We continue to publish materials from the “IFRS for Beginners” series. In previous issues, we studied the requirements of international standards for accounting for long-term assets using the example of fixed assets and investment property (see, No. 10, 2013), as well as the procedure for depreciation of long-term assets (see No. 11, 2013). This article also touches on the topic of long-term assets.
The main question that will be considered is whether to include initial cost an asset's borrowing costs if the borrowing is used to create the asset. The IASB has dedicated a separate standard to this issue - IAS 23 Borrowing Costs.
Drawing. Structure and main provisions of IFRS (ias) 23
The main idea of the standard
An entity must recognize borrowing costs as expenses in the period in which they are incurred.
However, borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset must be capitalized as part of the cost of that asset.
Under qualifying asset(qualifying asset) is understood as an asset whose preparation for
Note!
In the Russian translation of IAS 23, the term qualifying asset sounds like “an asset that meets certain requirements.” However, in paragraph 7 of the translation there is a phrase: “Assets that are ready for use for their intended purpose or for sale at the time of acquisition are not qualified assets.” The term was probably originally translated as “qualified asset” and subsequently changed to “qualifying asset”. But, unfortunately, not everywhere (perhaps a technical error). This article uses the “qualified asset” option because it is contained in the original text and is more convenient than the translated one.
Use for its intended purpose or for sale necessarily requires considerable time.
In this case, a qualifying asset may be:
- stocks;
- fixed assets;
- intangible assets;
- investment property.
The key concept for identifying a qualifying asset is the significant time it took to create or prepare for use.
However, the standard allows not to capitalize interest for inventories created in large quantities and on a regular basis, and for biological assets accounted for fair value, even if they meet the identification requirements as qualifying assets.
Naturally, assets that are ready for use or sale at the time of acquisition cannot be qualified.
Borrowing costs mean:
- interest expense calculated using the effective interest rate;
- financial costs for finance leases in accordance with IAS 17 Leases;
- exchange rate differences arising as a result of borrowing from foreign currency.
Let's figure out why interest on a loan is calculated based on the effective interest rate, and not the interest provided for in the contract.
Effective interest rate is a mathematically calculated interest rate at which future cash payments discounted at this rate equals the carrying amount of the liability.
The need for an effective interest rate is due to the fact that, in accordance with the current IAS 39 “Financial Instruments: Recognition and Measurement” as amended by IFRS 9 “Financial Instruments”, the initial cost of loans includes the costs of their attraction.
It is often surprising that international standards do not include the costs of borrowing as expenses.
However, it should be recalled that the Russian analogue also allows for the possibility of gradually including in expenses additional costs associated with obtaining a loan. Paragraph 8 of PBU 15/2008 “Accounting for expenses on loans and credits” allows evenly, throughout the term of the loan agreement, to recognize as expenses additional costs associated with obtaining a loan.
International standards for including additional borrowing costs in expenses use the effective interest rate mechanism. Let's look at the effect of the effective interest rate using an example.
Example
On January 1, 2013, the company received a loan from the bank to replenish working capital in the amount of USD 20 million for a period of three years. The interest rate under the agreement is 10 percent per annum, interest is payable at the end of each year. The loan principal in the amount of USD 20 million is due on December 31, 2015.
In accordance with the terms of the agreement, the bank charges a loan processing fee of 1.5 percent of the loan amount. In addition, the company paid for specialized services financial company related to the preparation of documents for obtaining a loan in the amount of 200 thousand US dollars.
You want to determine the finance costs recognized in profit or loss for 2013, 2014 and 2015.
Solution. Costs associated with obtaining a loan in the form of a loan processing fee of $300 thousand ($20 million x 1.5%) and services of a financial company in the amount of $200 thousand are not included in period expenses , but are included in the initial cost of the loan.
The initial cost of the loan is equal to 19,500 thousand US dollars (20,000 thousand - 300 thousand - 200 thousand).
The effective interest rate is 11.023 percent per annum. Note that the effective interest rate is almost impossible to find manually. To calculate it, in particular, the built-in IRR (internal rate of return) function of the Microsoft Excel package is used.
The calculation of interest expense recognized in profit or loss using the effective interest rate of 11.023 percent per annum is shown in Table 1.
Table 1. Calculation of interest expenses, thousand US dollars
Thus, interest on the loan in the amount of 6,000 thousand US dollars, as well as the initial costs associated with obtaining the loan in the amount of 500 thousand US dollars (300 thousand + 200 thousand) are recognized on a systematic basis in profits and losses as financing costs for 2013–2015.
For comparison, financing costs recognized according to PBU 15/2008 would be:
· 2013 – 2167 thousand US dollars (2000 thousand interest + 1/3 x 500 thousand costs of obtaining a loan);
· 2014 – 2167 thousand US dollars;
· 2015 – 2166 thousand US dollars.
Total: 6500 thousand US dollars.
Interest capitalization periods
Capitalization of interest begins from the moment when the following conditions are simultaneously met:
- expenses have been incurred on a qualifying asset;
- borrowing costs are incurred;
- work has begun to prepare the qualifying asset for its intended use or sale.
Interest capitalization is suspended when work on a qualifying asset is interrupted for an extended period of time. At the same time, capitalization of interest continues if the stop is related to the characteristics of the asset.
Example
The suspension of the construction of a building due to the pumping of water from the pit does not stop the capitalization of interest, since the soil characteristics were known in advance at the stage of linking the project to the area and the appearance of water in the pit was an expected event.
Capitalization of interest ceases when substantially all work has been completed to prepare the qualifying asset for use or sale. The term “substantially all work has been completed” means the completion of the physical structure qualified asset, although administrative work to finalize it may continue.
In order to capitalize interest on a qualifying asset, an entity must identify the type of borrowing that is used to finance the creation of the qualifying asset.
Loans for these purposes are divided into two types:
- special loans – loans raised solely for the purpose of financing the creation of a qualifying asset;
- general purpose loans are loans raised by an enterprise for general purposes, but which are actually used in whole or in part to finance the creation of a qualifying asset.
Special loans
Specialty loans are fairly easy to identify. Their purpose is directly indicated in the credit agreement (or loan agreement). All interest on special loans (subject to start and end capitalization requirements) less investment income is subject to capitalization as part of the cost of the qualifying asset.
Investment income means investment income from temporarily invested borrowed money. Enterprises receiving a special loan often have to invest the borrowed funds due to the fact that the creation of a qualifying asset requires gradual financing, while the bank (or lender) provides the entire loan amount at once.
Example
The company plans to manufacture and install a new production line during 2013. Manufacturing and installation costs are estimated at $10 million. To finance this project, it is planned to use both the enterprise’s own funds and special Bank loan in the amount of 6 million US dollars.
The bank provided the company with a loan on January 1, 2013 at a rate of 10 percent per annum with a maturity date of December 31, 2014. Interest is payable at the end of each year and the principal loan amount of US$6 million is due on December 31, 2014.
On January 1, 2013, the company made an advance payment to suppliers in the amount of $2 million from the funds received from the loan. The company placed the remaining loan amount (USD 4 million) on deposit with the same bank at a rate of 6 percent per annum until March 31, 2013.
The actual work on the manufacture and installation of the production line began on February 1, 2013. On December 1, 2013, work on the creation and installation of the production line was completed and it was ready for operation. Administrative work on the design of the production line was completed by December 31, 2013, and on January 1, 2014, the company began production.
It is required to determine the initial cost of the fixed asset, the amount of financing costs and the amount of investment income reflected in the financial statements for 2013.
Solution. The bank loan is a special loan, since it was attracted solely for the purpose of manufacturing and installing a new production line.
· the start date of costs for the qualifying asset (prepayment to suppliers was made on January 1, 2013);
The deadline for capitalization of interest on the loan is December 1, 2013, when almost all work on creating the production line is completed.
Interest on the loan accrued from February to November 2013 (10 months) is equal to 500 thousand US dollars (6000 thousand US dollars x 10% x 10 / 12).
