IHEC

ACCOUNTING REVIEW CASES

ACCOUNTING STANDARDS

BORROWING CHARGES
(NCT 13)

INTRODUCTION

Some assets have an acquisition, construction, or production period.

particularly long. To finance them, the company may be led to
borrow funds. The question that arises is whether the borrowing costs
Expenses supported during this period must be accounted for in the expenses of the financial year.
or considered as part of the cost of preparing these assets so that they
may be used as intended or sold.

The arguments for incorporating borrowing costs are as follows:

the borrowing costs are part of the acquisition costs;

the borrowing costs incorporated into the asset costs are compared to the
products from future periods;
This results in better comparability between the acquired assets and those that
are built.

The arguments against incorporating borrowing costs are as follows:

The attempt to link a borrowing cost with a specific asset is

arbitrary
Different financing methods can generate amounts
different incorporations for the same asset;
Accounting for borrowing costs as expenses of the period allows for obtaining
more easily comparable results.

Opponents of capitalization argue that it would lead to evaluating

differently an asset depending on whether it is financed by debt or by equity, to
less to admit also the incorporation of equity compensation; this
that everyone agrees to exclude.

The NCT 13 standard prescribes the accounting treatment of expenses (or costs)
of loan.

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 The borrowing costs are not limited to interest (on bank overdrafts and
short, medium, and long-term loans). They also include other costs
caused by a loan of funds such as:

the amortization of issue or repayment premiums;

b. the amortization of ancillary issuance costs;
c. the exchange rate differences on loans in foreign currencies, in the
measure where they can be considered as complements
of interest; and
the fraction of financial leases equivalent to interest.

In the case of loans issued in the form of bonds (where PE≤ VN≤
▪ the issue premium is the difference between the nominal value (NV) and the price
of emission (PE) ;
▪ The reimbursement bonus is the difference between the reimbursement price.
(PR) and the nominal value (VN).

These premiums are additional charges for the borrower; in the

accounting system of companies in Tunisia, they are spread over the duration of
the loan (in proportion to the accrued interest) in the form of an amortization that makes
part of the financial charges.

The NCT 13 standard provides that borrowing costs are recognized as expenses.
from the exercise during which they are incurred, unless they are incorporated into the
cost of a qualifying asset. This is the authorized treatment of standard IAS 23 Costs
of borrowing, the reference being the accounting of borrowing costs in
expenses of the financial year in which they are incurred.

QUALIFYING ASSETS AND INCORPORATION CONDITIONS

Qualifying assets are assets that require a long preparation period.

before they can be used or sold, such as:

▪ stocks requiring a long processing period before being

ready for sale;
▪ other assets such as factories, power generation facilities,
the highways and real estate investments.

The definition of qualifying assets calls for two remarks:

These assets can be fixed assets but also inventory of which the
the manufacturing or maturation period is particularly long (works
real estate, spirits...) ;

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 In the absence of precision, the assessment of the sufficiency of the duration
of putting into a state of use or sale is the responsibility of the company (and of
its auditors). The NCT 13 standard only states that manufactured assets
routinely or mass-produced on a basis
repetitive and a short period do not meet the conditions of
capitalization. The same applies to assets ready to be used or sold for
at the time of their acquisition, regardless of their production duration at
the supplier.

Section 23 of the NCT 04 standard, relating to Stocks, indicates that the charges
related financial à loans that financed cycles
supply, storage or production exceeding 12 months
are incorporable into the cost of acquiring or producing stocks.

Borrowing costs must be included in the costs of assets when they

meet the following three conditions:

they are directly attributable to the acquisition, construction or

production of an asset that may lead to cost capitalization
of borrowing;
The targeted asset can be an acquired, constructed, or produced asset.

The borrowing costs directly attributable to the acquisition of the

construction or to the production of an asset that may give rise to
Incorporation are those that would have been avoided if the expenses related to
the acquisition of this asset had not been made.

It is likely that they will generate future economic benefits for

the company;

They can be measured reliably.

All three conditions must be checked on each new occasion.

incorporation of borrowing costs.

