What Is Capitalization of Interest?

Capitalization of interest Recognizes interest expenses on borrowings as an asset. It takes a long time to reach the saleable status of inventory and investment real estate and other interest expenses on borrowings are also the scope of interest capitalization.

Capitalization of interest

Capitalization of interest

Scope definition of capitalization of borrowing costs

(1) Article 4 of the New Standard on the Scope of Assets Where Borrowing Costs Should Be Capitalized: "Eligible assets are those that require a considerable period of acquisition, construction, or production to reach their intended use or sale. Assets such as fixed assets, investment real estate, and inventories. "Different from the original borrowing cost guidelines, the assets capitalized by the new standard include capitalization costs that include not only the fixed assets of the enterprise, but also that it takes a considerable amount of time to reach the intended saleable status. Inventory and investment real estate.

It is important to note that the inventory that meets the capitalization requirements for borrowing costs mainly includes real estate development products developed by real estate development enterprises for external sale, and large machinery and equipment manufactured by enterprises for external sale. This type of inventory usually requires a considerable period of construction or production to reach its intended saleable status.

(II) Scope of borrowings that should be capitalized for borrowing costs The scope of borrowings that should be capitalized in the new standard includes both special borrowings and general borrowings. Special borrowings refer to payments made exclusively by borrowers for the purchase, construction, or production of assets eligible for capitalization. General borrowing refers to borrowing other than special borrowings. For general borrowings, the borrowing costs related to the general borrowings shall be capitalized only when the general borrowings are occupied by assets that meet the capitalization requirements for purchase, construction or production; otherwise, the borrowing costs incurred shall be included in the current profit and loss. In the original standard, borrowings that should be capitalized were only special borrowings.

(3) The period during which borrowing costs should be capitalized is limited to the period from the beginning of capitalization to the end of capitalization, that is, the starting point of capitalization of borrowing costs is to simultaneously meet the three conditions for starting capitalization (asset expenditure has occurred, borrowing When the expenses have been incurred, and the purchase, construction or production activities necessary for the asset to reach the intended use or sale status have been started), the end point is when the asset that meets the capitalization conditions reaches the intended use or sale status.

Due to tax laws and

Interest capitalization concept

China s interim regulations on corporate income tax stipulate that all borrowing interest incurred during the construction and purchase of fixed assets shall be capitalized and accounted for as the value of fixed assets before the final accounts for completion are put into operation. The Rules for the Implementation of the Income Tax Law for Foreign-Funded Enterprises and Foreign Enterprises also stipulate that: Corporate borrowings are used for the purchase, construction or transfer or development of intangible assets. Interest incurred before the asset is put into use shall be included in the fixed amount. The original price of the asset. However, the relevant laws do not specifically regulate how the interest on loans for the purchase and construction of fixed assets is capitalized, that is, how to include the value of fixed assets. Therefore, the financial personnel of most enterprises save trouble and generally adopt simple calculation methods.

Example of interest capitalization

The following is a specific example

A registered tax accountant, Xiao Fang, conducted a tax audit at Changjiang Fashion Co., Ltd. (hereinafter referred to as the Changjiang Company) on January 22, 2004, and found the following business: The company is a general taxpayer of value-added tax. In 2002, it realized sales income of 32.46 million yuan. The company has achieved good reputation in the domestic market. In order to expand production capacity, the company decided to expand another production workshop. On January 1, 2003, preparations for the construction of this production workshop began, and a three-year loan of 5 million yuan was specifically borrowed from the bank for the construction of the workshop, with an annual interest rate of 6%. The production workshop was completed on April 1, 2003 (assuming 30 days per month for simplicity).

The company's asset expenditures during January to March 2003 are as follows:

On January 1, the payment for the purchase of construction materials was 1.4040 million yuan, of which the input value-added tax for value-added tax was 204,400 yuan;

February 10, paid 90,000 yuan in wages to workers in the construction workshop;

On March 15, the polymer building materials purchased on December 28, 2002 were used for the construction of the workshop (at that time as inventory processing). The storage cost of the goods was 600,000 yuan, which was indicated on the special VAT invoice when purchased. The price is 500,000 yuan,

Related books

The market price of this product is 1 million yuan, the material price and VAT input tax have been paid at the time of purchase;

On March 31, the value-added tax for the transfer of input tax on the construction of fixed assets for March 15 was RMB 85,000. Li Ming, Chief Financial Officer of the Changjiang Company, will calculate the interest in a lump sum and capitalize the amount borrowed from the bank when the construction of the fixed asset is completed and delivered. The amount that the company should capitalize in the first quarter is: 500 × 6% × 3/12 = 7.5 (ten thousand yuan).