Investment income:
· for January 2013 equal to 20 thousand US dollars (4000 thousand US dollars x 6% x 1/12);
· for February–March 2013 equal to 40 thousand US dollars (4000 thousand US dollars x 6% x 2/12).
The total investment income is 60 thousand US dollars.
Interest on the loan subject to capitalization as part of the fixed asset is equal to 460 thousand US dollars (500 thousand - 40 thousand).
In total, the initial cost of the production line will be 10,460 thousand US dollars (10,000 thousand + 460 thousand).
Please note that not all investment income is deducted from accrued interest, but only income received during the period limited by the beginning and end of interest capitalization (that is, from February 2013 to November 2013 inclusive).
The total interest accrued for 2013 is $600 thousand ($6,000 thousand x 10%).
In total, the total amount of interest reflected as an expense in the income statement for 2013 will be $140 thousand (600 thousand - 460 thousand).
Investment income reported in profit or loss for 2013 is $60 thousand.
General purpose loans
The main difficulty is determining the relationship between loans received for general purposes of financing the company's activities and the costs of creating a qualifying asset. Were general purpose loan proceeds used to pay the costs of creating the qualifying asset, and if so, to what extent?
The IASB recognizes that these issues are complex and require professional judgment. To determine whether there is a relationship between general borrowings and a qualifying asset, IAS 23 introduces the following formula: borrowing costs are allocated to the acquisition, construction and creation of a qualifying asset if those costs could have been avoided in the absence of the most qualifying asset. Thus, the answer to the question of whether a general purpose loan is associated with a qualifying asset comes down to assessing the need to finance the company's activities, provided that the decision to create a qualifying asset has not been made. If there is no need for financing (in the absence of a qualified asset), then we can conclude that the loan is used to create a qualified asset. And you can check this by analyzing the financial report
To ensure uniform approaches and comparability of data for past periods, it is desirable that the methodology for assessing the need to finance the creation of a qualified asset using general purpose loans be enshrined in the accounting policy of the enterprise.
Position.
Example
Companies A and B are in need of financing. For these purposes, they attracted short-term loans in the first quarter of 2013. It is known that during 2013 both companies were engaged in the construction of new production lines and as of December 31, 2013, their construction had not yet been completed. The revenue of companies “A” and “B” increased in 2013 compared to 2012 by 50 and 20 percent, respectively. To ensure the uninterrupted process of production and sale of products, a corresponding increase in investments in current assets (minus trading accounts payable).
It is required to determine whether funds from current assets were used to finance the construction of qualifying assets (production lines) based on the data below in the statement of financial situation as of December 31, 2012 and 2013 (see Tables 2 and 3).
Table 2. Statement of financial position of company “A” as of December 31 (millions of US dollars)
| Assets | 2012 | 2013 | Change | Passive | 2012 | 2013 | Change |
| Long-term assets | Equity | 150 | 190 | 40 | |||
| Fixed assets | 100 | 100 | – | ||||
| Qualifying asset | – | 30 | 30 | long term duties | 70 | 70 | – |
| Total | 100 | 130 | 30 | ||||
| 120 | 180 | 60 | Short-term loans | – | 50 | 50 | |
| Total balance | 220 | 310 | 90 | Total balance | 220 | 310 | 90 |
Table 3. Statement of financial position of company B as of December 31 (millions of US dollars)
| Assets | 2012 | 2013 | Change | Passive | 2012 | 2013 | Change |
| Long-term assets | Equity | 110 | 114 | 4 | |||
| Fixed assets | 65 | 65 | – | ||||
| Qualifying asset | – | 25 | 25 | long term duties | 50 | 50 | – |
| Total | 65 | 90 | 25 | ||||
| Current assets (less trade payables) | 95 | 114 | 19 | Short-term loans | – | 40 | 40 |
| Total balance | 160 | 204 | 44 | Total balance | 160 | 204 | 44 |
If company "A" was not engaged in the creation of a production line (a qualifying asset), then the need for financing would arise only due to the need to finance an increase in working capital. The company's turnover increased by 50 percent, which required an increase in investments in working capital in the amount of $60 million. This increase in working capital is financed by a short-term loan of US$50 million and own funds company in the amount of US$10 million.
Conclusion: short-term loan proceeds were not used to finance the creation of a qualifying asset (production line).
If company "B" was not engaged in the creation of a production line (a qualifying asset), then the need for financing would arise only due to the need to finance an increase in working capital. The company's turnover increased by 20 percent, which required an increase in investments in working capital in the amount of $19 million. This working capital requirement is being financed entirely by a short-term loan of US$40 million.
It is clear that the loan proceeds of US$21 million (40 million - 19 million) are in excess of those required for financing working capital directed by the company to finance investments in a qualifying asset.
Conclusion: short-term loan proceeds in the amount of USD 21 million were used to finance the creation of a qualifying asset (production line).
It is worth noting that, unlike international standards, PBU 15/2008 does not indicate at all how an enterprise should determine whether general purpose borrowing funds were used to create a qualified asset ( investment asset in the terminology of PBU 15/2008).
The consequence of this is the formal approach of enterprises, when loan funds are withdrawn to a separate account for making payments to suppliers for purchased raw materials, materials and services, or (if loan funds end up in the current account of the enterprise) all investment payments are suspended until the loan amount is fully used for settlements with suppliers for operating activities. As a result, the enterprise is left with documents stating that the loan was spent solely for the purpose of replenishing working capital, but such an approach in no way reflects the real economic purpose attracting and
Note!
It is important to remember that when preparing financial statements in accordance with IFRS, the principle of priority of economic content over legal form plays an important role. Reporting must reflect the economic essence of the transaction, therefore the legal approach that is used by Russian enterprises within the framework of PBU 15/2008 to formally prove that loans were not used to finance an investment asset is unacceptable from the point of view of international standards.
Loan use.
The formal approach of PBU 15/2008 is clearly visible in the following example.
Example
The company is constructing an investment asset, and this construction will continue throughout the year. Construction costs are $1 million and can be spent as a lump sum at the start of construction (one-time purchase of materials and prepayment to contractors).
The company takes out a short-term six-month working capital loan of $1 million and actually uses it to finance construction. Six months later, the loan is returned and a new loan is taken out on the same terms and for the same amount ($1 million).
From an economic point of view, this is one loan, which is simply extended for 6 months, and naturally, all interest on the loan is subject to capitalization during the year of construction. However, from a formal point of view, PBU 15/2008, the second loan is in no way related to the construction of the facility (after all, all costs were incurred at the beginning of construction), and interest on the second loan in accordance with PBU 15/2008 should be recognized as period expenses.
Capitalized interest. How does IAS 23 determine the amount of general borrowing costs that need to be capitalized as part of a qualifying asset?
The IASB has proposed a very elegant solution to this issue. There is no need to determine which specific general purpose loans and to what extent were used to create a qualifying asset, as, for example, required by PBU 15/2008. An initial identification that general purpose loans (or a single loan) were used to finance the creation of a qualifying asset is sufficient.
In this case the formula is as follows:
Capitalized Borrowing Costs = Capitalization Rate x Cost per Asset
Capitalized borrowing costs x Actual accrued borrowing costs
Capitalization rate equal to the weighted average of borrowing costs remaining outstanding during the period (excluding special loans intended to finance the creation of an asset). The default period in international standards is annual. reporting period. However, if a company presents interim financial statements in accordance with IAS 34 Interim Financial Reporting, the period for capitalization purposes will be the interim reporting period (month, quarter or half-year). It will also not contradict the requirements of IFRS if in the accounting policy for the purposes of applying IAS 23 the company establishes its own (say, monthly) period for determining the capitalization rate.
Determination procedure asset costs not established by standard. In practice, the average cost per asset over the period is usually used.
Naturally, the procedure for determining the costs of an asset should also be fixed in the accounting
Note!
Asset costs are the total costs of the asset, not just those incurred during the period.
Enterprise policy.