If all the conditions are met, a company must continue to incorporate the
borrowing costs in the cost of the asset even if the carrying amount of the asset
exceeds its recoverable value. However, the carrying amount of the asset must be
reduced to recognize a loss of value (according to SIC - 2).

CALCULATION OF CAPITALIZABLE LOAN CHARGES

The amount that must be incorporated into the cost of a qualifying asset,
corresponds to the borrowing costs that could have been avoided if the expense related to
the qualifying asset had not been identified.

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 The identification of these costs is more or less easy depending on whether the financing of
the asset has been the subject of a particular loan or that the necessary funds have been
taken from all the company's resources.

To the extent that funds are borrowed specifically for the purpose of obtaining
of a qualifying asset, the amount of borrowing costs that can be included in the cost of
the asset must correspond to the actual borrowing costs incurred on this loan at
course of the period for preparing the asset for use or sale, deduction
make any potential income derived from the temporary placement of borrowed funds.

Ö Illustration: A company borrowed 3,000,000 DT to finance the

construction of its headquarters. The charges related to this loan have increased.
raised to 150,000 DT during fiscal year N. The borrowed amount exceeding
immediate needs of the company, part of the sum has been invested, providing
25,000 DT of financial products.

The amount of capitalizable interest for the financial year N is therefore:

150,000 DT - 25,000 DT = 125,000 DT

As funds are borrowed in general and used to

the acquisition of a qualifying asset, the amount of borrowing costs that can be capitalized to
the cost of the asset must be determined by applying the weighted average of costs
of borrowings (non-specific) for expenses related to the asset (including the
charges of loans previously included.

It should be noted that this way of proceeding generally leads to overestimating

the importance of indebtedness. Multiply the expenses related to the asset by the rate
representative of the weighted average cost of the company's borrowings during the
the period indeed assumes that this asset is fully financed by
loans, unrealistic assumption considering the mix (debts and equity)
of the financial structure of most companies.

In any case, the amount obtained must not exceed the charges.
of loans actually incurred during the period.

The expenses related to the qualifying asset are reduced by the grants received related to it.
to this asset.

Ö Illustration: A company whose fiscal year coincides with the calendar year has
undertook the construction of a building without seeking financing
particular. The loans and expenses accumulated at the beginning and at the closing of
The exercise N was as follows:

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 01 - 01 - N 31 - 12 - N Average

Loans:
▪ Loan A at 8% 1,000,000 800,000 900,000
▪ Loan B at 6% 1,500,000 1,500,000 1,500,000
2,500,000 2,300,000 2,400,000

Cumulative expenses 2,200,000 3,400,000 2,800,000

For exercise N, the interest on loans amounted to 170,000 DT.

▪ Average interest rate of loans in progress during fiscal year N:

[8% x 900,000 / 2,400,000] + [6% x 1,500,000 / 2,400,000] = 6.75%

▪ Capitalizable interest for the fiscal year N:

2,800,000 x 6.75% = 189,000 DT, capped at 170,000 DT.

The determination of borrowings directly attributable to the financing of an asset

particularly difficult in groups where financial decisions are
centralized at the level of a company (usually the holding) which distributes the
resources obtained between the different subsidiaries. In this case, the calculation of the rate
financial charges should take into account all borrowings
contracted by the parent company and its subsidiaries.

When the carrying amount of an asset, which includes embedded interests, is

greater than its recoverable value, the carrying amount is written down to
to reach this final value.

PERIOD OF INCORPORATION OF BORROWING COSTS

The incorporation of borrowing costs into the costs of an asset must begin
when:

expenses related to the property have been incurred;

borrowing costs are incurred;
c. activities that are essential for the preparation of the asset beforehand
its use or sale is underway.
The activities in question go beyond the mere physical construction of the asset.
They also include the prior technical and administrative work, such as
for example, the necessary steps to obtain a building permit.
However, these activities do not include the possession of an asset in the absence
of development altering its substance.

