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Initial recognition
The recognition of finance costs should reflect
the entity's use of the economic benefits derived
from the borrowing. Finance costs on short-term
borrowings such as a bank overdraft are recognised
when interest is incurred. Similarly, a dividend
on a preference share classified as a financial
liability is recognised in the period in which it
is incurred .
Recognition of finance costs on long-term bank
borrowings, bonds, debentures and notes arise from
the periodic re-measurement of these instruments
to amortised cost . The
recognition of other elements of finance costs reflects
the periodic restatement of other liabilities. For
example, the carrying amount of a provision should
be the present value of the expenditure required
to settle the obligation where the effect of the
time value of money is material [IAS37R.45]. The
provision's carrying amount is restated periodically
to recognise the effect of the time value of money
or the accretion of the discount. An entity should
recognise the adjustment as part of finance cost
[IAS37R.60]
.
The interest component of lease rentals incurred
by a lessee that is a party to a finance lease arrangement
are classified within finance costs [IAS17R.25].
The lessee should recognise its obligation under
a finance lease as a liability measured at the fair
value of the leased property or, if lower, at the
present value of the minimum lease payments [IAS17R.20].
Recognition of the interest cost occurs periodically
as the entity apportions the lease payments between
the finance charge and the reduction of the outstanding
liability. The finance charge should be recognised
in each period on the basis of the interest rate
implicit in the lease [IAS17R.25] .
Management should use judgment in determining when,
and to what extent, foreign currency exchange losses
on borrowings should be recognised as an adjustment
to finance costs . Foreign exchange
losses on borrowings may be an element of finance
costs if nominal foreign interest rates are lower
than the domestic currency interest rates. Management
may, however, have other reasons for borrowing in
a foreign currency, such as for example, to hedge
a net investment in a foreign entity .
IAS 39 provides no specific guidance on the classification
of derivative gains and losses in the income statement.
The presentation followed must be consistent with
the entity's risk management strategy and accounting
policies. Gains and losses on derivatives designated
as hedging instruments may be disclosed in the same
line item as gains and losses on the items being
hedged. Thus, gains and losses on derivatives designated
and effective as a hedge of an entity's exposure
to interest rate risk on its borrowings may be classified
in finance costs .
Finance costs may be capitalised as part of an
asset's cost provided certain criteria are met [IAS23R.11].
Measurement
The measurement of finance costs on short-term
borrowings, such as a bank overdraft, reflects the
interest cost paid or accrued by the entity during
the period. Similarly, the dividend incurred on
a preference share classified as a financial liability
reflects the amount of the finance cost for the
period. Finance costs that arise from a negative
change in a derivative's fair value should reflect
the amount of the change.
The finance costs incurred on financial liabilities
recognised at amortised cost reflects the amortisation
of the borrowing based on the effective interest
rate method . The effective
interest rate is the rate of interest that equates
the discounted periodic cash outflows on the liability
with its carrying amount at the date of issue. The
rate includes the effect of discounts and premiums
and all borrowing costs and points the entity has
paid [IAS39R.9]. Transaction costs, which are included
in the initial measurement of all financial liabilities,
should be included in the calculation of amortised
cost using the effective interest method and, in
effect, amortised through the income statement over
the life of the instrument .
The finance cost element of lease payments is measured
on the basis of the interest rate implicit in the
lease [IAS17R.25]. This is the discount rate that,
at the inception of the lease, causes the aggregate
present value of the minimum lease payments and
the unguaranteed residual value to be equal to the
sum of the fair value of the leased asset and any
initial direct costs [IAS17R.4] .
An entity should measure the finance costs that
arise from accreting the discount on liabilities
recognised at their present value, such as provisions.
This is done by multiplying the amount of the obligation
throughout the period by the current pre-tax rate
that reflects current market assessments of the
time value of money and the risks specific to the
liability, taking into account any material changes
in the obligation [IAS19R.82] [IAS37R.47].
Presentation and disclosure
An entity should disclose separately on the face
of the income statement finance costs for the period
[IAS1R.81(b)].
An entity should disclose in the notes to the financial
statements:
| a) |
total interest
expense calculated using the effective interest
method for financial liabilities that are not
at fair value through profit or loss [IAS32R.94(h)]; |
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| b) |
those elements of finance cost that result
from the re-measurement of financial liabilities
[IAS32R.94(h)]; and |
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| c) |
the interest cost element of
a defined benefit obligation recognised during
the period [IAS19R.120(f)(ii)]. |
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