Top Differences Between IAS 23 and US GAAP

The guidance for capitalizing borrowing costs under IAS 23 and US GAAP (ASC 835-20) is closely aligned at a high level, both require capitalizing borrowing costs directly attributable to acquiring, constructing, or producing a qualifying asset. But underneath that similarity sit several real differences that Audit Firms in Dubai and other entities need to understand before choosing which standard to apply, particularly for dual-reporting groups. This article walks through the most significant ones.

Industry-Specific Guidance: US GAAP Has It, IFRS Largely Doesn’t

US GAAP includes separate guidance for specific sectors, including oil and gas, and real estate, which can produce different qualification outcomes depending on the industry. IAS 23 applies more uniformly across firms in Dubai and the UAE, though it still carries separate guidance for exploration and evaluation of mineral resources under IFRS 6.

Also check: Financial Statement Audit Services in Dubai

Some Inventory Qualifies Under IAS 23, Not Under US GAAP

Inventory that takes a substantial period to bring to a saleable condition, but is produced repetitively and in large volumes, such as wine or cheese, can be treated as a qualifying asset under IAS 23 as an accounting policy choice. US GAAP does not extend the same treatment to inventory manufactured routinely in large quantities on a repetitive basis, even where the production cycle is long.

Internally Generated Intangible Assets: A Real IFRS/US GAAP Split

Under US GAAP, both research costs and development costs are expensed as incurred, neither qualifies as a capitalizable asset. Under IAS 38, development expenditure can be capitalized once it meets specific recognition criteria, at which point it becomes a qualifying asset for IAS 23 purposes. This is one of the more consequential differences for R&D-heavy businesses reporting under both frameworks.

Equity Method Investments: Excluded Under IAS 23, Conditional Under US GAAP

IAS 23 explicitly excludes investments accounted for under the equity method from the definition of a qualifying asset, regardless of the investee’s stage of operations. US GAAP takes a narrower, conditional approach: an equity-method investee’s assets can be treated as qualifying assets where (1) the investee is engaged in activities necessary to commence its principal operations, and (2) the investee is using the funds it receives to acquire its own qualifying assets. Where those two conditions aren’t both met, US GAAP treats it the same way IAS 23 does, as non-qualifying.

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Lease Interest: Broader Scope Under IAS 23

Under IFRS 16, lessees recognize lease liabilities on the balance sheet for nearly all leases, and the interest on those lease liabilities can be capitalized under IAS 23 where the underlying asset qualifies. Under US GAAP, only finance lease interest, determined under ASC 842’s finance lease guidance, is eligible for capitalization under ASC 835-20. Operating lease costs under US GAAP are generally not treated as interest for capitalization purposes, since operating leases don’t produce a separate interest expense component in the same way finance leases do.

Foreign Exchange Differences as Interest: IAS 23 Allows It, US GAAP Doesn’t

Where foreign currency borrowings are used, sometimes specifically to hedge currency exposure on a qualifying asset, IAS 23 permits certain foreign exchange differences to be treated as an adjustment to interest cost and included within capitalizable borrowing costs. Determining which foreign exchange differences qualify as an interest cost adjustment requires judgment, since not every FX movement on a foreign currency loan meets the threshold. US GAAP does not provide an equivalent mechanism for capturing FX differences within capitalized interest.

Derivative Gains and Losses: Limited IAS 23 Guidance

Interest rate swaps are a common tool for managing interest rate risk on borrowings tied to a qualifying asset. IAS 23 doesn’t directly address whether derivatives used to hedge that risk count as eligible interest. In practice, interest payments under an interest rate swap can be capitalized where the swap functions as an economic hedge of otherwise-eligible borrowing costs, but changes in the swap’s fair value itself are not capitalized.

Investment Income Offset: Required Under IAS 23, Generally Not Under US GAAP

Where funds from specific borrowings are temporarily invested before being spent on the qualifying asset, IAS 23 requires that any investment income earned be deducted from the borrowing costs eligible for capitalization. US GAAP generally does not require this offset, interest income on temporarily invested borrowed funds and interest expense on those same borrowings are not usually netted, except in narrower circumstances such as externally restricted, tax-exempt borrowings earmarked specifically for the qualifying asset.

Also check: Statutory Audit Services in Dubai

Cash Flow Statement Classification: IFRS Allows a Choice, US GAAP Doesn’t

Under IFRS, cash flows relating to capitalized interest can be classified in either of two ways:

• As part of investing cash flows, alongside other cash payments made to acquire the qualifying asset, or
• Consistently with how the entity classifies its non-capitalized interest cash flows, whether that’s operating or financing activities.