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 For example, the loan charges incurred during the phase of
development of land is capitalized during the period in which
for which this development is undertaken. However, the loan charges,
supported when the land acquired for construction purposes is held in
The absence of any development activity is not capitalizable.

The incorporation of borrowing costs into the cost of an asset is not suspended:

when all elements of an asset must be completed before a party

any that may be used or sold (for example, a factory);
for brief interruptions of activity;
for a duration during which technical and administrative work
important matters are underway;
when deadlines are a necessary step in the process
acquisition of the asset (for example, the maturation periods of wines).

The loan charges related to periods during which the

the development of the asset is suspended and cannot be capitalized. Thus, in the event of
extended delays in construction, for example due to an administrative blockage, the
interest related to this interruption period cannot, in principle, be
included in the construction cost.

The incorporation of borrowing costs into the cost of an asset must cease when:

The asset, whose physical construction is completed, is ready for use.

or at its scheduled sale;
Productive activity is interrupted for long periods;
the construction of an asset is partially completed, and that the part
completed is usable independently of the others (for example, a center
of business or a real estate complex including several buildings.

An asset is generally ready to be used or sold when its physical construction

is completed, although routine administrative work is still ongoing.
When only minor changes are made (for example, the decoration of a
property at the request of a buyer) remain to be carried out, the activities
essential for the preparation of the asset, prior to its use or its
Sales are practically all finished.

INFORMATION TO PROVIDE

The financial statements must provide the following information:

the accounting method used for borrowing costs;

the capitalization rate used to determine the amount of costs
of borrowing that can be included in the cost of assets;

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 c. the total amount of borrowing costs incurred during the period in
distinguishing
▪ the part recorded as expenses; and
▪ included in the cost of assets.

CASE STUDIES

Case No. 1

Company E is in the process of building a warehouse that will take 18 months to complete.
Construction work began on the [Link] 2002. The following payments have been
carried out during the year 2002:

DT
▪ January 31 200,000
▪ March 31 450,000
▪ June 30 100,000
▪ October 31 200,000
▪ November 30 250,000

The first payment on January 31 was made thanks to all non-specific debts.
However, company E has managed to negotiate a medium-term loan for an amount of
800,000 DT, on March 31, 2002 at a simple interest rate of 9% per year, calculated and payable monthly.
due at maturity. These funds were specifically used for the construction of this warehouse.
The surplus funds were temporarily invested at 6% per year, payable monthly.
matured term. The total amount of non-specific debts was used again for an amount
of 200,000 DT in order to honor the commitments of November 30 that cannot be met
to be covered by the above-mentioned medium-term loan.

The construction project has been temporarily suspended for a duration of three weeks.
Me, due to significant technical and administrative work undertaken at that time.

It is considered that company E has adopted the method of incorporating borrowing costs.
in the cost of the asset.

The following amounts of debt are to be settled and appear on the balance sheet of company E of
December 31, 2002:

DT
▪ Medium-term loan (see above) 800,000
▪ Bank overdraft (the average amount to be paid for the year is
750,000 DT, and the amount of interest charged by the bank amounts to 1 200 500
at 33,800 DT for the year
▪ 7-year bond loan at 10% contracted on the 1sterOctober 1997 to a 9,000,000
simple annual rate payable on December 31

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 Work to do: Determine the amounts of borrowing costs that need to be incorporated.
in the cost of the warehouse in 2002.

Solution

The amounts that must be included in the cost of the warehouse in 2002 may be
calculated as follows.

Specific loan DT

60000 54 000

Interest earned from the investment of the unused portion of the loan during the year:

▪ of 1erApril to June 30 [(800,000 - 450,000) x 6% x 3/12] = (5,250)

▪ of 1erJuly to October 31 [(800,000 – 550,000) x 6% x 4/12] = 5,000
er
▪ from 1 November to November 30 [(800,000 - 750,000) x 6% x 1/12] = (250)
43,500
Set of non-specific debts
▪ Capitalization rate of 9.58% (calculation a)
▪ Payment on January 31 (200,000 x 11/12 x 9.58%) 17,563
▪ Payment on November 30 (200,000 x 1/12 x 9.58%) one thousand five hundred ninety-seven
19 160
Total amount to be incorporated 62 660

