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HMRC internal manual

Corporate Finance Manual

Debt cap: the available amount: capitalised finance expenses in the consolidated financial statements

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Available amount includes capitalised finance expenses

Under IAS 23: Borrowing Costs, costs which are directly attributable to the acquisition, construction or production of particular assets are to be treated as part of the cost of that asset. The sort of assets affected by this standard are those which take time to build or develop.

This means that interest and ancillary expenses are capitalised in the consolidated balance sheet, rather than being debited to the income statement or profit and loss account as they arise. The expenditure will affect the profit reported by the company, or group, in a later period or periods - either as the asset is depreciated, or when it is sold.

TIOPA10/S332(1) requires only that interest or other financing expenses are ‘disclosed’ in the financial statements of the group. It does not go further and require the amount to be debited to the profit and loss account. Thus financing expenses that have been added to the cost of an asset are ‘disclosed’ and fall to be included in the available amount for the period in which they are incurred.

This, by itself, might lead to uncertainty about whether financing expenses are also ‘disclosed’ when the cost of acquiring or constructing the asset is amortised, or written off, to profit and loss account. TIOPA10/S349(2) resolves the point by providing that where an amount has been capitalised and included in a balance sheet, any part of that amount which is subsequently debited is not ‘an amount disclosed in financial statements’ for the purposes of Part 7. It will not therefore be included again in the available amount.

This harmonises with the tax treatment of capitalised interest prescribed by CTA09/S320 (CFM33160). At single company level, interest that is added to the cost of a fixed capital asset is relieved when it is capitalised, and not when the cost of the asset is subsequently amortised to profit and loss account. This means that, in general, where interest payable on an external debt is capitalised, it will be included both in the available amount and in the tested expense amount for the same period.