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Section 25: Borrowing Costs

Summary

Section 25 deals with the recognition and disclosures of borrowing costs. Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. It covers interest expense using the effective interest method, finance charges in relation to finance leases and exchange differences arising from foreign currency borrowings.

What is new?

Old GAAP does not have a specific standard on borrowing costs. While some guidance appears in FRS 15, this only relates to tangible fixed assets, therefore has a potentially narrower scope than Section 25.

Section 25 specifically deals with exchange differences on borrowing costs whereas under old GAAP this was not specifically addressed.

Section 25 defines what is a qualifying asset whereas this was not defined under old GAAP. Therefore, under old GAAP, entities may have capitalised interest which may not be allowed under Section 25 as it may not meet the requirement in relation to the asset.

What is different?

Section 25 deals specifically with the treatment of surplus investment income and the fact that this should be netted against the interest cost. Under old GAAP this was not specifically dealt with, however, in practice it was netted against the investment cost also.

Other standards affecting Section 25 where differences arise:

Section 35 Transition to FRS 102 – First time adopters that adopt a policy choice of capitalising borrowing costs can elect to treat the date of transition to FRS102 as the date the capitalisation commences.

What are the key points?

Accounting policy choice to capitalise qualifying borrowing costs or expense.

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use.

If a policy of capitalisation is adopted, then it must be applied consistently to a class of qualifying assets.

If funds are borrowed specifically to purchase an asset, the amount to be capitalised is the actual interest on those borrowings.

If the asset is funded from general borrowings then a weighted average rate from those borrowings is used, applied to the average carrying amount of the asset in the period.

Capitalisation begins when expenditure on the assets begins.

Capitalisation ceases when the asset is ready for its intended use or the sale is complete.

Disclosure required of the amount of borrowing costs capitalised and the rate used as well as the aggregate amount of interest in the cost of the qualifying asset.

What do accountants need to do?

Be aware of the differences between old GAAP and Section 25.

Advise companies on the benefits and drawbacks of capitalising borrowing costs.

Where entities adopt a policy of non-capitalisation on transition to FRS 102 but previously adopted a policy of capitalisation under old GAAP, then a transition adjustment will be required to derecognise the amount capitalised under old GAAP.

What do Companies need to do?

Be aware of the differences between old GAAP and Section 25.

Assess which policy choice is most appropriate for the entity.