Note: Despite the fact that activities were interrupted by administrative work and
techniques during the month of May 2002, the incorporation of borrowing costs into costs of
the asset is not suspended, in accordance with IAS 23.
Calculate a:
DT
a. Capitalization rate for all non-specific debts
▪ The total amount of interest paid:
- Bank overdraft 33,800
- 7-year bond loan (9,000,000 x 10%) 900,000
933 800
▪ Weighted average of these loans:
- Bank overdraft 750,000
- 7-year bond loan 9,000,000
9,750,000

▪ Capitalization rate = 933,800 / 9,750,000 = 9.58% (rounded)

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Case No. 2

The public limited company "Les Conserveries Réunies", established in 1995 with a capital of
10,000,000 DT (shares of 10 DT), operates several factories located in four cities.
different (Tunis, Nabeul, Mahdia, and Sfax) and where canned food is produced
either based on agricultural products (tomato, red pepper, ...) or based on fish products
(sardine, tuna, ...). It is publicly traded and controlled by a French company holding
51% of its share capital. A large part of its production is exported and its profits
net profits continue to grow from one fiscal year to the next. The company 'Les Conserveries Réunies'
takes advantage of the tax incentives in effect by regularly reinvesting part of its
benefits. This is how, in July 1999, it began the construction and equipment of
two other canneries on two plots of land that it already owns in Béja and Gabès. Their commissioning
service is scheduled for 2001.

For the financing of the construction and equipment expenses of the two canneries of
Béja and Gabès, the company "Les Conserveries réunies" contracted on the 1sterJuly 1999, the two
following bank loans (non-specific and fully collected at the date of the contract):

Rate Duration of
Principal
of interest refund
▪ Loan No. 1 1,200,000 DT 10% per year 7 years
▪ Loan No. 2 900,000 DT 8% per year 5 years

For each of these two loans, the interest is payable at the end of each semester and the
repayment of the principal will only begin after a two-year grace period, that is at
starting from June 30, 2001.

Here are the data related to the Béja factory:

▪ Costs incurred in 1999 : 375,000 DT

▪ Expenses paid in 1999 : 300,000 DT
▪ Costs incurred in 2000 : 750,000 DT
▪ Expenses paid in 2000 : 580,000 DT
- 120,000 DT, the 1sterApril
- 400,000 DT, June 30
- 60,000 DT, October 31
▪ Investment subsidy received on the 1storMay 2000: 150,000 DT

Questions:

1. When should borrowing costs be incorporated into the costs of assets?

2. Determine the amount of borrowing costs to be included in the cost of the Béja factory in
2000 and passing the writing related to the capitalization of these costs.
3. Define the period for incorporating borrowing costs into the cost of an asset.
4. Indicate the information to be provided.

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Solution :

Question No. 1: Conditions for incorporating borrowing costs into asset costs

Borrowing costs must be included in the costs of assets when they meet the
three following conditions:

They can be directly allocated to the acquisition, construction, or production of a

asset that can lead to the incorporation of borrowing costs.

The assets eligible for the incorporation of borrowing costs are those that
necessarily require a substantial preparation period before being able to
to be used or sold. The targeted assets may be acquired, constructed or
products.

The borrowing costs directly attributable to the acquisition, construction or the

the production of an asset that could lead to incorporation are those that could have been avoided
if the expenditure related to the acquisition of this asset had not been made.

It is likely that they will generate future economic benefits.

They can be measured reliably.

These three conditions must all be verified on each new occasion.

incorporation of borrowing costs.

Question No. 2: Calculation and accounting of borrowing costs to be incorporated into the cost of
the Béja factory

▪ Incorporation rate:
(1,200,000 x 10% + 900,000 x 8%) / (1,200,000 + 900,000) = 9.10%

▪ Avoidable interests:
(300,000 x 12/12 + 120,000 x 9/12 - 150,000 x 8/12 + 400,000 x 6/12 + 60,000 x 2/12) x 9.10%
= 500,000 x 9.10% = 45,500 DT

The expenses related to the asset qualifying for subsidies received related to it.
active.