Example
During the reporting period, the enterprise also presents quarterly interim reports.
On April 1, 2013, the company began construction of treatment facilities. They are expected to take one year to complete.
According to the interim financial statements and preliminary version of the annual financial statements for 2013, investments in the construction of treatment facilities (excluding capitalized interest) amounted to:
On May 1, 2013, the company received a short-term bank loan in the amount of $5 million for a period of 6 months at a rate of 12 percent per annum (hereinafter, the interest rate of the loan provided coincides with the effective interest rate).
On November 1, 2013, the company received an annual bank loan in the amount of $6 million for a period of 1 year at an annual rate of 11 percent.
The analysis showed that the proceeds from both loans were used to finance the construction of wastewater treatment plants.
In addition, throughout 2013, the company used a bank overdraft, the balance of which at the end of each month was $3 million. The overdraft was provided by the bank at a rate of 14 percent per annum.
It is required to determine the amount of expenses that the enterprise is obliged to capitalize as part of the costs of treatment facilities.
Solution. Wastewater treatment plants are a qualifying asset because they require a long time to construct. Because general purpose borrowings were used to finance the construction of wastewater treatment facilities, it is necessary to capitalize the related general purpose borrowing costs as part of treatment facility costs.
Calculation of actual costs for general purpose loans in the second quarter of 2013:
· overdraft in the amount of 3 million US dollars – 105 thousand US dollars (3000 thousand x 14% x 3 months / 12 months);
· for a loan of 5 million US dollars – 100 thousand US dollars (5000 thousand x 12% x 2 months / 12 months).
Total borrowing costs in the second quarter of 2013 – 205 thousand US dollars.
Calculation of actual costs for general purpose loans in the third quarter of 2013:
· for a loan of USD 5 million – USD 150 thousand (USD 5,000 thousand x 12% x 3 months / 12 months).
Total borrowing costs in the third quarter of 2013 – 255 thousand US dollars.
Calculation of actual costs for general purpose loans in the fourth quarter of 2013:
· overdraft in the amount of USD 3 million – USD 105 thousand (USD 3,000 thousand x 14% x 3 months / 12 months);
· for a loan in the amount of USD 5 million – USD 50 thousand (USD 5,000 thousand x 12% x 1 month / 12 months);
· for a loan in the amount of 6 million US dollars 110 thousand US dollars (6000 thousand US dollars x 11% x 2 months / 12 months).
Total borrowing costs in the fourth quarter of 2013 – 265 thousand US dollars.
Calculation of the capitalization rate for outstanding loans at the end of the II, III and IV quarters of 2013:
· capitalization rate in the second quarter – 13.0% ((105 + 100) / (3000 x 3 months / 12 months + 5000 x 2 months / 12 months));
· capitalization rate in the third quarter – 12.8% ((105 + 150) / (3000 x 3 months / 12 months + 5000 x 3 months / 12 months));
· capitalization rate in the fourth quarter – 12.3% ((105 +110) / (3000 x 3 months / 12 months + 6000 x 2 months / 12 months)).
Please note that in the fourth quarter the capitalization rate is calculated only taking into account the costs of outstanding loans at the end of the reporting period (December 31, 2013).
Calculation of costs (average) for the construction of treatment facilities in the II, III and IV quarters of 2013:
· construction costs in the second quarter – 2500 thousand US dollars ((5000 + 0) / 2);
· construction costs in the third quarter – 10,000 thousand US dollars ((15,000 + 5,000) / 2);
· construction costs in the fourth quarter – 17,500 thousand US dollars ((20,000 + 15,000) / 2).
The calculation of capitalized costs for loans as part of the costs of construction of treatment facilities in 2013 is shown in Table 4.
Table 4. Calculation of capitalized costs for loans as part of construction costs
At the end of 2013, as part of the costs of construction of treatment facilities, it is necessary to capitalize the costs of general purpose loans in the amount of 601 thousand US dollars.
The amount of USD 124 thousand (205 thousand - 81 thousand) will be reflected in profit and loss as borrowing costs.
Conclusion
We looked at the basics of IAS 23 Borrowing Costs and found that the core idea of the standard is that if borrowings are used to finance the creation of qualifying assets, they must be capitalized as part of the cost of the asset. All other borrowing costs are recognized as expenses for the reporting period.
The IASB has proposed simple and convenient ways capitalization of borrowing costs depending on the nature of the loan. If the loan is specifically obtained to finance the creation of a qualifying asset, then all interest less investment income is subject to capitalization.
If general-purpose loans are used to finance the creation of a qualified asset, then the calculation of borrowing costs subject to capitalization is also quite simple - this is the product of the capitalization rate by the amount of costs for the qualifying asset (but not more than the actual accrued borrowing costs). In this case, the calculation does not depend on what specific general purpose loans were used to finance the qualified asset, or in what proportion this happened.
The company must approve in its accounting policies:
- a methodology for determining whether general purpose borrowing is used to finance the creation of qualifying assets;
- the period used to calculate the capitalization rate;
- the procedure for determining the costs of a qualifying asset (average or reporting date).
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MINISTRY OF EDUCATION AND SCIENCE OF THE RUSSIAN FEDERATION
FSBEI HPE "VOLGA STATE TECHNICAL UNIVERSITY"
Department accounting and audit
Test
by discipline:
"International Financial Reporting Standards"
« Comparative analysis IFRS No. 23 “Borrowing Costs” and PBU 15/2008
“Accounting for loans and credits and the costs of servicing them”"
Performed:
student gr. ZBUA-51(6 years)
Chemodanova O. O.
Checked: k.e. n,
Associate Professor of the Department of Accounting
accounting and audit Yakovleva L. Ya
Yoshkar-Ola
Introduction
Similarities and differences between IFRS No. 23 “Borrowing costs” and PBU 15/2008 “Accounting for loans and credits, costs of servicing them”
Conclusion
Introduction
More and more often, organizations have to use borrowed funds in their work. At the same time, it’s no secret that the payment for such financial “help” is quite significant interest.
Accounting for interest on loans and borrowings always raises many questions for accountants. Since in the Russian Federation, from January 1, 2009, the procedure for accounting for expenses associated with the fulfillment of obligations under received loans and credits is regulated by the new PBU 15/2008, approved by Order of the Ministry of Finance of Russia dated October 6, 2008 N 107n. Regulation 15/2008 is quite close in content to IAS 23 Borrowing Costs. This serves as evidence of the gradual transition of Russian accounting practice to international standards.
The fundamental principle of accounting for borrowing costs under IAS 23 is that borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are included in the cost of that asset. Such borrowing costs are capitalized to the extent that it is probable that future economic benefits from the qualifying asset will flow to the entity and the costs can be measured reliably. Other borrowing costs should be recognized as expenses in the period in which the entity incurred the costs.
The purpose of the test is to conduct a comparative analysis of the methodology for accounting for borrowing costs in Russian and international accounting, based on a study of IFRS 23 and PBU 15/2008.
The object of work is the standards IFRS 23 and PBU 15/2008.
The subject is accounting for borrowing costs in accordance with IFRS 23 and PBU 15/2008.
Comparative analysis of IFRS No. 23 “Borrowing costs” and PBU 15/2008 “Accounting for loans and credits, costs of servicing them”
The rules for accounting for borrowing costs are established in IAS 23 “Borrowing Costs” (the new version of IFRS is applied from January 1, 2009) and PBU 15/2008 “Accounting for Borrowing Costs”, approved by Order of the Ministry of Finance of Russia dated 08.11. 2010 N 1144n (hereinafter referred to as PBU 15/2008). PBU 15/2008 in most cases follows the rules and recommendations set out in IAS 23, although in some situations there are differences between them.
According to IAS 23, borrowing costs are interest and other expenses incurred by an organization in connection with the receipt of borrowed funds. Based on PBU 15/2008, these expenses are associated with fulfilling obligations on loans received (including raising borrowed funds by issuing bills, issuing and selling bonds) and loans (including commodity and commercial).
