Article 71 | | Long-term liabilities are liabilities that will be settled after one year or after an operating cycle that is longer than one year, including long-term borrowings, bonds payable and long-term payables. |
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| | Each long-term liability should be accounted for separately and disclosed as a separate item in the balance sheet. The portion of long-term liabilities that is due for settlement within one year should be classified as a current liability in the balance sheet and disclosed separately. |
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| Article 72 | | Long-term liabilities should be recorded at the actual amount incurred |
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| | Interest should be accrued on a periodic basis based on specific interest rates and the principal amount of the liabilities or the face value of bonds, and recognized either as project cost [Translator note: for fixed assets under construction] or current period financial expenses respectively in accordance with the requirements of this Accounting System. |
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| | Where an enterprise adopts the tax effect accounting method, the effect on income tax resulting from taxable timing differences or deductible timing differences should be accounted for separately as an adjustment to the tax expense for the current period. |
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| Article 73 | | Where bonds are issued, an enterprise should record a liability at the aggregate amount of the proceeds of issue. The difference between the proceeds of issue and the face value of the bonds should be accounted for as premium or discount. The premium or discount should be amortized by the effective-interest-rate method or the straight-line method over the life of the bonds along with the interest, and be accounted for using the accounting principles as for borrowing costs. |
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| Article 74 | | Where convertible bonds are issued, an enterprise should account for the convertible bonds issued in the same way as ordinary bonds before conversion is made. When the bondholders exercise their rights to convert the bonds into shares or capital, the carrying amount of the bonds should be cleared. The difference between the carrying value of the convertible bonds and the par value of the shares issued or capital issued should be treated as capital reserve after deduction of any cash payments. |
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| | Where convertible bonds with an option to redeem are issued, an interest premium over and above the nominal interest on the bonds may become payable on the date of redemption. The interest premium should be accrued as interest payable between the date of issue and date of redemption of the bonds, and accounted for using the accounting principles as for borrowing costs. |
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| Article 75 | | For a fixed asset acquired under finance lease, the fixed asset should be recorded at an amount equal to the lower of the carrying amount of the leased asset originally recorded in the books of the lessor and the present value of the minimum lease payments at the inception of the lease. The enterprise should record the minimum lease payments as long-term accounts payable. The difference between the recorded amount of the leased asset and the liability should be recorded as unrecognized finance charges. |
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| | If leased assets (leased under finance leases) represent 30% or less of the total assets of an enterprise, both the leased asset and the long term liability should be recorded at an amount equal to the minimum lease payments at the inception of the lease. |
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| Article 76 | | Where an enterprise receives a grant of funding for a specific project [Translator note: typically a grant allocated from the government], it should be accounted for as a specific account payable. On completion of the specific project, the specific account payable should be reduced by the appropriate amount, and the balance should be transferred to capital reserve. |
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| Article 77 | | Borrowing costs incurred by an enterprise are interest incurred on borrowings, amortization of discounts or premiums, ancillary costs incurred in connection with the arrangement of borrowings, and exchange differences arising from foreign currency borrowings. Ancillary costs include handling charges. |
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| | Except for those borrowing costs incurred on a specific borrowing for the acquisition or construction of a fixed asset, borrowing costs should be recognized as expenses and included as finance charges in the period in which they are incurred. |
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| | Under this Accounting System, a specific borrowing is one borrowed specifically for the acquisition or construction of a fixed asset. |
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| | Borrowing costs on specific borrowings incurred for the acquisition or construction of fixed assets should be accounted for as prescribed below: |
| | (1) | | Treatment for ancillary costs incurred in connection with borrowings: |
| | | | 1. | | when an enterprise issues bonds to raise funds for the acquisition or construction of a fixed asset, before the fixed asset has reached working condition for its intended use, the issue costs incurred in connection with the offering of bonds (after deduction of interest income earned from the subscription money received before the issuance of the bonds) should be capitalized as the cost of the fixed asset if the amount is significant. If the amount is not significant, the amount (after deduction of interest income earned from the subscription money received before the issuance of the bonds) should be included as finance charges in the period in which they are incurred. |
| | | | | | Handling fees incurred in connection with bank borrowings should also be treated according to the above principle. |
| | | | 2. | | Ancillary costs (other than bond issue costs and handling fees on bank borrowings) on specific borrowings, to the extent incurred before the fixed asset has reached working condition for its intended use, should be capitalized as the cost of the fixed asset if the amount is significant. Ancillary costs incurred after the fixed asset has become ready for its intended use should be recognized as finance charges in the period in which they are incurred. If the amount of the ancillary costs is not significant, they may be recognized as finance charges in the period in which they are incurred. |
| | (2) | | Treatment for interest incurred on borrowings, amortization of discounts or premiums and exchange differences: |
| | | | 1. | | An enterprise should commence capitalization of interest, amortization of discounts or premiums, and exchange differences arising from specific borrowings for the acquisition or construction of a fixed asset and include the capitalized amount as cost of the fixed asset when all the following three conditions are satisfied: |
| | | | | | (i) | | expenditures for the asset (limited to only those expenditures that have resulted in payments of cash, transfer of non-cash assets or the assumption of interest-bearing liabilities) are being incurred; |
| | | | | | (ii) | | borrowing costs are being incurred; and |
| | | | | | (iii) | | activities necessary to prepare the asset for its intended use have commenced. |