The amount incorporated into the costs of assets during a period must not exceed
borrowing costs incurred during the same period. Often, part of the expenses
is financed by the company's own funds.

Assuming that the amount of avoidable interest is less than the amount of interest of the
bank borrowings actually incurred by the company in 2000 (reduced by any income
financial result of the possible temporary placement of borrowed funds given that
these funds were cashed on the date of the contract), the capitalization of costs entry
The loan related to the Béja factory is as follows:

Debit: Work in Progress 45,500

Credit: Transfer of financial charges 45 500

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Question 3: Period for incorporating borrowing costs into the cost of an asset

The inclusion of borrowing costs in the cost of an asset must begin when the three
the following conditions are met:

▪ Expenses related to the asset have already been incurred;

▪ Borrowing costs have already been incurred;
▪ The essential activities for preparing the asset prior to its use or to
His sale is in progress.

The incorporation of borrowing costs must be suspended during long periods.

in which there is no effective development of the property in question. However,
the incorporation of borrowing costs is generally not suspended in the following cases:

▪ An important technical and administrative work is underway;

▪ The period of temporary interruption is an integral part of the process of preparation.
of use or sale of the asset.

The incorporation of borrowing costs must cease once the essential activities for the
Preparation of the asset for its intended use or for its sale are practically all
completed. When the construction of an asset is carried out in phases and each phase
may be used even as the construction of the other phases continues,
the incorporation of borrowing costs into each tranche must cease once it is
practically finished.

Question no. 4: Information to provide

The following information must be communicated:

▪ Accounting method used for borrowing costs;

▪ Incorporation rate used to determine the amount of borrowing costs
incorporable;
▪ Amounts of borrowing costs incurred distinguishing those recognized as expenses of
those incorporated into the costs of the assets.

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Case No. 3

In January 1997, the company XYZ began the construction of two production workshops.
The completion of the work is scheduled in 15 months.

For this investment, three financings were obtained in December 1996:

▪ Un emprunt de 1 000 000 DT, taux d’intérêt : 9%, durée de remboursement 10 ans ;
▪ A loan of 600,000 DT, interest rate: 10%, repayment period 6 years;
▪ 300,000 DT

The 1erTheloan is specific to workshop I; the other two concern the two workshops.
The 1erPayments made on December 31, 1997, only included interest.
The achievements of 1997 are as follows:

Workshop I : Cost of work undertaken 2,000,000

Expenses incurred 1,800,000

1erJanuary 360 000
1erI 960,000
1erSeptember 480,000

Workshop II: Cost of the work undertaken 1,000,000

Expenses incurred 960,000

1heJanuary 240 000
1erMars 480,000
1heJuly 240 000

Work to be done: Determine the amounts of borrowing costs that need to be incorporated.
in the costs of workshops I & II in 1997.

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Solution

1°/ Calculation of the weighted average of cumulative expenses

Period of Weighted average

Date Amount
capitalization of cumulative expenses

Workshop I 1erJanuary 360,000 12/12 360,000

er
1 I 960,000 08/12 640,000
1erSeptember 480,000 04/12 160,000
Total 1,800,000 1,160,000

Workshop II 1erJanuary 240,000 12/12 240,000

er
1 Mars 480,000 September 12 360,000
1heJuly 240,000 June 12 120,000
Total 960,000 720,000

2°/ Calculation of the weighted average interest rate of non-specific loans

▪ Loan of 600,000 ; Interests : 60,000 = 60,000

▪ Loan of 300,000 ; Interests : 39,000 = 39,000
900,000 99,000

Weighted average interest rate: 99,000 / 900,000 = 11%

3°/ Calculation of avoidable interest

Studio I 1,000,000 x 9% = 90,000

107,600
160,000 x 11% = 17,600
186,800

Workshop II 720,000 x 11% = 79 200

4°/ Calculation of real interest

1,000,000 x 9% = 90,000
600,000 x 10% = 60,000 189,000 is greater than 186,800

39 000 = 39,000

5°/ Capitalizable interests

The amount of capitalizable interest is the lesser amount between avoidable interest.
and the actual interest, either 186,800 DT.

