CPC 20 Borrowing Costs
Concept and main rule
Borrowing costs are interest and other charges related to obtaining funds. Those directly attributable to the acquisition, construction, or production of a qualifying asset must be capitalized when the standard's requirements are met. The others are recognized as an expense for the period.
A qualifying asset is one that necessarily requires a substantial period of time to be ready for use or sale. Examples: a factory under construction, a plant, and certain long-maturation inventories. A machine acquired ready for use is not a qualifying asset.
When to capitalize
|
Stage |
Treatment |
|
Home |
Requires, simultaneously, expenditures on the asset, borrowing costs, and activities necessary for preparation. |
|
Suspension |
Extended work stoppages suspend capitalization. Relevant technical work and delays necessary to the process may justify its continuation. |
|
Closing |
It ceases when substantially all activities for preparing for use or sale have been completed. |
To capitalize means to incorporate into the asset's cost; it does not mean to increase share capital. The standard does not establish a single number of months to define substantial time.
Practical examples of CPC 20
Example 1 Construction of a factory
The construction lasts 12 months and receives specific financing fully applied to the construction. The capitalization requirements are met throughout the entire period, with no stoppages or income from temporary investments.
|
Component |
Value |
|
Materials, services and other costs |
BRL 500,000 |
|
Eligible interest
during construction |
BRL 40,000 |
|
Total factory cost |
BRL 540,000 |
Recording of interest incurred but not yet paid:
|
Debit |
Credit |
Value |
|
Construction in progress |
Interest payable |
BRL 40,000 |
When the factory is available for use, the cost will be transferred to the definitive fixed asset account. Depreciation begins when it is available for use, considering useful life and residual value.
Example 2 Working Capital Loan
A company uses a loan for operating expenses and incurs R$ 2,000 in interest. Since it is not tied to the preparation of a qualifying asset, the interest is a financial expense.
|
Debit |
Credit |
Value |
|
Financial expense with interest |
Interest payable |
BRL 2,000 |
Other important points
For specific borrowings, income from temporary investments of those funds is deducted from eligible costs. For general borrowings, a capitalization rate based on the weighted average of applicable costs is used, respecting the limit of borrowing costs incurred during the period.
Explanatory notes: disclose the total capitalized during the period and the capitalization rate used. Reference: CPC 20 (R1), items 5, 8, 12, 14, 17, 20 to 22 and 26.
CPC 46 Fair Value Measurement
Fair value is the exit price: the amount that would be received from selling an asset or paid to transfer a liability, in a non-forced transaction between market participants, at the measurement date.
CPC 46 explains how to measure. Another pronouncement determines when to use fair value and where to recognize the adjustment. Therefore, the standard does not authorize freely revaluing any asset, such as machinery or owner-occupied real estate.
Valuation techniques
|
Approach |
How it works |
|
Market |
Uses prices
and transaction information with identical or comparable items. |
|
Cost |
Considers the
current replacement cost of the asset's service capacity, with the relevant
adjustments. |
|
Revenue |
Converts future values into a present value, as in discounted cash flow. |
Fair value hierarchy
|
Level |
Information used |
Example |
|
1 |
Quoted price
without adjustment for an identical item in an active market. |
Stock exchange-traded
action. |
|
2 |
Other data
observable, directly or indirectly. |
Title evaluated
with comparable transaction rates. |
|
3 |
No significant unobservable data for the valuation. |
Company without
valuation assessed with cash flow projections. |
The classification of the entire measurement follows the lowest-level input that is significant. A relevant unobservable input can push the entire valuation to Level 3, even when other observable inputs exist.
Present value does not automatically imply
Level 3: the classification depends on the data used. Level 3 does not mean
error or high risk automatically; its assumptions must be substantiated
and reflect market participants.
Transaction costs, such as commissions, are not deducted from fair value. Transportation costs may require adjustment when location is a characteristic of the asset. Reference: CPC 46, items 9, 24 to 26, 61 to 73 and 76 to 90.
Practical examples of CPC 46
Example 3 Shares classified as Level 1
A company has 1,000 shares recorded
at R$ 20,000. At closing, the quoted price in an active market is R$ 23 per share.
For this example, the investment is measured at fair value through
profit or loss, in accordance with CPC 48.
Fair value = 1,000 × R$ 23 = R$ 23,000.
Positive adjustment = R$ 23,000 − R$ 20,000 = R$ 3,000.
|
Debit |
Credit |
Value |
|
Financial assets — stocks |
Gain from
fair value assessment |
BRL 3,000 |
Example 4 Present value with Level 3 data
An investment provides for a single receipt of R$121,000 in two years. The risk-appropriate rate is 10% per year. Assume that the model reflects the assumptions of market participants and that its unobservable estimates are significant.
Present value = R$ 121,000 ÷ (1.10)² = R$
100,000.
|
Amount recorded before assessment |
Estimated fair value |
Adjustment |
|
BRL 100,000 |
BRL 100,000 |
Zero |
|
BRL 95,000 |
BRL 100,000 |
Positive of R$
5,000 |
Zero adjustment means no difference to record; the asset remains valued at R$ 100,000. The measurement remains at Level 3 due to the data used. The destination of any adjustment depends on the standard and the classification of the investment.
In the notes to the financial statements, the techniques and data used are disclosed. For Level 3, there are additional requirements, as applicable, such as significant quantitative data, reconciliation of balances, and sensitivity information. Reference: CPC 46, items 91 to 99.
Comparison to memorize
CPC 20: are interest costs part of the asset's cost
or are they an expense? CPC 46: what is fair value and what data support the
valuation? The present value adjustment under CPC 12 is not, by itself, fair value
measurement.
Sources for reference
Accounting Pronouncements Committee. CPC 20
(R1) — Borrowing Costs.
https://www.cpc.org.br/Arquivos/Documentos/281_CPC20_R1.pdf
Accounting Pronouncements Committee. CPC 46
— Fair Value Measurement.
https://www.cpc.org.br/Arquivos/Documentos/395_CPC_46_rev%2012.pdf
