Standard No. 16
01. This standard aims to prescribe and guide the principles and methods for accounting borrowing costs, including: recognition of borrowing costs into production and/or business costs in the period; capitalization of borrowing costs when these costs directly relate to the construction investment or production of uncompleted assets which serve as basis for recording accounting books and compiling financial statements
02. This standard applies to the accounting of borrowing costs.
03. The terms in this standard shall be construed as follows:
Borrowing costs are loan interest and other costs incurred in direct relation to borrowings of an enterprise.
Uncompleted assets are assets in the construction investment process and assets in the production process, which need a duration long enough (over 12 months) to be put to use according to the set purposes or to sale.
04. Borrowing costs include:
(a) Interests on short-term and long-term borrowings, including borrowing interest on overdraft amounts;
(b) Amortization of discounts or premiums related to borrowings through bond issuance;
(c) Amortization of ancillary costs incurred in relation to the arrangement of borrowing procedures;
(d) Financial costs of financial leasing assets.
05. For example: Uncompleted assets are those being in the construction investment process, which are either unfinished or finished but not yet put into production or use; unfinished products being in the production process of production lines with a production cycle of over 12 months.
CONTENTS OF THE STANDARD
Recognition of borrowing costs
06. Borrowing costs should be recognized into production or business costs in the period in which they are incurred, unless they are capitalized according to provisions in paragraph 07.
07. Borrowing costs directly related to the construction investment or production of uncompleted assets shall be accounted into the value of such assets (capitalized) when the conditions prescribed in this standard are fully met.
08. Borrowing costs directly related to the construction investment or production of uncompleted assets shall be accounted into the value of such assets. Borrowing costs shall be capitalized when it is highly probable that enterprises can get future economic benefits from the use of such assets and the costs can be reliably determined.
Determination of borrowing costs to be capitalized
09. In cases where a particular borrowing is used only for the purpose of construction investment or production of an uncompleted asset, the borrowing cost fully eligible for capitalization for such uncompleted asset shall be determined as borrowing cost actually arising from borrowings minus (-) incomes earned from temporary investments of such borrowings.
10. Incomes from temporary investments of particular borrowings shall, pending the use thereof for the purpose of obtaining uncompleted assets, be offset against borrowing costs incurred upon the capitalization.
11. In case of joint capital borrowings, which are used for the purpose of investment in construction or production of an uncompleted asset, the borrowing costs eligible for capitalization in each accounting period shall be determined according to the capitalization rate for weighted average accumulated costs incurred to the investment in construction or production of such asset. The capitalization rate shall be calculated according to the weighted average interest rate applicable to the enterprise’s borrowings unrepaid in the period, except for particular borrowings for purpose of obtaining an uncompleted asset. The amount of borrowing costs capitalized during a period must not exceed the amount of borrowing costs arising during that period.
12. If any discount or premium arises upon the issuance of bonds, the borrowing interest shall be readjusted by amortizing the value of such discount or premium and readjusting capitalization rate in an appropriate manner. The amortization of the discount or premium may be effected by the actual interest rate method or straight line method. Borrowing interests and amortized discounts or premiums capitalized in each period must not exceed the actual borrowing interest amount and amortized discount or premium amount in that period.
Time of commencing capitalization
13. The capitalization of borrowing costs into the value of an uncompleted asset shall commence when the following conditions are simultaneously satisfied:
(a) Expenses for investment in construction or production of the uncompleted asset start to arise;
(b) Borrowing costs are arising;
(c) Activities that are necessary to prepare the uncompleted asset for its intended use or sale are being conducted.
14. Costs of the investment in construction or production of an uncompleted asset include costs which must be paid in cash, transfer of other assets or the acceptance of interest-bearing liabilities, excluding subsidies or supports related to the asset.
15. Activities necessary to prepare the asset for its intended use or sale include the activities of construction, production, technical and general management prior to the commencement of construction or production, such as the activities related to the application for permits prior to the commencement of construction or production. However, such activities do not cover the holding of an asset when no construction or production that changes the asset’s state is taking place. For example, borrowing costs related to the purchase of a land plot requiring site preparation activities shall be capitalized in the period during which activities of preparing such site are conducted. However, borrowing costs incurred while such land plot is purchased for the purpose of holding without construction activities related to such land plot, shall not be capitalized.
Temporary cessation of capitalization
16. The capitalization of borrowing costs shall be temporarily ceased in periods during which the investment in construction or production of uncompleted assets is interrupted, except for cases where such interruption is necessary.
17. The capitalization of borrowing costs shall be temporarily suspended when the investment in construction or production of uncompleted assets is abnormally interrupted. At that time, incurred borrowing costs shall be recognized as in-period production or business costs until the investment in construction or production of uncompleted assets resume.
Termination of capitalization
18. The capitalization of borrowing costs shall terminate when the major activities necessary to prepare the uncompleted asset for its intended use or sale are completed. Borrowing costs arising afterward shall be recognized as in-period production or business costs.
19. An asset is ready for its intended use or sale when its construction or production is complete even though general management works might still continue. In cases where due to minor changes (such as the asset decoration at the purchaser’s or user’s request) these activities are not yet completed, the major activities are still considered complete.
20. When the investment in construction of an uncompleted asset is completed in parts and each completed part is capable of being used while the construction investment continues for the other parts, the capitalization of borrowing costs shall terminate when all major activities necessary to prepare that part for its intended use or sale are completed.
21. For a trade quarter comprising many buildings, each of which can be used separately, the capitalization shall terminate for borrowed capital used for each particular completed work. However, for the construction of an industrial plant involving many production items which are carried out in sequence, the capitalization shall terminate only when all production items are completed.
Presentation of financial statements
23. Enterprises must present in their financial statements:
(a) Accounting policy applicable to borrowing costs;
(b) Total amount of borrowing costs capitalized in the period; and
(c) Capitalization rate used for determining borrowing costs capitalized in the period