| | | | 2. | | Interest incurred, amortization of discounts or premiums, and any exchange differences related to specific borrowings for the acquisition or construction of a fixed asset should be capitalized as cost of the fixed asset if the above conditions are satisfied, to the extent they are incurred before the fixed asset has reached working condition for its intended use. To the extent such costs are incurred after the fixed asset has reached working condition for its intended use, they should be recognized as finance charges in the period in which they are incurred. The amount of interest to be capitalized for each accounting period should be computed in accordance with the following formula: |
| | | | | | The amount of interest to be capitalized for each accounting period = The weighted average amount of accumulated expenditures for the acquisition or construction of fixed assets incurred up to the end of the current period x The capitalization rate |
| | | | | | Weighted average amount of the accumulated expenditure = å (Amount of individual expenditures on asset x Number of days the expenditures were actually outstanding during the accounting period divided by Number of days in the accounting period) |
| | | | | | For simplicity, the number of months may be used as the factor to calculate the weighted average amount of the accumulated expenditure. |
| | | | | | The capitalization rate should be determined as follows: if only one specific borrowing was used for the acquisition or construction of a fixed asset, the capitalization rate should be the rate on that borrowing. If more than one specific borrowing was used for the acquisition or construction of a fixed asset, the capitalization rate should be the weighted average interest rate on those specific borrowings. The weighted average interest rate should be calculated as follows: |
| | | | | | Weighted average interest rate = "Summation of the actual amounts of interest on specific borrowings incurred during the period" divided by "The weighted average amount of outstanding principals of specific borrowings" x 100% |
| | | | | | Weighted average amount of outstanding principals of specific borrowings = å (Principal of each specific borrowing X "Number of days each specific borrowing was actually outstanding during the accounting period" divided by "Number of days in the accounting period") |
| | | | | | For simplicity, the number of months may be used as the factor to calculate the weighted average amount of outstanding principals of specific borrowings. |
| | | | | | If there is a discount or premium on the bonds issued by an enterprise, interest cost should be adjusted by the amount of amortization of such discount or premium and the capitalization rate should be adjusted accordingly. The weighted average interest rate should be determined in accordance with the following formula: |
| | | | | | Weighted average interest rate = (Summation of the actual amounts of interest on specific borrowings incurred during the period + Amortization of discount or premium) divided by "Weighted average amount of the outstanding principals of specific borrowings" x 100% |
| | | | 3. | | The exchange differences (related to both principal and interest) arising in each accounting period in connection with specific borrowings denominated in foreign currency should be capitalized as cost of the fixed asset to the extent incurred before the fixed asset has reached working condition for its intended use. After the fixed asset has reached working condition for its intended use, the exchange differences should be recognized as finance charges in the period in which they are incurred. |
| | | | 4. | | If the bond issue costs incurred by an enterprise are less than the interest income earned from the subscription money received before the issuance of the bonds, the difference should be treated as premium arising from bond issue, and amortized over the life of the bond along with the interest expense. |
| | | | 5. | | The amount of interest and amortization of discount or premium capitalized for each period should not exceed the actual amount of interest incurred and discount or premium amortized in respect of specific borrowings during the period. |
| | | | | | In determining the amount of borrowing costs to be capitalized, interest income earned in connection with specific borrowings [Translator note: interest income may arise from temporary investment of those borrowings] should not be used to reduce the acquisition or construction cost of the fixed asset. The interest income should be netted off the finance charges for the current period. |
| | | | 6. | | Where an enterprise raises funds (specifically to acquire or construct a fixed asset) other than by borrowing, for instance through grants or the issue of shares, the borrowing costs on specific borrowings raised before such funds are received should be treated under the above principles. After such funds are received, the borrowing costs should be treated as follows: |
| | | | | | - charged as finance charges, when the actual expenditure for the asset has not exceeded the amount of funds raised other than by borrowing; |
| | | | | | - treated as borrowing costs under the above principles, when the actual expenditure for the asset has exceeded the amount of funds raised other than by borrowing. However, the amount of funds raised should be deducted from the weighted average cumulative expenditure for the period. |
| | | | 7. | | When the construction of a fixed asset is completed in parts and each part is capable of being used while construction continues on other parts, capitalization of borrowing costs (attributable to the completed parts) should cease when substantially all the activities necessary to prepare that part for its intended use are completed. Thereafter, borrowing costs should be included as finance charges for the current period. When the construction of a fixed asset is completed in parts but each part cannot be used until all parts are completed, capitalization of borrowing costs should cease when all parts are completed. Thereafter, the borrowing costs should be included as finance charges for the current period. |
| | | | 8. | | Capitalization of borrowing costs should be suspended during periods in which the acquisition or construction of a fixed asset is interrupted abnormally, and the interruption period is three months or longer. These costs should not be capitalized and should be recognized as finance charges for the current period until the acquisition or construction activities are resumed. After the activities are resumed, borrowing costs are capitalized until the fixed asset reaches working condition for its intended use. |
| | | | | | However, capitalization of borrowing costs during the suspended periods should continue when the interruption is a necessary part of the process of bringing the asset to working condition for its intended use. |
| | | | | | Capitalization of borrowing costs should cease when the fixed asset being acquired or constructed has reached working condition for its intended use. Borrowing costs incurred thereafter should be recognized as a finance charge in the period in which they are incurred. |
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| Article 78 | | Under this Accounting System, a fixed asset has "reached working condition for its intended use" if the asset has reached working condition for the use intended by the purchaser or constructer. A fixed asset has reached working condition for its intended use when any of the following conditions are satisfied: |
| | (1) | | the physical construction (including installation) of the fixed asset is completed or substantially completed; |
| | (2) | | the results of the trial production or test run prove that the fixed asset can produce qualifying products in a stable way or the trial operation process proves that the fixed asset can operate normally. |
| | (3) | | expenditure to be incurred further for construction of the fixed asset is minimal or virtually zero; |
| | (4) | | the fixed asset being acquired or constructed meets the specification or requirements in the contract, or substantially meets such specification or requirements, and any non-compliance will not affect the normal use of the fixed asset. |
