Borrowing cost: Difference between revisions
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'''Borrowing [[cost]]''' | '''Borrowing [[cost]]''' - "Include [[interest]] and other costs incurred by an entity in relation to borrowing of funds." (Abbas A. Mirza, Magnus Orrell, Graham Holt, 2008, p. 170). | ||
In general, borrowing costs include interest costs. However, these are not only the costs of interest on short-term borrowings, such as hank overdrafts and obligated bills of exchange, or long-term borrowings, such as term loans and mortgages (Abbas A. Mirza, Magnus Orrell, Graham Holt, 2008, | In general, borrowing costs include interest costs. However, these are not only the costs of interest on short-term borrowings, such as hank overdrafts and obligated bills of exchange, or long-term borrowings, such as term loans and mortgages (Abbas A. Mirza, Magnus Orrell, Graham Holt, 2008, p. 171). | ||
==Components of the total borrowing costs== | ==Components of the total borrowing costs== | ||
The components of the total cost of the loan include (D. W. Adams and G. I. Nehman, 1979, | The components of the total cost of the loan include (D. W. Adams and G. I. Nehman, 1979, p. 166): | ||
* interest rate | * interest rate | ||
* fee for considering the application | * fee for considering the application | ||
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==Other related costs with borrowing cost== | ==Other related costs with borrowing cost== | ||
Borrowing costs are interest and other costs incurred in borrowing funds. [[Financing]] costs may include (Abbas A. Mirza, Magnus Orrell, Graham Holt, 2008, | Borrowing costs are interest and other costs incurred in borrowing funds. [[Financing]] costs may include (Abbas A. Mirza, Magnus Orrell, Graham Holt, 2008, p. 171): | ||
* Interest on overdraft facilities and interest on short-term and long-term loans and credits | * Interest on overdraft facilities and interest on short-term and long-term loans and credits | ||
* | * "Amortization of discounts or premiums relating to borrowing | ||
* Amortization of ancillary costs incurred in connection with the arrangement or borrowings | * Amortization of ancillary costs incurred in connection with the arrangement or borrowings | ||
* Exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs | * Exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs | ||
* Finance charges in respect of finance | * Finance charges in respect of finance leases". | ||
==Borrowing costs eligible for capitalization== | ==Borrowing costs eligible for capitalization== | ||
Borrowing costs that are directly related to the construction, acquisition or [[production]] will qualifying to such an asset that requires a significant amount of time to prepare it for its intended use or sale, then such borrowing costs eligible for capitalization. | Borrowing costs that are directly related to the construction, acquisition or [[production]] will qualifying to such an asset that requires a significant amount of time to prepare it for its intended use or sale, then such borrowing costs eligible for capitalization. They contain the actual borrowing costs incurred, less income on the momentary [[investment]] from these borrowings. The application of the [[capitalization rate]] to the expenditures incurred on this asset will determine the altitude of borrowing costs eligible for capitalization (PKF International Limited, 2015, p. 189). | ||
'''The capitalization rate''' This is the initial return expected by the purchaser of the property, expressed as a percentage of the purchase [[price]] of the property fully covered by cash. | '''The capitalization rate''' This is the initial return expected by the purchaser of the property, expressed as a percentage of the purchase [[price]] of the property fully covered by cash. | ||
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{{infobox5|list1={{i5link|a=[[Direct lease]]}} — {{i5link|a=[[Interim financing]]}} — {{i5link|a=[[Capital property]]}} — {{i5link|a=[[Ijarah]]}} — {{i5link|a=[[Cash and cash equivalents]]}} — {{i5link|a=[[Closed-End Lease]]}} — {{i5link|a=[[Depreciation vs. amortization]]}} — {{i5link|a=[[Long-Term Assets]]}} — {{i5link|a=[[Assets funding strategy]]}} }} | {{infobox5|list1={{i5link|a=[[Direct lease]]}} — {{i5link|a=[[Interim financing]]}} — {{i5link|a=[[Capital property]]}} — {{i5link|a=[[Ijarah]]}} — {{i5link|a=[[Cash and cash equivalents]]}} — {{i5link|a=[[Closed-End Lease]]}} — {{i5link|a=[[Depreciation vs. amortization]]}} — {{i5link|a=[[Long-Term Assets]]}} — {{i5link|a=[[Assets funding strategy]]}} }} | ||
==References== | ==References== | ||
* Adams D. W., Nehman G. I. (1979), [https://www.academia.edu/4010831/Borrowing_Costs_and_the_Demand_for_Rural_Credit''Borrowing Costs and the Demand for Rural Credit''], Journal of Development Studies, Volume 15, | * Adams D. W., Nehman G. I. (1979), [https://www.academia.edu/4010831/Borrowing_Costs_and_the_Demand_for_Rural_Credit''Borrowing Costs and the Demand for Rural Credit''], Journal of Development Studies, Volume 15, Issue 2 | ||
