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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://frs102.com/members/premium-toolkit/section-25/” type=”big” color=”red”] Return to Section 25 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” 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″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Section 25: Borrowing Costs
Section 25 deals with the recognition, policy choices available and the disclosure requirements with regard to borrowing costs.
Scope Extract from FRS102: Section 25.1
Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. Borrowing costs include:
(a) interest expense calculated using the effective interest method as described in Section 11 Basic Financial Instruments;
(b) finance charges in respect of finance leases recognised in accordance with 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).
OmniPro comment Interest costs that can be considered
(a) Interest charged on the effective interest method
Section 25.1 above 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:
- Normal borrowings on bank loans and loan notes including the directly attributable transaction cost. The reason for same is that under Section 11, 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.
- 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.
- Fair value of interest rate swaps excluding transaction costs of the derivative financial instrument.
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.
(b) Finance lease interest
Finance leases interests would need to be interest on finance leases on assets which are used specifically on the construction or production of the asset.
(c) 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.
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