Capitalization of costs for financing assets
Capitalization of costs for financing qualifying assets may be an interesting option for small and medium-sized entrepreneurs, since the costs for financing the current period are in this way reduced. Thus, reduced costs have a direct impact on the business result of the current year.
Financing (lending) costs primarily include interests, but also other costs incurred in connection with granting and withdrawal of credit.
When it comes to large businesses (defined as large by Law on Accounting) and financial institutions, they publish their financial reports in accordance with the International Financial Reporting Standards (IFRS). Their financing costs must be capitalized if such costs originate directly from the acquisition, construction or production of qualifying assets. Thereat, it should be noted that qualifying asset represents an asset that takes a substantial period of time to get ready for its intended use or sale. Capitalization of financing costs (primarily interest costs) is, for example, an investment in a building construction, since payment of loan interests doesn’t differ much from expenditures for procurement of construction materials needed for construction.
For example, productive and power plants could be qualifying assets, or land intended for agricultural production, intangible assets, and inventories that take a substantial period of time (more than one year) to get ready for its intended use or sale, like fish supplies in fish nurseries etc. Assets made or produced within a time period shorter than one year and assets ready for their intended use or sale at the moment of their acquisition can not be defined as qualifying assets.
Small and medium-sized entrepreneurs applying Croatian Financial Reporting Standards (CFRS), may apply, but are not obligated to, capitalization of financing costs originating directly from the acquisition, construction or production of qualifying assets.
Since the entrepreneurs applying CFRS have the possibility to choose whether or not to capitalize their financing costs originating from qualifying assets, they are obligated to determine by their accounting policy whether or not they will capitalize such costs or represent them as expenses of the period. The accounting policy must be disclosed in the notes with financial reports and must be applied consistently on all qualifying assets. In this case, it is necessary to disclose in these notes the amount of interests and other financing costs capitalized during the period.
Capitalization of financing costs may be an interesting option for entrepreneurs, since the costs of the current period are in this way reduced. Thus, reduced costs have a direct impact on the business result of the current year, since these financing costs are included in the historic cost of the assets and are represented as expenditures through that asset’s amortization (for intangible assets) or as expenditures when supplies that meet the above set conditions for qualifying asset are met.