The composition of borrowing costs according to IAS 23 is wider than in PBU 15/2008. Borrowing costs IAS 23 includes interest on bank overdrafts and short-term and long-term loans; amortization of discounts or premiums associated with loans; amortization of additional costs incurred in connection with arranging for a loan; interest on finance lease; exchange differences arising from borrowings in foreign currencies.
In accordance with paragraph 3 of PBU 15/2008, it is determined that borrowing costs are interest due to the lender (creditor), as well as additional borrowing costs. In this case, additional costs are the amounts paid for information and consulting services; amounts paid for the examination of a loan agreement (credit agreement); other expenses directly related to obtaining loans (credits). All additional costs directly related to obtaining loans and borrowings are classified as other expenses in the reporting period in which they were incurred. However, PBU 15/2008 also allows for uniform inclusion additional expenses for loans and credits during the term of the credit agreement or loan agreement.
The fundamental principle of accounting for borrowing costs in accordance with paragraph 9 of IAS 23 is the following: borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are included in the initial cost of that asset. Such borrowing costs are capitalized to the extent that it is probable that future economic benefits from the qualifying asset will flow to the entity and the costs can be measured reliably. Other borrowing costs should be recognized as expenses in the period in which the entity incurred the costs.
The fundamental principle of accounting for borrowing costs in accordance with clause 6 of PBU 15/2008 is somewhat different: borrowing costs are reflected in accounting in the reporting period to which they relate. They are recognized as other expenses of the organization. As well as small businesses, with the exception of issuers of publicly placed valuable papers, has the right to recognize all borrowing costs as other expenses. However, there is an exception to this rule: interest payable to the lender (creditor), directly related to the acquisition, construction and (or) production of an investment asset, is included in the cost of the latter, unless otherwise established by clause 7 of PBU 15/5008. PBU 15/2008 stipulates that interest on loans and borrowings is included in other expenses or applied to the cost of the investment asset evenly, regardless of the conditions for the provision of borrowed funds. In this case, interest can be reflected in accounting based on the terms of a loan or credit only if such reflection of interest does not differ significantly from straight-line inclusion.
International Standard IAS 23 paragraph 5 defines a qualifying asset as follows: it is an asset that necessarily requires a significant amount of time to prepare for its intended use or sale. In PBU 15/2008, instead of the term “qualifying asset”, the concept “investment asset” is used. In this case, two conditions for recognizing an investment asset are named: not only significant time, but also significant expenses. In accordance with paragraph 7 of PBU 15/2008, an investment asset is understood as an object of property, the preparation of which for its intended use requires a long time and significant costs for acquisition, construction and (or) production.
According to paragraph 7 of IAS 23, depending on the circumstances, qualifying assets may be: inventories that require significant time to bring them to marketable condition, manufacturing enterprises, electric power enterprises, intangible assets, investment property. The following are not qualifying assets (clause 7 of IAS 23): financial assets and inventories produced or otherwise created in a short period of time, assets that, upon acquisition, are ready for use for their intended purpose or for sale. PBU 15/2008 clause 7 considers only fixed assets. Investment assets include objects of unfinished production and construction in progress, which will subsequently be accepted for accounting by the borrower and (or) customer (investor, buyer) as fixed assets (including land), intangible assets or others outside current assets.
According to paragraph 17 of IAS 23, an organization is required to begin capitalizing borrowing costs as part of the cost of a qualifying asset from the initial date. In this case, the starting date is the date on which the organization first fulfilled all of the following conditions:
incurred expenses on this asset;
incurred borrowing costs;
The work necessary to prepare the asset for its intended use or sale has begun and continues.
The activities required to prepare an asset for its intended use or sale include more than just the physical creation of the asset itself. These activities may include technical and administrative work that precedes the physical creation of the asset. For example, activities related to obtaining permits necessary to begin construction.
In accordance with clause 9 of PBU 15/2008, it defines similar conditions, under which the costs of loans and borrowings are included in the value of the investment asset:
expenses for the acquisition, construction and (or) production of an investment asset are subject to recognition in accounting;
borrowing costs associated with the acquisition, construction and (or) production of an investment asset are subject to recognition in accounting;
work has begun on the acquisition, construction and (or) production of an investment asset.
In accordance with paragraph 20 of IAS 23, an entity must suspend the capitalization of borrowing costs for extended periods when active modification activities are interrupted. The exception is during periods when the entity is undertaking significant technical and administrative work or when a temporary delay is a necessary part of the process of preparing an asset for its intended use or sale. For example, capitalization continues over a long period of time when high level water delays the construction of a bridge if such water levels are normal for a given geographic region.
PBU 15/2008 clause 11 specifies during what period the inclusion of interest on loans in the value of an investment asset is suspended. If the acquisition, construction and (or) production of an investment asset is suspended for a period of more than 3 months, interest on loans ceases to be included in the cost of the investment asset from the first day of the month following the month of suspension of the acquisition, construction and (or) production of such an asset. The period during which additional approval of technical or organizational issues that arose during the acquisition, construction and (or) production of an investment asset is not considered a suspension of work. Moreover, from the first day of the month following the month of suspension of work on the asset, and until the last day of the month in which work on the investment asset resumed, interest on loans and borrowings is included in other expenses of the organization.
In accordance with paragraph 22 of IAS 23, capitalization of borrowing costs must cease when substantially all work necessary to prepare the qualifying asset for its intended use or sale has been completed. A property is generally considered ready for intended use or sale when its physical construction is completed, although day-to-day administrative work may still continue. If only minor improvements remain, such as finishing the object in accordance with the requirements of the buyer or user, this indicates almost complete completion of the work.
Similar requirements to stop capitalizing interest on loans are contained in clauses 12 and 13 of PBU 15/2008. Interest payable to the lender (creditor) ceases to be included in the value of the investment asset from the first day of the month following the month of the earlier event of the two listed:
cessation of work on this asset;
the beginning of using an investment asset for the manufacture of products, performance of work, provision of services (despite the incompleteness of work on the acquisition, construction and (or) production of the investment asset).
International Standard IAS 23 clarifies the procedure for ceasing capitalization of borrowing costs in paragraph 24 when construction of a qualifying asset is completed in parts. Where each part of a qualifying asset can be used while construction of other parts continues, capitalization of borrowing costs should cease when substantially all work necessary to prepare that part of the asset for its intended use or sale has been completed. An example of such a qualifying multi-part asset is a business center consisting of several buildings, each of which is separately usable. At the same time, if we are talking about an industrial company that combines several production processes carried out sequentially in different workshops of the company located on the same site (for example, steel rolling production), then the capitalization of borrowing costs will be suspended only upon complete completion of the work. PBU 15/2008 does not contain such requirements to stop capitalizing borrowing costs.
In accordance with paragraph 12 of IAS 23, the amount of borrowing costs allowed for the capitalization of a qualifying asset must be determined as the actual costs incurred on that borrowing during the period, less any investment income from the temporary investment of those borrowed funds. In some cases, borrowed funds received by an entity may be temporarily invested before they are spent on a qualifying asset, and the entity receives investment income. Such income is deducted from the amount of borrowing costs incurred.
A similar rule is contained in clause 10 of PBU 15/2008. Interest on loans related to the acquisition, construction and (or) production of an investment asset is reduced by the amount of income from the temporary use of funds received from loans (credits) as long-term and (or) short-term financial investments.
According to paragraph 14 of IAS 23, to the extent that an entity borrows funds for general purposes and uses them to acquire a qualifying asset, the amount of borrowing costs allowed for capitalization should be determined by applying the capitalization rate to the costs of that asset . In this case, the capitalization rate should be the weighted average of borrowing costs in relation to the organization's loans remaining outstanding during the period, with the exception of loans received specifically for the acquisition of a qualifying asset. However, the amount of borrowing costs capitalized by an entity during a period must not exceed the amount of borrowing costs incurred during that period.
