Explanation of the borrowing cost criterion

The loans cost standard is an Egyptian Standard No. 14 International Standard No. 23 of the standards that have been amended in 2015 in the Egyptian Accounting Standards and the basic principle in this criterion is that the loans costs (interest) directly related to obtaining an asset or creating an asset that is charged on this asset as part of the cost in condition that that this asset qualifies for capitalization, as for other loans costs, they bear expenses in the income statement. This makes us understand the meaning of an asset that qualifies for capitalization

The most important criterion for loans costs

This standard is applied in all cases related to loaning costs, except for borrowing costs related to establishing or obtaining vital assets (Agriculture Standard).

Because it is measured at fair value as well as the stock that is made in large quantities or frequent and also loaning costs related to the cost of preferred stock because they are considered property rights

 

Terminology of loaning Cost Criteria (Farming Standard)

The loaning costs: are the benefits borne by the company as a result of loaning money

Qualifying Asset: It is an asset that requires a long period of time to be prepared for use or sale

If the stock is manufactured periodically and repeatedly, it is not considered a qualifying asset and the standard does not apply to it, which is often the majority of the stock to be present in all companies. Therefore, the assets ready for use or sale upon obtaining them for it are not considered as qualifying assets for capitalization...

 

What are the assets that qualify for capitalization?

The construction of a bridge or buildings takes a year or more to start its operation or take advantage of it. The cost of loaning is not only the cost of bank loans, but also the amortization of discounts and costs associated with loaning bonds and the additional costs associated with loans

If the company is going to build a commercial building or a mall as long as the construction takes a long time, the interest of the loans on the building is capitalized, but if the company has borrowed to buy even a fleet of luxury cars, they are not considered assets eligible for capitalization because they are assets ready for use directly when buying or selling these are general concepts based on loaning cost criterion

Accounting process of loaning costs

Accounting treatment of loaning costs

Before the loaning cost criterion was amended, there was more than one accounting treatment related to the loaning costs of fixed assets that qualify for capitalization, and there was a basic treatment which is that the interest of loans is recorded as an expense in the income statement. An alternative and permissible treatment is that the cost of loaning; Interest (added to the asset as part of its cost under certain conditions) Capitalization (becomes part of the indirect costs of the asset and is then charged through the depreciation of the asset on the income statement

This was amended in the international accounting standards and after that the Egyptian accounting standards and the basic accounting treatment was canceled, which is recording the interest of loans as an expense in the income statement during a period, and now available is the capitalization of loaning costs, i.e. adding interest to the asset in the presence of certain conditions for capitalization (capitalization means charging the borrowing cost on The asset is part of the cost, but not all types of loaning costs are subject to recycle (adding the interest of the loan to the cost of the asset).

When does the interest capitalization work begin?

When the company begins to spend on the asset (i.e., expenses related to the asset) licenses and building foundations, when the company begins, the company incurs the interest expenses of the loans, in effect when the company started to have the necessary activities related to preparing the asset for use or sale such as establishing bases for buildings and so on

When does the company begin to be pended from capitalizing loan interest?

Capitalization is pended when the process of building and constructing the asset is pended, except in cases where the stoppage is necessary as an important part of the process of creating or producing the asset in construction cases, especially according to each project, which means this, if the project, for example, was running and an administrative problem occurred between the company and the government or The company, whatever the need, and the project stops due to any reason - the capitalization of the interest of the loans is stopped, and in this case, the expenses are charged to the income statement                        

But if it is necessary to stop as part of the process of construction or production is not capitalized suspension means favors bearing interest on the original mean procedure performed, like that company to adopt a building and of course, which is to adopt all possible role halt construction period of things, especially engineering building materials.

In this case, capitalization of interest continues because stopping the completion of the construction is a necessary and engineering part, but if the construction stops due to a financial and administrative problem that is not specific to the technical or engineering aspects, then the capitalization is suspended, which means that it stops being charged on the cost of the asset

 

When does the company cease capitalization?

The company stops capitalization when the construction of the asset is completed and is ready for use or sale. When loans are obtained specifically to obtain the construction or production of a qualifying asset, the borrowing cost related to the qualifying asset is determined immediately and easily and it is easy to determine the cost of loaning costs eligible for capitalization, as we explained before that

The difficulty arises if the regulation of loaning and financing is central in the company between a holding company and groups of subsidiary companies, for example, or the company takes loans from the bank and then spends them on its projects. In this case, a weighted average of capitalization is calculated that can be applied to the qualifying asset and when the funds loaning specifically to finance a qualifying asset are not used Immediately, but it uses the asset other than the asset for which the amount was loaning to finance it, the loaning costs that are capitalized must be reduced by any investment income resulting from the investment of temporarily unused funds.

