse the depreciation posted in 2014 on the borrowing costs
Adjustments required in the year ended 31 December 2015 financial statements assuming the opening balance sheet journals are reposted
| CU | CU | |
| Dr Fixed Assets | 15,000 | |
| Cr Depreciation in P&L (cost of CU150,000 / 10 years) | 15,000 |
Being journal to reverse the depreciation posted in 2015 on the borrowing costs
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