In paragraph 14 of PBU 15/2008, it considers a different approach to calculating capitalized expenses. If funds from loans (credits) received for purposes unrelated to such work are spent on the acquisition, construction and (or) production of an investment asset, interest on loans is included in the cost of the investment asset in proportion to the share of these funds in total amount loans (credits) payable to the lender (creditor), received for purposes not related to the acquisition, construction and (or) production of such an asset. In this case, the calculation of the share of interest on loans to be included in the cost of the investment asset is based on the following assumptions specified in subclause 4 of clause 14:
rates on all loans (credits) are the same and do not change during the reporting period;
work on the acquisition, construction and (or) production of an investment asset continues after the end of the reporting period.
However, calculations made by organizations may be based on other assumptions.
Similarities and differences between IFRS No. 23 “Borrowing costs” and PBU 15/2008 “Accounting for loans and credits, costs of servicing them”
Analogous to IFRS IAS 23 standard Borrowing costs“in Russian accounting is PBU 15/2008 “Accounting for expenses on loans and credits”, approved by Order of the Ministry of Finance of Russia No. 107n dated October 6, 2008 (began to be applied on January 1, 2009). Last changes were introduced by Order No. 144n dated November 8, 2010.
Similarities:
|
Cost accounting in IAS 23 |
|||
|
Borrowing costs |
This is interest due to the lender, as well as additional expenses: amounts paid for the examination of the terms of the loan agreement, information and consulting services, and other expenses directly related to obtaining loans. In Russian accounting, the procedure for reflecting various exchange rate differences is given in PBU 3/2006, so there is no need to repeat these norms in PBU 15/2008. |
This interest and other expenses incurred by the company in connection with obtaining borrowed funds: |
|
|
Reflection |
They relate to other expenses and are reflected in the period in which they were incurred, except for expenses that are subject to capitalization. |
Refer to other things expenses are reflected in the period in which they were incurred, except for expenses that are subject to capitalization. |
|
|
Conditions for capitalization of costs: |
Simultaneous execution: |
Simultaneous performance: Expenses have been incurred on this asset; Borrowing costs have arisen; The work necessary to prepare the asset for its intended use or sale has begun, such work may include: technical and administrative work prior to the start of the creation of the asset itself; creating the most qualifying asset. |
|
|
Deduction of investment income |
Interest payable is reduced by the amount of income from the temporary use of funds received from loans as long-term and/or short-term financial investments. |
At receiving income from the temporary investment of borrowed funds, any investment income received on such funds must be subtracted from the amount of borrowing costs incurred. |
Differences
|
Accounting for borrowing costs in PBU 15/2008 |
Cost accounting in IAS 23 |
||
|
Asset name |
An investment asset is an object of property, the preparation of which for its intended use requires a long time and significant expenses for acquisition, construction and/or production. |
Qualified an asset is one that necessarily requires a significant amount of time to prepare for its intended use or sale. |
|
|
Suspension of capitalization |
If the acquisition, construction and/or production of an asset is suspended for more than 3 months, then from the 1st day of the month following the month of suspension of work on the asset until the last day of the month in which work on the investment asset resumed, interest is not capitalized, and are included in other expenses. |
Capitalization of costs should pause during extended periods when active modification activities are interrupted. |
|
|
Additional borrowing costs |
Can be expensed as a lump sum at the time of their occurrence; |
They are depreciated, i.e. they are expensed on a straight-line basis. |
Conclusion
In modern economic conditions survival commercial organization It is almost impossible without borrowing funds for various purposes. The main source of additional financing is bank loans.
A positive aspect in updating accounting regulations in 2008 was the introduction new edition PBU 15/2008 “Accounting for expenses on loans and credits” in relation to financial statements 2009. It has become significantly shorter and brought us closer to international financial reporting standards.
In this test work reviewed all the main positions of PBU 15/2008. Conducted a comparison with the IFRS 23 “Borrowing Costs” standard.
Thus, we can conclude that the problem of accounting for loans has now been sufficiently developed and requires detailed study.
List of used literature
Decree of the Government of the Russian Federation dated 03/06/1998 No. 283 “On approval of the Accounting Reform Program in accordance with IFRS”
Accounting Regulations “Accounting for assets and liabilities, the value of which is expressed in foreign currency” (PBU 3/2006) approved by Order of the Ministry of Finance Russian Federation dated November 27, 2006 No. 154n.
Accounting Regulations “Accounting for expenses on loans and credits” (PBU 15/2008), approved by Order of the Ministry of Finance of the Russian Federation dated October 6, 2008 No. 107n.
IFRS 23 Borrowing Costs.
Financial accounting: Textbook for universities / Ed. prof. Yu.A. Babaeva. - M.: University textbook, 2011. - 525 p.
Bilyk Yu.A. Accounting for loans and credits in 2009 // Accountant Consultant. - 2009. - No. 4. - p.37-47
Blokhin K.M. How to determine the capitalization period // IFRS: application practice. - 2011. - No. 2. - p.57-61
Borisenko V. Accounting for borrowing costs in accordance with IFRS 23 “Borrowing costs” // Financial newspaper. - 2010. - No. 49. - p.11
Eremina M.D. We take into account credits and loans // Accountant Consultant. - 2008. - No. 7. - pp. 16-24 accounting costs loan credit
Rzhanitsyna V.S. New in the methodology of loans and credits according to PBU 15/2008 // Accounting. - 2009. - No. 1. - p.5-10
Fomicheva L.P. Accounting for credits and loans // New in accounting and reporting. - 2010. - No. 8. - p.18-27
Posted on Allbest.ru
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IAS 23 Borrowing Costs
Common practice for Russian companies, however, like their foreign colleagues, is to attract borrowed funds to finance their activities.
Liabilities for borrowed funds are financial obligations, the repayment of which is made in cash or other financial assets. Borrowing obligations incur additional costs associated with interest on loans, the accounting for which is discussed in a separate standard, IAS-23 “Borrowing Costs”.
In accordance with the basic standard rule for recognizing borrowing costs, these costs must be recognized as expenses in the period in which they are incurred, regardless of the terms of the loan, that is, regardless of in what form and when payments on loans and advances are made.
The standard specifies that the following are recognized as borrowing costs:
Interest on bank overdrafts, short-term and long-term loans;
Amortization of discounts or premiums associated with borrowed funds;
Amortization of additional costs that were incurred in connection with obtaining loans and borrowings;
Finance lease payments paid in excess of the principal (cost) of the leased property;
Exchange differences arising on loans in foreign currency, to the extent that they are considered an adjustment to the cost of repaying loans.
If funds are borrowed for general purposes
The amount of costs should be determined by applying a capitalization rate to the costs of the relevant asset, which is calculated as a weighted average of the costs in relation to the company's borrowings remaining outstanding during the period, other than target loans.
∑ capitalized costs
∑ period costs
All loans are not targeted.
Capitalization rate = (1,000 * 20% + 5,000*15%+10,000*10%)/ (1000+5,000+10,000)
If 5,000 is 15% target, then:
Capitalization rate = (1,000*20% + 10,000*10%)/(1,000+10,000)
Interest on loans and borrowings must be recognized in the reporting period in which obligations on the loan or borrowing arose and existed, regardless of the period in which, according to the terms of the loan (loan), they must be paid to the lender who lent the funds. The amount of interest recognized (accrued) in the reporting period is determined by calculation using the following formula:
SP = ----------,
where SP is the amount of interest accrued in a given reporting period;
N is the interest rate under the terms of payment of which borrowed funds are provided;
D - the number of days of use of borrowed funds in a given reporting period;
SZ - the amount of the loan obligation in a given reporting period, on which interest is accrued;
PP - the period for which the established interest rate is calculated. Typically, the interest rate is set for an annual period. They set, for example, a rate of 14% per annum based on an annual period. But interest rates may be established per quarter, month or other period, less than an annual period. For example, the norm is 1% per week.