 

Clarifications on the cost of loaning in the financial statements

The company should disclose in the notes on the accounting policy relating to the recognition of the loan amount of the costs of loaning costs capitalized during the period of capitalization rate used the amount of loaning costs eligible for capitalization to determine if the increased carrying amount of the asset recorded eligible for capitalization value of recoverable

According to the accounting standards, the asset may not continue to be recorded in the books at more than its recoverable value (the net sales value of the asset or the net cash flows generated from the asset, whichever is greater)

If that happens, the carrying amount of the asset is reduced to the redemption value of the consideration and the loss of the difference in accordance with IAS 36 and the Special Accounting Standard down value of the asset.

 

Disclosure ... practical examples on the issue of the loaning cost

One company decided to set up a tunnel separating the two sides of the sides of the River Nile to avoid the occurrence of natural disasters and take two years to create the tunnel and the cost of constructing the bridge 20 million and provide a safety margin of the company borrowed 22 million pounds from 3 banks

And it used the increase in the amount of 2 million for the purposes of working capital loans was financing arrangement

Bank loans for 5 million, with an annual interest of 7%

7 million loans from institutions with an annual interest of 8%

Bonds were issued 10 million annual interest rate of 9%

In the first stage of the tunnel construction, there were funds available for use in the amount of 10 million pounds, the company invested it for a period of 6 months and the income resulting from the investment was half a million

. The answer

Capitalization of borrowing costs we calculate the weighted average cost rate of borrowed funds

= Total benefits + lump sum amounts

 (5 million * 7%) + (7 million * 8%) + 10 million * 9%)

Is 8.22%

Meaning the capitalization rate is 8.22%

Total borrowing costs = 20 million * 8.22% * 2 years = 3.28 million pounds

The 20 million is the cost of constructing the bridge

Investment costs that are capitalized = interest expense - investment income achieved with amounts not utilized temporarily, in order to understand this, we took a loan of 22 million to construct a bridge at a cost of 20 million

I had 2 million riyals to increase their use in any investment, and according to the example, half a million pounds were generated, so the interest that is capitalized on the original

Total benefits -

 Revenue Investment income earned on the amounts unexploited

=  million - 5. Million 3.288

Million pounds, which is to be drawn on the original 2788=

Another example of the loaning cost

A second idea... On the first of December 2002, the *** company started constructing homes for earthquake victims, and it is expected that construction will take 3 and a half years. Financing for the construction of the property was obtained by issuing a bond loan worth 7 million dollars at an annual interest rate

12% and these bonds are charged at a rate of 1.5%, issuance costs, and the project is also financed by issuing capital shares at a cost of 14% of the required capital. Calculation of the borrowing cost that can be capitalized according to International Standard No. 23

First: Since these properties take a long time to be constructed, they are eligible for capitalization and borrowing has been made to finance their construction. Therefore, borrowing costs are capitalized and calculated as follows:

Interest on bonds of 7 million = 7 million * 12% = 840,000

Depreciation of bond issuance costs = 15. * 700,000 * 3.5 years = 30,000

Total borrowing cost eligible for capitalization = 840,000 + 30,000 = 8,000,000

 

Capitalization is based on cost of the asset

An important idea ... and a company, for example, took out a loan of one million pounds to finance the construction of a building at an interest rate of 10% for a period of one year, and the building was completed during the same year, and during the year the company invested part of the loan in realizing an investment of 30,000 pounds.

Interest on the loan = 1,000,000 * 10% = 100,000

Capitalized costs = 100,000-30000 = 70000

 

Determine the cost of borrowing

Difficulty in the issue of capitalizing the cost of borrowing. If the company takes a group of loans and uses part of the borrowed funds in building a fixed asset, it is difficult for you to determine the borrowing cost of the asset and determine the capitalized costs on

The asset takes the weighted average of loans after eliminating the loan designated for the fixed asset

(Meaning if the company takes a group of loans, including a loan for a specific asset, this loan is excluded from the group of loans through which you will create a capitalization rate of 9.

As for the group of loans, the average interest rate, like the example that was previously explained, is taken from it, through which the borrowing cost is calculated and the part capitalized on the asset is determined according to the terms of the qualifying asset as we have explained, and the revenue resulting from investing part of the borrowed money is subtracted from the borrowing costs, if any.

As for the issue of interest and loans, and how the interest is calculated, we will see it with us in short-term loans

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