What Is the Capitalization Policy?

Capitalization is also called capital structure or invested capital. The distribution of equity, bonds, etc. contained in the company's capital reflects the ratio of various creditor's rights to owners' rights in the company. There are two types of capitalization: simple and complex: (1) simple capital struc-ture, which means that the company has only ordinary shares, or only ordinary shares and non-convertible preferred shares; (2) complex capital structures ( complex capital struc-ture), in addition to the common shares, the company also owns corporate bonds, preferred shares, and outstanding stock options, warrants, etc. ^[1]

Capitalization

Capitalization is also called capital structure or invested capital. The distribution of equity, bonds, etc. contained in the company's capital reflects the ratio of various creditor's rights to owners' rights in the company. There are two types of capitalization: simple and complex: (1) simple capital struc-ture, which means that the company has only ordinary shares, or only ordinary shares and non-convertible preferred shares; (2) complex capital structures ( complex capital struc-ture), in addition to the common shares, the company also owns corporate bonds, preferred shares, and outstanding stock options, warrants, etc. ^[1]

English: Capitalization

Amortization of interest, discounts or premiums on monies borrowed specifically for the purchase and construction of fixed assets.

Borrowing costs such as ancillary expenses and exchange differences incurred due to foreign currency borrowings are included in the cost of fixed assets when the conditions are met. From an asset perspective,

There are three conditions for starting capitalization:

The first condition is that asset expenditure has already occurred. This condition refers to the purchase or construction of the enterprise

Capitalization means that assets (especially fixed assets, intangible assets) can only be amortized in stages, and cannot be directly credited to the current profit and loss. For example, the cost of borrowing is included in the construction in progress, which is capitalized, recorded in fixed assets, and amortized in installments.

In addition, the case of interruption

The accounting standards provide for the time when the capitalization of borrowing costs is suspended. If the acquisition, construction or production of assets that meet the capitalization conditions is interrupted abnormally and the interruption period exceeds 3 consecutive months, the capitalization of borrowing costs shall be suspended . The reason for the interruption must be an abnormal interruption, which is a normal interruption, and the relevant borrowing costs can still be capitalized.

Abnormal interruptions are usually caused by corporate management decisions or other unforeseen reasons. For example, an enterprise has a quality dispute with the construction party, or engineering and production materials are not supplied in a timely manner, or capital turnover has encountered difficulties, or a construction or production safety accident has occurred, or labor related to asset purchase, construction, and production has occurred. Disruptions, such as disputes, that cause the interruption of asset purchase or construction or production activities are abnormal interruptions.

Abnormal interrupts are significantly different from normal interrupts. The normal interruption is usually limited to the interruption caused by the procedures necessary for the acquisition, construction or production of assets eligible for capitalization to reach the intended usable or saleable state, or foreseeable force majeure factors. For example, certain projects must be suspended for quality or safety inspection at a certain stage of construction, and the construction of the next stage can be continued after the inspection is passed. Such interruptions are foreseeable before construction, and are the procedures that the project must go through. Is a normal interruption. In some areas, during the construction process, due to foreseeable force majeure factors (such as the rainy season or freezing season), the construction stopped, which is also a normal interruption.

As for the accounting treatment, there is nothing special, mainly based on the above to determine whether to terminate the capitalization of borrowing costs and the timing of termination of capitalization. If the definition of abnormal interruption is met, the interest expense during this period is calculated, and the interest expense during this period is included in the financial expense. The entry is as follows:

Borrow: financial expenses

Loan: Interest payable

If it is a normal interruption, the interest expense is included in the construction in progress

Borrow: construction in progress

Loan: Interest payable