Under US GAAP, there is no such choice, capitalized interest paid must be classified within investing cash flows.

Disclosure Requirements Differ Too

Both frameworks require disclosure of capitalized borrowing costs, but the form differs. Under IAS 23, entities disclose the capitalization rate used to determine the amount capitalized. Under US GAAP, entities disclose total interest cost incurred for the period, split between the amount capitalized and the amount expensed.

IAS 23 vs. US GAAP: Summary Table

Area	IAS 23	US GAAP (ASC 835-20)
Industry guidance	General, with separate IFRS 6 guidance for mineral exploration	Separate guidance for specific industries (oil, gas, real estate)
Long-cycle inventory	Can qualify as a qualifying asset	Does not qualify if produced repetitively in large volume
Internally generated intangibles	Development costs can be capitalized and qualify	Research and development both expensed as incurred
Equity method investments	Always excluded as qualifying assets	Can qualify under specific, narrower conditions
Lease interest	Broader, covers most recognized lease liabilities	Limited to finance lease interest
FX differences as interest	Certain differences included, judgment required	Not addressed as an interest cost adjustment
Investment income offset	Required, deducted from capitalizable costs	Generally not required, narrow exceptions apply
Cash flow classification	Choice between investing and consistent treatment	Must be classified as investing activities
Disclosure	Capitalization rate disclosed	Total interest cost, capitalized and expensed, disclosed

Worked Example: Calculating a Capitalization Rate

A Dubai construction company has three outstanding borrowings not specifically tied to a single project: AED 5,000,000 at 6%, AED 3,000,000 at 7%, and AED 2,000,000 at 5%. The weighted average capitalization rate is calculated as total borrowing costs divided by the weighted average of the outstanding borrowings, giving a rate of approximately 6.1%. Under IAS 23, that rate would be applied to qualifying expenditure on the asset and disclosed as the capitalization rate used. Under US GAAP, the company would instead disclose the total interest cost for the period, showing how much was capitalized against the qualifying asset and how much was expensed.

Common Mistakes for Dual-Reporting Firms

• Applying one framework’s qualifying asset definition under the other. Long-cycle inventory or equity-method investments treated as qualifying under IFRS need to be reassessed, not assumed, under US GAAP.
• Missing the investment income offset under IAS 23. Failing to net temporary investment income against capitalizable costs overstates the amount capitalized.
• Inconsistent cash flow classification. Since IAS 23 allows a choice, dual reporters need a documented, consistent policy rather than varying the classification period to period.
• Overlooking operating lease interest under US GAAP. Assuming all recognized lease liabilities generate capitalizable interest, as under IFRS 16, when US GAAP limits this to finance leases only.

Related: Compliance Audit Services in Dubai

What to Take Away From This

IAS 23 and US GAAP treat the core principle of borrowing cost capitalization similarly, but the details, what counts as a qualifying asset, how the capitalization rate is calculated, and how the resulting figures get disclosed, diverge in ways that matter. Dual-reporting firms in Dubai need to apply each framework’s rules on their own terms rather than assuming one calculation transfers cleanly to the other.

Frequently Asked Questions

Can the same capitalization rate be used for both IAS 23 and US GAAP reporting?

Not reliably. Differences in what counts as a qualifying asset and whether investment income is offset mean the underlying calculation, not just the disclosure, can produce different figures under each framework.

Does IAS 23 allow capitalization of interest on inventory?

Only for inventory that takes a substantial period to bring to a saleable condition and is produced repetitively in large quantities, such as wine or cheese. Most inventory does not qualify.

Why does US GAAP expense all research and development costs?

US GAAP takes the position that the future economic benefit of R&D is too uncertain to justify capitalization, so both research and development costs are expensed as incurred, unlike IAS 38’s conditional capitalization of development costs.

Are equity method investments ever qualifying assets under IAS 23?

No. IAS 23 excludes them entirely, regardless of the investee’s activities. US GAAP allows a narrower exception where specific conditions about the investee’s principal operations and use of funds are met.

What’s the main disclosure difference between the two frameworks?

IAS 23 requires disclosure of the capitalization rate applied. US GAAP requires disclosure of total interest cost for the period, split between the capitalized and expensed portions.

Getting Borrowing Cost Capitalization Right Across Frameworks

The differences between IAS 23 and US GAAP rarely show up as an obvious error, they show up as a capitalization figure that looks reasonable under one framework’s logic but doesn’t reconcile once the other framework’s rules are applied properly. That gap is exactly where dual-reporting firms tend to get flagged in review.

AFD – Audit Firm in Dubai can review how your borrowing costs are being capitalized under each framework and confirm the figures hold up under both sets of rules.