Example. On September 12, the organization received a loan from a bank for a period of one month in the amount of 300 million rubles. with an interest rate of 28% per annum. Interest is paid at the end of the term, along with the repayment of the debt amount. In the balance sheet for the period ending September 30 (in the financial statements as of October 1), the amount of interest for the period from September 13 to September 30 should be accrued and recognized as an expense in September. The day the loan was received (September 12) is not taken into account.
(28 x 18 x 300) : (365 x 100) = 4.2 million rubles.
The amount of interest is 4.2 million rubles. should be recorded as an expense in September, and since it has not been paid to the bank, in balance sheet add it to the amount of the principal debt, recognizing the loan obligations as of the reporting date as equal to 304.2 million rubles.
Amortization of discounts or premiums on loans received in equal amounts is recognized as expenses for the reporting periods to which they relate. For example, on September 15, the organization received 300 million rubles against a bill of exchange. The bill of exchange becomes due in 125 days, not counting the day of its issuance. The amount of the bill to be paid is 325 million rubles. Upon receipt of money in the amount of 300 million rubles. they will be credited to the organization’s bank account with the simultaneous reflection of the obligation on the bill in the amount of 325 million rubles. Consequently, the premium on the bill is 25 million rubles. must be repaid within 125 days, according to: 25: 125 = 0.2 million rubles. in a day. The amount for 15 days of September is written off as expenses in the financial statements for 9 months: 15 x 0.2 = 3 million rubles. The remaining amount is 22.5 million rubles. should be recognized in the balance sheet as of October 1 as deferred expenses. In the reporting for the fourth quarter, in which there are 92 days, the following should be recognized as an expense: 92 x 0.2 = 18.4 million rubles, leaving on the balance sheet as of January 1 as deferred expenses: 22 - 18.4 = 3.6 million rubles, which will be written off as an expense in the next reporting quarter upon payment of this bill.
Amortization of additional costs incurred in connection with the receipt of loans and advances is carried out evenly over the entire period of use of borrowed funds in the same manner as described above for recognizing amortization on discounts and premiums.
Exchange differences arising on loans in foreign currency are especially important to determine based on the amounts of interest capitalized in accordance with the acceptable alternative procedure for accounting for borrowing costs, which will be discussed below. Exchange differences arising as costs on borrowings denominated in foreign currencies are recognized to the extent that these exchange differences adjust the amount of interest paid on such borrowings.
Example. The organization received a loan in foreign currency from a non-resident in Russia in the amount of 420 thousand pounds sterling, on which interest was accrued but not paid at the reporting date in the amount of 8.4 thousand pounds. When drawing up the report, an exchange rate difference was accrued for the amount of the specified liability, increasing the balance of the organization’s liability by 943.6 thousand rubles. Of this amount, the exchange rate difference should be attributed to borrowing costs (interest): 943.6: 428.4 x 8.4 = 18.5 thousand rubles.
Acceptable Alternative Treatment for Borrowing Costs
The standard allows that each organization, instead of the main procedure for accounting for borrowing costs, can choose an alternative, which must be stated when disclosing accounting policy. An alternative accounting treatment is that borrowing costs are recognized as an expense in the period to which they relate, less that portion that is capitalized and included in the cost of related qualifying assets.
A qualifying asset is an item whose preparation for beneficial use or takes a significant amount of time to sell. Qualifying assets include property, plant and equipment and other similar property that requires significant time and expense to acquire, construct, or produce. Other investments and assets produced in large quantities in a constantly repeating production cycle and in a relatively short period of time are not considered qualifying assets. Property that is ready for its intended use upon purchase and that can be sold without significant time-consuming work after purchase is not a qualifying asset.
The alternative treatment of borrowing costs adopted by an entity and declared as an applicable method in its accounting policies shall be applied consistently to all borrowing costs that are directly attributable to the acquisition, construction, or production of any and all qualifying assets of the entity, even if the carrying cost such an asset, after capitalization of borrowing costs, will exceed its fair value. But in such cases, it is allowed to write off the specified excess as expenses (losses) of the reporting period in which they were identified.
Borrowing costs capitalized at the cost of acquiring, constructing or producing a qualifying asset are the costs of borrowing money that were used solely to create (acquire) the qualifying asset. If borrowings are raised specifically to finance a qualifying asset, the borrowing costs capitalized in the cost of that asset are determined accurately and fairly simply. These are the actual costs of these loans. Otherwise, it is necessary to apply special calculations of the share of borrowing costs subject to capitalization. In complex cases, such estimates may be highly subjective and should be disclosed in detail in the notes to the financial statements.
Obtaining borrowed funds may be ahead of the actual timing of their use to finance qualifying assets. Naturally, borrowing costs may also arise, and they should be recognized before the start of financing the objects for which they are intended. Borrowed funds in such conditions can be temporarily invested in financial instruments, others investment projects, generating income. The amount of borrowing costs subject to capitalization when using the borrowed funds for their intended purpose is reduced by the amount of investment income previously received on them.
In all cases where borrowed funds are obtained for general improvement financial system organizations were actually used to finance a qualifying asset, the amount of capitalized borrowing costs is determined at the weighted average rate determined by the amount general loans remaining outstanding during this reporting period. Excluded from the total amount of borrowings outstanding for these calculations are amounts obtained specifically to finance qualifying assets. The standard emphasizes that the amount of borrowing costs capitalized during the reporting period should not exceed the total amount of borrowing costs recognized for that period.
An example of calculating the share of capitalized borrowing costs:
in thousand dollars
1. Total amount of loans outstanding
during the reporting period 1946
2. Including the amount of loans for financing
qualifying assets 1283
3. Total borrowing costs
in the reporting period 232
4. Including the amount of borrowing costs
to finance qualifying assets 179
5. Borrowed funds spent
to finance qualifying assets 1575
6. Including financed by
borrowed funds received for general purposes 371
7. Weighted average cost rate:
for general loans
(232 - 179) : (1946 - 1283) x 100 8%
Because (Total amount of borrowing costs in the reporting period - amount of borrowing costs to finance qualifying assets) : (Total amount of loans outstanding - amount of loans to finance qualifying assets) x 100
8. The amount of borrowing costs subject to
capitalization in the reporting period:
179 + ((1575 - 1283) x 0.08) = 202.4 202.4
Because amount of borrowing costs to finance qualifying assets + ((borrowed funds spent to finance qualifying assets - amount of loans to finance qualifying assets) * 8%
Note: the capitalized amount of borrowing costs in a given reporting period does not exceed the total amount of borrowing costs for the same period (232 > 202.4).
Borrowing costs begin to be capitalized, that is, included in the initial cost of an item of fixed assets or other qualifying asset, from the period in which the borrowing costs arose. this object, and are completed after all work on the object is completed and it is ready for its intended use or for sale. In relation to fixed assets, this is the complete completion of work on this facility and its transfer to operation. For other qualifying assets, capitalization of borrowing costs continues throughout the period in which the work necessary to prepare it for its intended use or subsequent sale begins and is being carried out. For example, borrowing costs incurred during periods when land acquired for subsequent development remained unused should not be capitalized. During the periods necessary work to prepare land for construction, borrowing costs are capitalized over the entire period of completion of the work.
When construction of an individual item of property, plant and equipment is completed in parts and each part of the item is ready for its intended use, capitalization of borrowing costs for that part of the item ceases. It continues through other parts of the object that are not yet ready for use. But if the completed portion of a facility cannot be used for its intended purpose while construction of other portions of the facility continues, capitalization of borrowing costs may cease only when the entire facility is ready for its intended use. It is not uncommon for a situation where the construction of a separate fixed asset item has been completed and it has been transferred for its intended use, but costs for the outstanding portion of the loan continue. These borrowing costs are no longer capitalized, but are recognized as an expense of the reporting period in which they arose, that is, they are included in the reduction of profit for that reporting period.
