Natural Resources - Accounting for borrowing costs
About 20% of the worlds energy is currently being sourced from Clean energy. This leaves the remaining 80% coming from combustion of fossil fuels.
Unfortunately, this releases Carbon dioxide, and other harmful gases, and pollutants into the atmosphere, and has been creating a lot of harm to the world’s environment.
With the world population on the rise, as well as increasing efforts to provide electricity to all parts of the world; there is no better time for us to be seriously considering clean energy from Natural Resources.
The United Nations also acknowledges this global issue that we are faced with, and has set Year 2030 goals to increase the use of renewable energy.
Over the last decade, we have seen a rise in the generation of clean energy generators. This is mostly at a small scale, and we expect this to continue rising in the future.
Today however, my main concern is on how to account for borrowing costs within your energy generating business.
We understand that as a business owner, one of the main issues that may be of concern to you is how to account for all the Infrastructure that you will be acquiring during the set- up stages in your business. This will usually be purchased using financing received from a financial institution such as a bank.
I will talk briefly on how to account for loans as well as the costs related to them;
Firstly, though, I would encourage you to maintain a filing system to keep all documentation that you receive or issue within the business. This may include, Invoices received and issued, Contracts, Receipts, as well as any other 3rd party paperwork. Doing this, makes it easier to go back and refer when necessary.
The amount borrowed from the bank to purchase the items of Property, plant and equipment is treated as a liability in your accounts, as this is an amount that you will be expected to pay back.
The purchased items of property are recognised either as Work in progress, or as Completed assets.
For the ongoing asset builds, borrowing costs may arise. Under the UK Generally accepted accounting practise (UK GAAP) FRS 102, you will have options on how to treat these costs.
Borrowing costs may be either Expensed to the Profit and Loss, or, Capitalised as part of the asset.
So, the question right now is probably, “What are these borrowing costs, and how do we treat them?”
Borrowing costs are simply the costs of obtaining the financing from your lender, and this may include
- Interest expenses
- Finance charges in relation to finance leases
- Exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest costs.
If the capitalisation treatment is being used,
The asset being built has to be a qualifying asset and this essentially means it takes a substantial period of time to get it ready for its intended use or sale.
To qualify, only the borrowing costs directly attributed to the asset should be capitalised. All other costs are recognised as an expense in the Profit and Loss account for that period.
Capitalisation should commence when expenditures are being incurred, and activities necessary to prepare the asset for its intended use or sale are in progress.
This process of capitalisation of borrowing costs should be suspended during periods in which the active development of the asset is interrupted.
The process ceases completely when there are indications that substantially, the asset construction is complete.
If, however your business applies FRS 105 for Micro entities, ALL borrowing costs shall be treated as an expense in the Profit and Loss account in the period in which they are incurred.
If you do require any additional support to help you and/ or your business, then please call our offices on 01865 379 272 or feel free to visit our Oxford offices, and one of our friendly professionals will be happy to help you.