SIC-2, or Standard Interpretation Committee Interpretation 2, is a guidance issued by the International Accounting Standards Committee (IASC) that provides guidance on the consistency requirement in capitalizing borrowing costs. According to SIC-2, an entity should use the same accounting policy for capitalizing borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset. However, there are circumstances where different accounting policies may be used for capitalizing borrowing costs, and SIC-2 provides examples of such situations. Here are some examples:
- General Borrowing Costs: Under this method, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are capitalized as part of the cost of that asset. For example, if a company borrows funds to finance the construction of a building, the interest expense incurred on the borrowed funds may be capitalized as part of the cost of the building.
- Specific Borrowing Costs: In some cases, borrowing costs may be directly attributable to a specific borrowing or group of borrowings. In such cases, the entity may choose to capitalize only the actual borrowing costs incurred on that specific borrowing or group of borrowings, and not on other borrowings. For example, if a company has multiple borrowings, but only one borrowing is specifically used to finance the construction of a qualifying asset, the entity may choose to capitalize only the borrowing costs related to that specific borrowing and not capitalize borrowing costs related to other borrowings.
- Weighted Average Borrowing Costs: In some cases, an entity may choose to capitalize borrowing costs based on a weighted average of the borrowing costs incurred during the period. This method calculates the weighted average of all the borrowing costs incurred during the period and capitalizes this average as part of the cost of the qualifying asset. For example, if a company has multiple borrowings with different interest rates, it may choose to calculate a weighted average of the borrowing costs and capitalize this average as part of the cost of the qualifying asset.
- Specific Rate Borrowing Costs: Under this method, an entity may choose to capitalize borrowing costs based on a specific rate, such as the rate of a specific borrowing or a benchmark rate, rather than the actual borrowing costs incurred during the period. For example, if a company has multiple borrowings with different interest rates, it may choose to capitalize borrowing costs based on a specific benchmark rate, such as the prime rate, instead of the actual borrowing costs incurred.
- No Capitalization of Borrowing Costs: In some cases, an entity may choose not to capitalize any borrowing costs and expense them in the period in which they are incurred. This may occur if the entity does not have any qualifying assets under construction or if the entity chooses not to capitalize borrowing costs for other reasons, such as immateriality or industry practices.
In conclusion, SIC-2 allows for different accounting policies for capitalizing borrowing costs in certain situations, such as when the nature of the borrowing or the entity’s accounting practices warrant different treatment. It is important for entities to carefully consider and apply the appropriate accounting policy for capitalizing borrowing costs in accordance with relevant accounting standards and guidelines.