Question

What is a qualifying asset and how do we treat exchange rate differences relating to the acquisition of qualifying assets?

Contrast this with the treatment for assets that are not qualifying assets.

Answer 1

In AASB 123, the qualifying assets are refereed to those assets which usually require a substantial time period to get ready for their sale or intended usage.

The standard relates to the cost of borrowing, which are widely defined within it as cost of interest and any other costs incurred by the business in connection with the funds borrowing. The exchange rate differences generated while outstanding the loans is termed to be to be borrowing costs.

AASB 123 states that cost of borrowing, which include the exchange differences, which relate to qualifying assets must be considered in the asset's acquisition cost, to an extent that it arises before the assets ceases to be qualifying assets. Only the differential causes arising before an asset ceases to be a qualifying asset need to be considered. The differences in exchange considered in the qualifying asset's cost for the financial years are those amounts that otherwise would have been considered within the period’s profit or loss. The capitalised amount as the asset's cost must not exceed its recoverable amount. In case the exchange differences cause the recoverable amount to be higher, the differential or the excess amount would be written-off to the income statement

Where a qualifying asset is not involved, there is a general rule that exchange difference relating to monetary items must be included to account in the income statement during the period when the rate of exchange changes