[et_pb_section bb_built=”1″ admin_label=”Header – All Pages” transparent_background=”off” background_color=”#1e73be” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” custom_padding=”0px||0px|” next_background_color=”#000000″ custom_padding_tablet=”50px|0|50px|0″ custom_padding_last_edited=”on|desktop” global_module=”1221″][et_pb_row admin_label=”row” global_parent=”1221″ make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” custom_padding=”||5px|” allow_player_pause=”off” parallax=”off” parallax_method=”on” make_equal=”off” parallax_1=”off” parallax_method_1=”off” background_position=”top_left” background_repeat=”repeat” background_size=”initial”][et_pb_column type=”4_4″][et_pb_post_title global_parent=”1221″ title=”on” meta=”off” author=”on” date=”on” categories=”on” comments=”on” featured_image=”off” featured_placement=”below” parallax_effect=”on” parallax_method=”off” text_orientation=”left” text_color=”light” text_background=”off” text_bg_color=”rgba(255,255,255,0.9)” module_bg_color=”rgba(255,255,255,0)” use_border_color=”off” border_color=”#ffffff” border_style=”solid” custom_padding=”10px|||” parallax=”on” background_color=”rgba(255,255,255,0)” /][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” custom_padding=”30px||0px|” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” background_color=”#1e73be” prev_background_color=”#000000″ next_background_color=”#ffffff” custom_padding_tablet=”0px||0px|” global_module=”1228″][et_pb_row global_parent=”1228″ make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” custom_padding=”30px||0px|” allow_player_pause=”off” parallax=”off” parallax_method=”off” make_equal=”off” parallax_1=”off” parallax_method_1=”off” column_padding_mobile=”on” background_position=”top_left” background_repeat=”repeat” background_size=”initial”][et_pb_column type=”4_4″][et_pb_text global_parent=”1228″ background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid” background_position=”top_left” background_repeat=”repeat” background_size=”initial”]
[breadcrumb]
[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″ custom_padding_tablet=”0px||0px|” custom_padding_last_edited=”on|desktop” prev_background_color=”#1e73be” next_background_color=”#000000″][et_pb_row][et_pb_column type=”4_4″][et_pb_toggle admin_label=”Index” _builder_version=”3.0.106″ title=”Index” open=”off”]
Contents
25.1.1 Extract from FRS102: Section 25.1.
25.1.2.2 Borrowing costs defined.
25.1.2.2.1 Interest charged on the effective interest method.
25.1.2.2.1.1 Examples of interest considered for capitalisation.
25.1.2.2.1.2 Examples of costs not eligible for capitalisation.
25.1.2.2.2 Finance lease interest.
25.1.2.2.3 Exchange differences.
25.2.1 Extract from FRS102: Section 25.2 – 25.2C.
25.2.2.1 Definition of qualifying asset.
25.2.2.2 Accounting policy choice and qualifying borrowing costs.
25.2.2.3 Substantial period of time.
25.2.2.4 Class of qualifying assets- consistency.
25.2.2.5 Borrowing costs less any investment income generated.
25.3 Commencement and cessation of capitalisation.
25.3.1Extract from FRS102: Section 25.2D.
25.3.2.1 Commencement of capitalisation.
25.3.2.2. Suspension of capitalisation.
25.3.2.3 Cessation of capitalisation.
25.4.1 Extract from FRS102: Section 25.3 – 25.3A.
25.4.2.2.1 Property plant and equipment.
25.4.2.2.4 Trade and other payables.
25.4.2.3 Critical Accounting Judgements and Estimates.
25.4.2.4. Notes to the financial statements.
[/et_pb_toggle][/et_pb_column][/et_pb_row][et_pb_row][et_pb_column type=”3_4″][et_pb_text admin_label=”Main Body Text” text_orientation=”justified” use_border_color=”off” border_color_all=”off” module_alignment=”left” _builder_version=”3.17.6″]
Section 25: Borrowing Costs
25.1 Scope
25.1.1 Extract from FRS102: Section 25.1
25.1 Borrowing costs applies to borrowing cost.
Borrowing costs include:
(a) interest expense calculated using the effective interest method as set out in Section 11 Basic Financial Instruments;
(b) finance charges in respect of finance leases as set out in Section 20 Leases; and
(c) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs (Section 25.1).
25.1.2 OmniPro comment
25.1.2.1 Overview
Section 25 deals with the recognition, policy choices available and the disclosure requirements with regard to borrowing costs.
25.1.2.2 Borrowing costs defined
Section 25.1 of FRS 102 defines borrowing costs as interest and other costs that’s an entity incurs in connection with the borrowing of funds. Borrowing costs include:
- Interest charged on an effective interest method (see 25.1.2.2.1)
- finance lease/hire purchase interest (see 25.1.2.2.2)
- exchange differences on borrowings (see 25.1.2.2.3)
25.1.2.2.1 Interest charged on the effective interest method
Section 25.1 of FRS 102 makes it clear that any interest expense calculated using the effective interest method can be capitalised if it meets the conditions for capitalisation. As a result interest on the following types of liabilities can be considered for capitalisation:
25.1.2.2.1.1 Examples of interest considered for capitalisation
– Normal borrowings on bank loans and loan notes including the directly attributable transaction cost. The reason for same is that under Section 11 of FRS 102, any transaction costs are netted against the loan amount and charged to the profit and loss account on the effective interest rate basis. The loan balances are held at amortised cost. See 11.6.2.4
– Dividends paid on preference dividend shares issued which have been classified as a financial liability under Section 22-Liabilities and Equity. e.g. 10% mandatory redeemable preference shares.
– Deemed interest on non-market rates loans including transaction costs i.e. interest free loans which are carried at amortised cost and the interest charged over the life of the loan under the effective interest rate method. See calculations of deemed interest at 11.6.2.4
– Fair value of interest rate swaps excluding transaction costs of the derivative financial instrument.
25.1.2.2.1.2 Examples of costs not eligible for capitalisation
Examples of interest costs even it is directly related to the asset that would not be allowed are:
- Dividend paid on equity instruments as determined by Section 22-Liabilities and Equity.
- Gains/losses on derecognition of borrowings where loans are repaid early or a substantial modification has occurred would generally not be allowed as if they are able to be repaid early then it would be very hard to argue that they were directly attributable. This is not dealt with by Section 25 however this would appear to be the most appropriate course of action to take in these situations.
25.1.2.2.2 Finance lease interest
Finance leases interests and hire purchase interests would need to be interest on finance leases/hire purchases on assets which are used specifically on the construction or production of the asset.
25.1.2.2.3 Exchange differences
There may be instances where a foreign currency loan is taken out due to the rate being cheaper than a functional currency loan. Where that foreign currency loan is used directly in connection with the loan then it is likely that the foreign exchange difference would be allowed in full where it is linked to an adjustment in the interest rates. Given that Section 25 does not expand further it is likely entities will have to apply judgement. The most important thing is that the accounting policy is disclosed.
[/et_pb_text][/et_pb_column][et_pb_column type=”1_4″][et_pb_toggle _builder_version=”3.0.106″ title=”Practical Examples” open=”off”]
Examples
Example 1: Borrowing costs net of investment income.
Example 2: Calculation of capitalisation rate.
[/et_pb_toggle][/et_pb_column][/et_pb_row][/et_pb_section]