Are transaction costs capitalized for IFRS?

Capitalization of Transaction Costs under IFRS

In accordance with International Financial Reporting Standards (IFRS), transaction costs incurred during the acquisition of an asset are considered an integral part of its acquisition cost and are therefore capitalized. This means that these expenses are added to the asset’s book value and amortized over its useful life.

Rationale for Capitalization

The rationale behind capitalizing transaction costs is that they are directly attributable to the acquisition of the asset and increase its future economic benefits. These costs are incurred in order to secure the asset and make it suitable for its intended use. They represent a necessary investment in the asset’s future earning potential.

Examples of Transaction Costs

Examples of transaction costs that are included in the acquisition cost of an asset under IFRS include:

• Legal fees related to the purchase agreement
• Property taxes incurred during the acquisition period
• Title search and transfer fees
• Appraisal costs
• Brokerage fees

Exclusion of Interest Costs

It is important to note that interest costs incurred during the acquisition financing are not considered transaction costs and are therefore not capitalized. Interest expenses are treated as a separate expense and recognized in the income statement as incurred.

Impact on Financial Statements

The capitalization of transaction costs under IFRS has the following implications for financial statements:

• Increases the asset’s book value, leading to higher carrying amounts.
• Decreases the entity’s net income in the period of acquisition due to the amortization of capitalized costs.
• Improves the asset’s return on investment (ROI) calculations, as it includes all expenses related to the acquisition.

Conclusion

Under IFRS, transaction costs incurred during the acquisition of an asset are capitalized as part of its acquisition cost. These costs are considered an investment in the asset’s future economic benefits and are amortized over its useful life. By including transaction costs in the asset’s book value, IFRS provides a more accurate representation of the total cost of acquiring and utilizing an asset.