During periods in which construction or production of a facility is interrupted for an extended period of time, capitalization of borrowing costs is suspended. Borrowing costs in these periods are reduced to reported profit. If the construction of an object is suspended, but technical and administrative work on this object continues: preparation or revision of design estimates, documents for obtaining the necessary permits from government authorities, etc., then the capitalization of borrowing costs is not suspended. If the delay or interruption of work at a facility is caused by technical, natural or other so-called objective reasons provided for by projects and work plans, then the capitalization of borrowing costs continues in the periods in which they arose, regardless of the temporary suspension of work at the facilities.
The notes to the financial statements must disclose the accounting policies used to account for borrowing costs, the amount of costs capitalized in the reporting period and the average capitalization rate used to calculate the cost of borrowings obtained for other purposes but diverted to invest in qualifying assets.
Taking into account the fact that domestic companies most often generate IFRS reporting by adjusting their reporting according to RAS, it is important to know the main differences between these accounting systems in relation to the reflection of borrowing costs.
According to fundamental principle IAS 23, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form the cost of that asset, that is, they are capitalized. Other borrowing costs must be recognized as expenses. PBU 15/2008 “Accounting for expenses on loans and credits” puts forward similar requirements. Thus, borrowing costs are recognized as other expenses, with the exception of that part of them that is subject to inclusion in the cost of an investment asset, unless otherwise established by this provision (clause 7 of PBU 15/2008).
Although PBU 15/2008 is largely consistent with the principles set out in IAS 23 Borrowing Costs, there are differences in some situations, for example:
inconsistency in the composition of borrowing costs;
different interpretations of the concept of “qualifying asset”;
differences in the timing criteria required to capitalize borrowing costs as part of a qualifying asset;
the difference in the recognition of additional costs associated with obtaining loans and credits.
These differences lead to difficulties at the stage of recognizing borrowing costs and necessitate adjustments during the reporting transformation process. Let's look at the main problems that domestic companies face when applying the provisions of IAS 23.
Let's compare the provisions of IAS 23 “Borrowing Costs” with the provisions of PBU 15/08 “Accounting for Borrowing Costs” according to the main characteristics.
The first sign is the scope of regulation.
In IFRS, accounting for borrowing costs is governed by IAS 23 “Borrowing Costs”. In RAS, accounting for borrowing costs is regulated by PBU 15/08 “Accounting for loans and credits and the costs of servicing them.”
The Borrowing Costs standard addresses issues related to the recognition of borrowing costs in financial statements.
The standard states that its provisions cannot be applied to borrowing costs such as:
Qualifying assets that are stated at fair value;
Inventories that are produced in large quantities and on a regular basis.
In addition to reflecting borrowing costs, PBU 15/08 also regulates issues directly related to the borrowed funds themselves. This is due to the fact that RAS does not have a special provision regulating the accounting of financial liabilities, similar to IAS 32-39. The issues of including borrowing costs in the value of assets, for example, are regulated by PBU 5/01 “Accounting for inventories.”
In general, we can say that after the entry into force of PBU 15/2008 “Accounting for costs of loans and credits”, this provision is a mirror image of its international counterpart IAS 23 “Borrowing costs”.
The second comparison point is the composition of borrowing costs.
IAS 23 characterizes borrowing costs as an entity's costs associated with obtaining debt financing.
Borrowing costs include according to IAS 23:
Interest on bank overdrafts and long-term and short-term loans and loans;
Amortization of the discount or premium associated with borrowing funds;
Amortization of additional expenses of the organization arising as a result of attracting debt financing;
Expenses in respect of finance leases in accordance with IAS 17;
Exchange differences associated with borrowing funds in foreign currency in the part considered as an adjustment to financial expenses for interest payments.
PBU 15/08 presents the following composition of borrowing costs:
Interest due to the lender (creditor);
Additional borrowing costs.
Additional borrowing costs are:
Amounts paid for information and consulting services;
Amounts paid for the examination of a loan agreement (credit agreement);
Other expenses directly related to obtaining loans (credits).
In IFRS, the list of borrowing costs is open, unlike RAS.
In RAS, interest on bank overdrafts is not included in borrowing costs.
Also, in RAS, due to the lack of a standard that would regulate finance leases, financial expenses associated with finance leases are not defined as part of borrowing costs.
Let's compare IAS 23 with PBU 15/08 in terms of how they characterize the concept of a qualifying / investment asset.
IAS 23 characterizes a qualifying asset as one that requires an extended period of time to be ready for use or sale.
The standard provides examples of qualifying assets such as inventories, fixed assets, investment property, and intangible assets.
RAS uses the concept of investment asset. An investment asset is an object of property, the preparation of which for its intended use requires a long time and significant expenses for acquisition, construction and (or) production.
The provision lists such examples of investment assets as objects of work in progress and construction in progress, which will subsequently be accepted for accounting by the borrower and (or) customer (investor, buyer) as fixed assets (including land), intangible assets or other non-current assets.
Under IAS 23, inventories and investments that are produced in significant quantities, on a recurring basis and over a short period of time are not included in the categories of qualifying assets.
IFRS considers a larger number of types of work that are carried out on the production or acquisition of an asset, therefore increasing the list of qualifying assets and the period for capitalization of borrowing costs.
The fourth point of comparison is the recognition of borrowing costs.
According to IAS 23, borrowing costs directly attributable to the formation of a qualifying asset are included in the cost of that asset. Other borrowing costs are recognized as an expense in the period in which they arise. IFRS considers the possibility of attributing costs to a qualifying asset based on the relationship between the occurrence of borrowing costs and the costs of acquiring (creating) the asset.
The costs of loans received for the purpose of financing a qualifying asset that arose during the capitalization period are included in the cost of the asset less income from the temporary investment of the loan, as financial investments.
In accordance with RAS, expenses on loans received are recognized as expenses for the period in which they were incurred, with the exception of the part that must be included in the cost of the investment asset.
Borrowing costs incurred in connection with the acquisition of an investment asset are subject to inclusion in the cost of acquisition of the asset minus income from the temporary use of borrowed funds as financial investments.
Thus, on this basis, RAS and IFRS are almost identical.
Let's compare the accounting of borrowing costs according to the fifth criterion - the period of capitalization of borrowing costs.
In IFRS, capitalization of borrowing costs begins when the following conditions are met:
The occurrence of costs associated with the acquisition of an asset;
The occurrence of borrowing costs;
Carrying out activities to bring an asset into a condition suitable for use or sale.
Capitalization of borrowing costs in the cost of a qualifying asset is suspended when there is interruption in the activity of making the qualifying asset available for use or sale, unless the interruption of activity is an integral part of the process of creating the asset.
Borrowing costs cease to be capitalized against the cost of the qualifying asset upon completion of the work necessary to bring the asset to a condition suitable for use or sale.
In cases where the creation of a qualifying asset is completed in parts, each of which is ready for use, although the creation of other parts is not completed, the capitalization of costs in the cost of the completed part ceases.
According to RAS, capitalization of borrowing costs in the cost of an investment asset is carried out if the following conditions are met:
The occurrence of expenses for the acquisition, construction and (or) production of an investment asset;
Start of work on the formation of an investment asset;
Availability of borrowing costs or obligations for their implementation.
The inclusion of costs for loans received and credits used to create this asset is suspended when work related to the acquisition, construction and (or) production of an investment asset is stopped for a period exceeding three months.
The period during which additional approval of technical and (or) organizational issues arising during the construction of the asset is carried out is not considered a suspension of work on the formation of the investment asset.
The inclusion of costs for received loans and credits in the cost of an investment asset ceases from the first day of the month following the month the asset was accepted for accounting.
PBU 15/08, unlike IFRS, specifies a temporary criterion for suspending the capitalization of borrowing costs.
However, PBU 15/08 does not contain provisions on stopping the capitalization of costs in the cost of part of the object.
It should also be noted that the conditions for capitalizing borrowing costs into the cost of an investment asset in accordance with PBU 15/08 are absolutely identical to those given in IFRS (IAS 23).