For the business from the perspective of tax management, there are no problems. However, if it is analyzed from the perspective of corporate financial management, it is uneconomical and there is room for tax planning.

Registered tax accountant Xiao Fang pointed out that the "Enterprise Accounting System", which was implemented nationwide from January 1, 2001, provided for the capitalization of such interest on borrowings for fixed assets purchased and constructed. The interest, discount or premium amortization and exchange difference incurred as a result of special borrowings shall be capitalized when the following three conditions are met at the same time: first, asset expenditures have occurred; second, borrowing costs have already occurred; third, The acquisition and construction activities necessary to bring the asset to its intended use have already begun. At the same time, the "Enterprise Accounting System" also stipulates the amount of interest capitalization, and the determination of the amount of interest capitalization should be linked to the expenditures incurred on the purchase and construction of fixed assets. In each accounting period that should be capitalized, the amount of interest incurred as a result of the purchase or construction of a fixed asset shall be the weighted average of the cumulative expenditures for the acquisition or construction of the asset up to the end of the current period multiplied by the capital The rate.

Interest capitalization calculation formula

The amount of interest capitalized in each accounting period = the weighted average of the cumulative expenditure on the purchase and construction of fixed assets up to the end of the current period × capitalization rate.

The weighted average of cumulative expenditure in the above formula should be calculated and determined by multiplying the amount of each asset expenditure by the ratio of the days occupied by each asset to the days covered by the accounting period. The "days per asset" refers to the length of time that the borrowing costs should be borne by the expenditures incurred on the fixed assets. The "number of days covered by an accounting period" refers to the length of the accounting period in which the amount of borrowing costs that should be capitalized is calculated.

Specific according to different situations

The capitalization rate in the above formula should be determined according to different situations:

First, if only one special loan was borrowed for the purchase and construction of fixed assets, the capitalization rate is the interest rate of the loan.

Second, to borrow more than one special loan for the purchase and construction of fixed assets, the capitalization rate shall be the weighted average interest rate of these special loans.

The company should calculate the capitalized amount of the interest on the fixed asset purchase and construction loan according to the "Enterprise Accounting System", which is more beneficial to the enterprise and can receive tax savings.

Then, Xiaofang made a specific calculation of the business from another angle. According to the "Enterprise Accounting System", the capitalization of loan interest calculations can be calculated monthly, quarterly or annually. If the borrowing costs that should be capitalized are calculated on a monthly basis, the weighted average monthly cumulative expenditure should be calculated based on the ratio of the amount of each asset expenditure per month and the number of days that the borrowing costs are required to bear to the number of days in the month:

The weighted average of the cumulative monthly price of 140.40 × 30/30 = 140.40 (ten thousand yuan);

The weighted average cumulative price of February price is 140.40 × 30/30 + 9 × 20/30 = 146.40 (ten thousand yuan);

The weighted average of the cumulative price in March was 140.40 × 30/30 + 9 × 30/30 + 68.50 × 15/30 + 8.50 × 0/30 = 183.65 (ten thousand yuan).

Calculating the borrowing costs that should be capitalized on a monthly basis, the amount that the company should capitalize in the first quarter is:

140.40 × 6% × 1/12 + 146.40 × 6% × 1/12 + 183.65 × 6% × 1/12 = 2.35225 (ten thousand yuan).

If the borrowing costs that should be capitalized are calculated quarterly, the amount that the company should be capitalized in the first quarter is:

(140.40 × 90/90 + 9 × 50/90 + 68.50 × 15/90) × 6% × 3/12 = 2.3523 (ten thousand yuan).

Interest capitalization results

Through calculation, it is found that the calculation is monthly or quarterly (year). The results are similar, but it is far from the original calculation method of capitalization of the accounting staff of the enterprise. If it is not calculated according to the method stipulated in the "Enterprise Accounting System", the amount of capitalization of the enterprise during the purchase and construction of the fixed asset is:

75000-23522.5 = 51477.5 (yuan).

In other words: it affects the taxable income for the year of 51477.5 yuan. If the enterprise's income tax rate is 33%, the enterprise should pay an additional corporate income tax of 16,987.58 that year.