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Case No. 4

The company Sigma plans to have a building constructed for office use.
construction began on the 1sterApril N became operational on the [Link] N. the
the cost of construction rose to 500,000 DT. To finance this construction, the company
Sigma made two loans, starting from March 15 of year N, one of 400,000 DT from the
bank A at a rate of 5% and the other 150,000 DT from bank B at a rate of 6%.
Not having the necessity to finance the entire project immediately, she placed at the rate
5% of a sum of 300,000 DT from April 15 to June 30 of year N, then a sum of 200,000 DT
er
from 1 July to September 30.

Work to do: Determine the amount of borrowing costs that should be incorporated into the
cost of the building for office use.

Solution

The interest paid by Sigma for year N (up to December 31) amounts to:

Bank A: 400,000 x 5% x 9.5/12 = 15,833 DT

bank B: 150,000 x 6% x 9.5/12 = 7,125 DT

The interests earned by Sigma for year N amounted to:

300,000 x 5% x 2.5/12 + 200,000 x 5% x 3/12 = 5,625 DT.

The net amount of borrowing costs for year N is 15,833 + 7,125 - 5,625 = 17,333
All of these costs cannot be included in the production cost of the asset.
It must first be limited to the construction period, that is, from the [Link] 1er
November N. A weighted average rate between the two loans is taken into account:

20000 + 9000 5,273%

550,000

We obtain thus 500,000 x 5.273% x 8/12 = 17,577 DT

It is also necessary to deduct the interest earned on the investments, but on 250,000 DT and 150,000.
DT because the total loans were 550,000 DT (and not 500,000 DT) which gives:
250,000 x 5% x 2.5/12 + 150,000 x 5% x 3/12 = 4,479 DT.

The borrowing costs directly attributable to construction are therefore:

17,577 - 4,479 = 13,098 DT

We will proceed with the following writing:

222 Constructions 13,098

651 Interest charges 13098

(or Transfer of Financial Charges)
Borrowing costs attributable to the construction of the building
for office use

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Case No. 5

The Alpha company has just built its headquarters, the cost of which (excluding expenses
Financial) amounted to 2,700,000 DT. Construction started on the 1sterMars N-2 and has
finished the 1heJune N. The expenses were spread regularly over the period of
construction. To finance this building, the Alpha company borrowed 200,000 DT on the [Link]
February N-2 at a rate of 6%, then 1,000,000 DT at a rate of 5.4% on the 1st erJuly N-2, then again
er
1,000,000 DT on the 1st July of the previous year at a rate of 5.28%.

What amount of financial charges should it include in the cost of the headquarters?
social?

Solution

The expenses, amounting to 2,700,000 DT, were spread over 27 months (from the 1sterMars N-2 to
May 31. It is also important to take into account the fact that the debts are too high in some cases.
periods to finance the capital investment. The average borrowing rates have been 6% until
June 30, N-2, then 5.50% = (200,000 x 6% + 1,000,000 x 5.4%) / 1,200,000 of July N-2
as of June 30 N-1, then 5.40% = (200,000 x 6% + 1,000,000 x 5.4% + 1,000,000 x 5.28%) /
2,200,000 starting from July of year N-1. We can thus calculate the cost:

of 1erMarch N-2 to April 30 N-2: 200,000 x 50% x 6% x 2/12 = 1 000

of 1heFrom May N-2 to June 30 N-2: 200,000 x 6% x 2/12 = 2,000

of the 1erJuly N-2 to February 28 N-1:
= 25,667
(200,000 + 1,000,000 x 50%) x 5.5% x 8/12
from 1erMarch N-1 to June 30 N-1: 1,200,000 x 5.5% x 4/12 = 22,000
of 1orJuly N-1 to December 31 N-1:
= 45,900
144000
of 1erJanuary N to May 31 N: 2,200,000 x 5.4% x 5/12 = 49,500

146 067

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