* Holt G., Mirza A. A., Orrell M. (2008), [https://books.google.pl/books?id=nSKYzfKhS_kC&pg=PA170&dq=Borrowing+cost&hl=pl&sa=X&ved=0ahUKEwi_5pq5xeLlAhXLbFAKHXpLC84Q6AEINDAB#v=onepage&q=Borrowing%20cost&f=false ''Wiley IFRS: Practical Implementation Guide and Workbook''], John Wiley&Sons, Inc., New Jersey | * Holt G., Mirza A. A., Orrell M. (2008), [https://books.google.pl/books?id=nSKYzfKhS_kC&pg=PA170&dq=Borrowing+cost&hl=pl&sa=X&ved=0ahUKEwi_5pq5xeLlAhXLbFAKHXpLC84Q6AEINDAB#v=onepage&q=Borrowing%20cost&f=false ''Wiley IFRS: Practical Implementation Guide and Workbook''], John Wiley&Sons, Inc., New Jersey | ||
* PKF International Limited (2015), [https://books.google.pl/books?id=WeUbBgAAQBAJ&pg=PA189&dq=Borrowing+cost&hl=pl&sa=X&ved=0ahUKEwiSiY3j2OLlAhUJ2qQKHZiNB0E4ChDoAQgwMAE#v=onepage&q=Borrowing%20cost&f=false ''Wiley IFRS 2015: Interpretation and Application of International Financial Reporting Standards''], John Wiley&Sons, Inc., New Jersey | * PKF International Limited (2015), [https://books.google.pl/books?id=WeUbBgAAQBAJ&pg=PA189&dq=Borrowing+cost&hl=pl&sa=X&ved=0ahUKEwiSiY3j2OLlAhUJ2qQKHZiNB0E4ChDoAQgwMAE#v=onepage&q=Borrowing%20cost&f=false ''Wiley IFRS 2015: Interpretation and Application of International Financial Reporting Standards''], John Wiley&Sons, Inc., New Jersey | ||
Latest revision as of 17:28, 17 November 2023
Borrowing cost - "Include interest and other costs incurred by an entity in relation to borrowing of funds." (Abbas A. Mirza, Magnus Orrell, Graham Holt, 2008, p. 170).
In general, borrowing costs include interest costs. However, these are not only the costs of interest on short-term borrowings, such as hank overdrafts and obligated bills of exchange, or long-term borrowings, such as term loans and mortgages (Abbas A. Mirza, Magnus Orrell, Graham Holt, 2008, p. 171).
Components of the total borrowing costs
The components of the total cost of the loan include (D. W. Adams and G. I. Nehman, 1979, p. 166):
- interest rate
- fee for considering the application
- interest
- preparation fee
- commission
- payment for establishing a security
- expenses for insurance on loan repayment
- administrative fee
- time and travel expenses involved in the loan transaction
Borrowing costs are interest and other costs incurred in borrowing funds. Financing costs may include (Abbas A. Mirza, Magnus Orrell, Graham Holt, 2008, p. 171):
- Interest on overdraft facilities and interest on short-term and long-term loans and credits
- "Amortization of discounts or premiums relating to borrowing
- Amortization of ancillary costs incurred in connection with the arrangement or borrowings
- Exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs
- Finance charges in respect of finance leases".
Borrowing costs eligible for capitalization
Borrowing costs that are directly related to the construction, acquisition or production will qualifying to such an asset that requires a significant amount of time to prepare it for its intended use or sale, then such borrowing costs eligible for capitalization. They contain the actual borrowing costs incurred, less income on the momentary investment from these borrowings. The application of the capitalization rate to the expenditures incurred on this asset will determine the altitude of borrowing costs eligible for capitalization (PKF International Limited, 2015, p. 189).
The capitalization rate This is the initial return expected by the purchaser of the property, expressed as a percentage of the purchase price of the property fully covered by cash.
To be able to capitalize on interest, the necessary conditions should be met:
- the construction of assets has already started (the necessary actions have been taken that constitute the planning phase)
- some expenses have already been made,
- interest costs are incurred.
Capitalization of acquisition costs or manufacturing costs ends when the asset is adjusted to the place and conditions needed to start operating as intended by management, i.e. the asset is ready for use.
| Borrowing cost — recommended articles |
| Direct lease — Interim financing — Capital property — Ijarah — Cash and cash equivalents — Closed-End Lease — Depreciation vs. amortization — Long-Term Assets — Assets funding strategy |
References
- Adams D. W., Nehman G. I. (1979), Borrowing Costs and the Demand for Rural Credit, Journal of Development Studies, Volume 15, Issue 2
- Holt G., Mirza A. A., Orrell M. (2008), Wiley IFRS: Practical Implementation Guide and Workbook, John Wiley&Sons, Inc., New Jersey
- PKF International Limited (2015), Wiley IFRS 2015: Interpretation and Application of International Financial Reporting Standards, John Wiley&Sons, Inc., New Jersey
- Zhan Z. , Kemoe L.(2018), Fiscal Transparency, Borrowing Costs, and Foreign Holdings of Sovereign Debt, International Monetary Fund
Author: Weronika Chudzik
