Finance Costs

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International Accounting Standard 23 defines finance costs as “interest and other costs that an entity incurs in connection with the borrowing of funds”.

Finance costs are also known as “financing costs” and “borrowing costs”. Companies finance their operations either through equity financing or through borrowings and loans. These funds do not come for free. The providers of funds want reward for against there funds. The equity providers want dividends and capital gains. The providers of loans seek interest payments. Interest cost is the price of obtaining loans and borrowings.

Finance costs are usually understood to be referred to interest costs. Usually they are thought to refer to interest expense on short-term borrowings (for example bank overdraft and notes payable) and long-term borrowings (for example term loans and real estate mortgages). The term “finance cost” is broader and also includes costs other than just interest expense. Finance costs also include:

  • Amortization of discounts or premiums that are related to the borrowings
  • Amortization of ancillary costs incurred in connection with the borrowings or arrangements
  • Finance charges in respect of the finance leases
  • Exchange differences arising from foreign currency borrowings to the extent that they are regarded as adjustment to the interest cost

There are two accounting treatments for finance costs under IAS 23 Borrowing Costs:

  • The preferable treatment is to recognize finance costs as expense in the period in which they are incurred. When this treatment for recognizing finance cost is used, these costs should be expensed regardless of how they are applied.
  • The allowed alternative treatment capitalizes finance costs as part of cost of a qualifying asset, if these costs are directly attributable to the construction, production, or acquisition of that qualifying asset. Capitalization of finance cost is allowed only if it is probable that they will result in future economic benefits and they can be reliably measured (otherwise the finance costs are expensed).  

IFRS 9 Financial Instruments provides guidance on the recognition and measurement of financial assets and liabilities, including the accounting for finance costs. It requires that an entity use the effective interest method to calculate the amortized cost of a financial asset or liability and to allocate interest income or expense over the relevant period.

IAS 39 Financial Instruments: Recognition and Measurement, an older standard, also provides guidance on the accounting for finance costs. It requires entities to use the effective interest method to calculate the amortized cost of a financial asset or liability, and to allocate interest income or expense over the relevant period.

IFRS 16 Leases provides guidance on accounting for leases and also specifies how to account for finance costs on leases. It requires that finance costs on leases be included in the finance costs and be recognized as an expense in the statement of profit or loss, using the effective interest method.

It's important to note that IFRS 9 and IFRS 16 have replaced IAS 39, so entities should use the latest standards for the accounting of finance costs.

Quote jaffa, 16 March, 2012
Great.
Quote shima, 21 August, 2012
Quote
jaffa wrote:
Great.
exellent
Quote BOBBY, 30 November, 2012
GOOD
Quote Guest, 12 February, 2013
fantastic
Quote MUSENGI, 12 February, 2013
WONDERFUL
Quote gayatri, 23 May, 2013
thanx
Quote Guest, 7 June, 2013
Merci beaucoup.
Quote Zaid, 18 June, 2013
Good one
Quote 2lani, 30 August, 2013
perfect answers
Quote Guest, 5 September, 2013
need author name and book name where it taken from..?
Quote Vit. A., 5 September, 2013
Quote
need author name and book name where it taken from..?
Written using  IAS 23.
Quote Guest, 14 October, 2015
COOL WRITE-UP
Quote SEAD, 14 October, 2015
GOOOD
Quote Guest, 29 November, 2016
Thanks
Quote Guest, 9 October, 2018
EXCELLENT
Quote Accountant Hre, 22 January, 2020
How do you treat exchange rate differences between spot rate and the premium rate charged when buying foreign currency from a bank.
Quote Guest, 25 February, 2022
interest on car loan can be treated as financial cost????
Quote Guest, 25 February, 2022
interest on car loan can be treated as financial cost????

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