Let's compare the features of recognizing borrowing costs when it is difficult to unambiguously determine the relationship between loans and a qualifying asset.
If it is difficult to unambiguously determine the connection of received loans with a specific qualifying asset, then the costs subject to capitalization are determined using the capitalization rate.
The capitalization rate is the weighted average borrowing rate on all of the company's loans, excluding those loans received against a qualifying asset.
If funds from loans (credits) received for purposes not related to such acquisition, construction and (or) production are spent on the acquisition, construction and (or) production of an investment asset, then the interest payable to the lender (creditor) is included in the cost investment asset in proportion to the share of the specified funds in the total amount of loans (credits) due for payment to the lender (creditor), received for purposes not related to the acquisition, construction and (or) production of such an asset.
Also, IAS 23 states that the amount of capitalization costs cannot exceed the amount of borrowing costs that were incurred during a given period.
The next, seventh feature of comparison is impairment testing.
According to IAS 23, if the expected ending carrying amount of a qualifying asset exceeds its net realizable value or value in use, book value must be written off in accordance with the requirements of other standards.
PBU 15/08 does not provide for impairment testing.
Transitional provisions.
IAS 23 specifies that the amended standard applies to borrowing costs for which the cost capitalization date begins on or after the effective date of the standard.
RAS does not define the concept of transitional provisions.
Conceptual differences
If the accounting policies coincide and if borrowing costs are significant for the organization, then despite this, the reporting under RAS and IFRS will not coincide for the following two reasons:
Loan debt in accordance with RAS is reflected at actual cost assets received upon receipt, whereas in IFRS it is reflected at the fair value of assets received less initial costs under IFRS 39. Thus, the amount of accounts payable, as well as financial results for each period until its full repayment in IFRS will differ if the conditions for obtaining borrowed funds differ from market conditions.
Interest expenses in IFRS are not reflected evenly, as specified in PBU 15/08, but using the effective method interest rate. It is determined using the discount formula based on future cash flows by historical cost and periods financial liability. This rate is then multiplied each reporting period by the increasing amount of the liability, and the difference is recognized in the income statement as interest expense.
Comparative analysis of IFRS No. 23 “Borrowing costs” and PBU 15/01 “Accounting for loans and credits and the costs of servicing them”
The principles for accounting for debt on borrowed funds established by the national Russian standard PBU 15/01 and the similar international accounting standard (IFRS 23 “Borrowing Costs”) differ significantly.
Comparative characteristics allows us to state the following.
1. IFRS 23 Borrowing Costs provides two different ways accounting for costs of loans and borrowings. The first (standard) method involves attributing interest on loans and borrowings to expenses of the period in which they were incurred. The second (alternative) method, in addition to standard accounting, suggests the use of capitalization of borrowing costs in the value of assets, called qualifying ones, if borrowed funds were raised specifically for the acquisition of these assets.
At alternative way cost accounting, the initial cost of qualifying assets includes interest on loans and borrowings. A qualifying asset is one that necessarily requires a significant amount of time to prepare for its intended use or sale.
Here are examples of qualifying assets.
- 1. Inventories that require significant time to bring them to marketable condition. For example, a company produces 5-year-old wine. The company may consider this to be a qualifying asset.
- 2. Objects in progress capital construction, for example, a company is building a power plant, construction works will last 4 years. The company may consider this to be a qualifying asset.
- 3. Investment property, for example, a company acquired office building and plans to renovate it and rent it out to a third party. The company may consider this to be a qualifying asset.
Inventories that can be converted into goods in a short period of time (for example, the production of cottage cheese from milk, which takes several days; this cannot be considered a qualifying asset), as well as goods intended for further resale, do not qualify as qualifying assets.
IN Russian practice accounting in accordance with the norms of PBU 15/01, the procedure corresponding to the permissible alternative in IFRS 23 is applied. According to clause 12 of PBU 15/01, expenses on loans and credits received must be recognized as expenses for the period in which they were incurred, with the exception of that part of them, which must be included in the cost of the investment asset. A “qualifying asset” is called an investment asset in PBU 15/01, however, despite the difference in names, economic entity These concepts are the same: these are assets that require significant time to acquire and (or) construct and prepare for use.
So, PBU 15/01 requires, and IFRS 23 allows, the inclusion of borrowing costs directly related to the acquisition of an investment (qualifying) asset in its initial cost, however, unlike IFRS 23, PBU 15/01 makes a number of reservations prohibiting such inclusion in in some cases. Let's look at them.
In accordance with clause 13 of PBU 15/01, investment assets do not include objects acquired for resale. Thus, even if preparing these objects for use requires considerable time, the costs of borrowing funds will not be included in their cost. IFRS 23 does not have this limitation.
PBU 15/01 prohibits including borrowing costs in the cost of an investment asset for which, according to Russian accounting rules, depreciation is not provided (clause 23). IFRS 23 does not require the inclusion of borrowing costs in the cost of a qualifying asset to depend on whether the asset is depreciated.
From the requirement of PBU 15/01 to include borrowing costs only in the cost of those investment assets for which depreciation is charged, it follows that these costs should not be included in the cost of current assets, since depreciation is not provided for them. Reasoning this way, we can conclude that borrowing costs should not be included not only in the cost of goods, but also in the cost of inventories. Note that IFRS 23 does not contain this limitation.
PBU 15/01 does not propose accounting for costs of borrowings and credits in the manner that is indicated in IFRS 23 as the main one (reflecting interest on borrowed funds exclusively as part of current expenses).
- 2. PBU 15/01 establishes general principles accounting for debt on loans received, credits and borrowed funds issued, the description of which is not provided by IFRS 23. Thus, IFRS 23 does not contain instructions on the classification of debt on loans and borrowings into short-term and long-term, the need to transfer urgent debt to overdue if there are grounds.
- 3. Both PBU 15/01 and IFRS 23 determine the composition of costs for loans and credits, including: “general” - interest on borrowed funds, additional costs - associated with raising borrowed funds and exchange rate differences arising when raising borrowed funds. At the same time, IFRS 23 classifies as expenses such expenses as gradual write-off (sometimes called depreciation) of income and expenses received as a result of the issue of bonds, financial payments under financial leasing, reflected in accounting in accordance with IFRS 17 “Lease”. PBU 15/01 refers to the costs of borrowed funds the amount differences, as well as interest, discount on bills and bonds due for payment.
- 4. IFRS 23 focuses on the recognition of borrowing costs under an acceptable alternative accounting treatment, determining the composition of borrowing costs allowed for capitalization; the moment of commencement of capitalization and suspension of capitalization; accounting for costs of loans and borrowings upon termination of capitalization.
The norms of PBU 15/01 (clause 29) in cases where borrowed funds received for purposes unrelated to its acquisition are spent to acquire an investment asset, also provide for the use of a “capitalization rate” when calculating interest for the use of these borrowed funds, but in The Russian standard uses the term “weighted average rate”. The procedure for its calculation is similar to the procedure established in IFRS 23.
When determining the amount of borrowing costs allowed for capitalization during the period, any investment income received on such funds is deducted from the amount of borrowing costs incurred (clause 16 of IAS 23). A similar requirement is contained in paragraph 26 of PBU 15/01, according to which the costs of received loans and credits associated with the acquisition of an investment asset are reduced by the amount of income from the temporary use of borrowed funds as long-term and short-term financial investments.
Under IAS 23, capitalization of borrowing costs as part of the cost of a qualifying asset must begin when:
expenses have arisen on this asset;
borrowing costs have arisen;
the work necessary to prepare the asset for its intended use or sale has begun.
According to the requirements of clause 27 of PBU 15/01, the inclusion of costs for received loans and credits in the initial cost of an investment asset is carried out if the following conditions are met:
incurrence of expenses for the acquisition and (or) construction of an investment asset;
the presence of actual costs of loans and credits or obligations for their implementation;
the actual start of work related to the formation of an investment asset.
Thus, the moment of the beginning of capitalization according to Russian and international standards is determined similarly.