Interest and Finance Charges (IFC) – Treatment in Costing

CMA Navneet Kumar Jain

Institute of Cost Accountants of India has released CAS-17: “COST ACCOUNTING STANDARD ON INTEREST AND FINANCING CHARGES” on 23/05/2013. This article is a step towards interpretation and explanation of various aspect of the said Cost Accounting Standard

Cost Audit Report and Cost Compliance Reports are required to be filed mandatorily in case of most of the companies now.

One of the important certifications in the Cost Compliance Report or the Cost Audit Report is :

“In our opinion, the said books and records are in conformity with the Generally Accepted Cost  Accounting Principles And Cost Accounting Standards Issued by The Institute of Cost and Works Accountants of India, to the extent these are found to be relevant and applicable”.

Though most of the companies comply with all the CAS and GACAP yet there was always a confusion regarding whether to include Interest and finance charges in costing or not.

With the issue of CAS 17, the Institute has provided a document to the various stakeholders/users of costing information to check whether the different type of interest and finance charges are required to be taken into costing or not.

What are Interest and Finance Charges (IFC) as per CAS-17?

Interest and Financing charges: Costs incurred by an enterprise in connection with the borrowing of fund or other costs which in effect represent payment for the use of non equity fund.

Examples are:

1. Interest and commitment charges on bank borrowings, other short term and long term borrowings:

2. Amortisation of discounts or premium related to borrowings:

3.Aamortisation of ancillary cost incurred in connection with the arrangements of borrowings:

4. Financing Charges in respect of finance leases and other similar arrangements:

5. Exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to the interest costs.

6. Cash discount allowed to customers.

The terms Interest and financing charges, finance costs, and borrowing costs are used interchangeably.

The measurement of Interest and Finance charges needs to be done in the following way:

A)               Identification of IFC for different broad activities

The organization should identify Interest and Finance Charges for:

a)                 acquisition / construction/ production of qualifying assets including fixed assets; and

b)                Other finance costs for production of goods/ operations or services rendered which cannot be classified as qualifying assets

Asset: The terms Asset, Fixed Asset, Tangible Fixed Asset, Intangible Fixed Asset, Qualifying asset, current asset will have the same meaning as in the Accounting Standards notified by the Central Government under the Companies (Accounting Standards) Rules,2006.

B)                Treatment of IFC in Costing

If the Interest and Financing Charges are directly attributable to the acquisition /construction/ production of a qualifying asset , the same shall be included in the cost of the asset.

It needs to be noted that only the IFC relating to acquisition of assets are included in the cost of the assets

While providing the treatment for IFC, ICAI-CMA has specified that Subsidy / Grant / Incentive or amount of similar nature received / receivable with respect to Interest and Financing Charges if any, shall be reduced to ascertain the net interest and financing charges. It means that only the net interest and Finance Charges are to be included in cost if any recovery/benefit of any nature has been made towards IFC.

C)                Treatment of Penal Interest

In CAS-17, clarification has been given for the penal interest stating that interest paid for delayed payment of statutory dues shall not be treated as penal interest. As mentioned in the para 5.5, Penal Interest for delayed payment, Fines, penalties, damages and similar levies paid to statutory authorities or other third parties shall not form part of the Interest and Financing Charges.

It seems that interest paid to statutory authority for delayed payment of dues will not be considered as Penal Interest and will form part of cost.

D)               Interest Charges on Investments

Interest paid for or received on investment shall not form part of the other financing charges for production of goods / operations or services rendered;

IFC are to be shown in the cost statement as a separate item of cost of sales and therefore these cannot be clubbed up with administration or other charges

Disclosures in cost statements:

A duty has been casted on the company to disclose various informations relating to the IFC, the noted among these are

ü    The basis of distribution of Interest and Financing Charges to the cost objects/ cost units.

ü    Interest and Financing Charges paid/ payable to related parties.

ü    Interest and Financing Charges incurred in foreign exchange.

ü    Any Subsidy / Grant / Incentive or any amount of similar nature received /receivable reduced Interest and Financing Charges.

As per the note in CAS-17, it is applicable from the period commencing on or after 01/04/2014. However it is suggested that keeping in view of the extensive requirements in cost records preparation and statutory reuirements from other regulators the same can be applied for the benefit of companies even in the current year also

The views and interpretations expressed are based on  our understanding of the Cost Accounting Standard. IFC denoted Interest and Finance Charges