What are financial costs? What are the forms of financial costs? How to calculate financial costs, how to account for account 635 (financial cost account)?
I. Legal basis
- Pursuant to Clause 1, Article 90 of Circular 200/2014/TT-BTC, amended by Clause 1, Article 30 of Circular 177/2015/TT-BTC regulating the accounting principles of account 635;
- Pursuant to Clause 2, Article 90 of Circular 200/2014/TT-BTC, amended by Clause 2, Article 30 of Circular 177/2015/TT-BTC regulating the structure and content of account 635;
- Pursuant to Clause 1, Article 82 of Circular 200/2014/TT-BTC on principles of accounting for expenses.
II. What are financial costs and the structure reflecting the content of financial costs?
1. What are financial costs?
Financial costs are costs or losses arising from financial investment activities such as securities investment, capital contribution, borrowing and lending, etc.
2. Content structure reflects financial costs
Financial costs of enterprises are structured in terms of reflected content as follows:
➤ Financial costs at the debt side:
- Interest expense, rental income, finance lease income and deferred purchase interest;
- Foreign currency sales losses;
- Discount costs paid to buyers;
- Expenses from losses resulting from liquidation or sale of investments;
- Expenses from exchange rate losses incurred during the period;
- Expenses from provisions for devaluation of trading securities and investment losses in other entities;
- Some other financial investments depending on the regulations and operations of each business.
➤ Credit side financial costs:
- Reversal of provisions for devaluation of trading securities and loss on investments in other entities;
- The amounts written off are included in financial expenses;
- At the end of the accounting period, transfer all financial expenses incurred during the period to specifically determine the company’s business performance;
- The expenses will not be included in the finance cost.
➤ In addition to the financial expenses included above, there are some types of expenses that do not qualify to be classified as operating expenses. Specifically:
- Costs for production, business and sales activities;
- Business operating and management costs;
- Basic investment and construction costs;
- Types of real estate business costs;
- Types of expenses to be covered by other funding sources;
- Other costs.
III. What are the forms of financial costs and the meaning of financial costs?
1. Forms of financial costs
Types of financial costs include:
➤ Interest costs
This is the type of cost that businesses have to pay when borrowing money with collateral, including cash advance interest, balance transfer interest and late payment penalty interest…
➤ Start-up costs
Typically, lenders will charge an origination fee of 0.5% to 1% of the loan amount. Origination fees are common on mortgages, auto loans, and personal loans, and while they don’t apply to credit cards, they may apply to certain credit lines.
➤ Late fees
This is the fee you will have to pay if you pay after the due date. To avoid this fee, you need to be organized and proactive with your time, paying on time every time.
➤ Prepayment penalty fee
In some contracts, the lender may charge a prepayment penalty if the borrower defaults and pays off the loan earlier than scheduled.
If the borrower repays the loan earlier than the contract stipulates, there will be a prepayment penalty as per the contract terms. This will help prevent the lender from losing the income they could have earned from interest.
2. Meaning of financial costs
Financial operating expenses will specifically reflect a part of the business activities of the enterprise. Depending on the increase or decrease in financial expenses, it is possible to grasp the business situation of the company, at the same time, closely review accounting to avoid loss of money, corruption and embezzlement…
➤ Increased financial costs
If a business’s financial costs increase, it represents two cases:
- Case 1: The business is on the path to expanding and boosting its business activities;
- Case 2: The business is no longer effective, loses control and is likely to incur large losses.
➤ Reduced financial costs
The reduction in financial costs represents two cases:
- Case 1: The business is facing many problems in the business process such as not being able to pay for investment and business activities;
- Case 2: This result shows that the business effectively controls expenses, reduces business costs and contributes to increasing after-tax profits.
IV. How to account for financial expenses (accounting for account 635)
Depending on each case, there will be different ways to calculate financial costs. Specifically as follows:
➤ In case of expenses arising from securities sales, business loans and foreign currency trading:
- Debit to account 635;
- Credit to accounts 111, 112, 114…
➤ In case the sale of trading securities and liquidation of investments in subsidiaries, joint ventures and associates results in losses:
- Debit to accounts 111, 112… (selling price calculated based on fair value of received assets);
- Debit to account 635 – Financial expenses (loss);
- Credit to accounts 121, 221, 222, 228 (book value).
➤ In case when receiving back capital contribution to subsidiaries, joint ventures and associates, the fair value of the divided assets is less than the value of capital contribution:
- Debit accounts 111, 112, 152, 156, 211…(fair value of divided assets);
- Debit to account 635 (loss amount);
- Credit accounts 221 and 222.
➤ In the case where an enterprise sells investments in shares of other enterprises in the form of stock exchange. The enterprise must determine the fair value of the shares at the time of exchange. The difference between the fair value of the shares received and the book value of the shares exchanged is recorded by the accountant as financial expense:
- Debit accounts 121, 221, 222, 228 (book value of received shares);
- Debit to account 635;
- Credit to accounts 121, 221, 222, 228 (fair value of shares exchanged).
➤ Cases where accounting provisions for devaluation of trading securities and provisions for losses due to investment in other entities are made when preparing financial statements. Specifically:
- When the amount of provision to be made in this period is greater than the amount of provision made in the previous period, the accountant will make additional provision for the difference:
- Debit to account 635;
- Credit to account 229 – Provision for asset losses (2291 and 2292).
- When the amount of provision to be made in this period is less than the amount of provision made in the previous period and the accountant makes additional provision for the difference:
- Debit to account 229 – Provision for asset losses (2291 and 2292);
- Credit to account 635.
➤ In case the payment discount for goods and services is enjoyed due to early payment, it must be paid:
- Debit to account 635;
- Credit accounts 131, 111 and 112…
>> See more: How to account for account 131.
➤ In case the costs directly related to loans such as auditing and loan application appraisal costs… are included in the financial costs for the following loan types, they are calculated as follows:
- With loans in the form of bonds:
- Debit to account 635;
- Credit to accounts 343 – Issued bonds (3431 and 3432).
- For loans in the form of conventional contracts and agreements:
- Debit to account 635;
- Credit accounts 111 and 112…
➤ In case the unit has to periodically pay loan interest and bond interest to the lender:
- Debit account 242 (if the unit pays loan interest in advance);
- Credit to account 111,112;
- Periodic allocation of loan interest:
Debit 635 – Financial expenses;
There are 242: Prepaid expenses.
>> See more: How to account for account 242.
➤ In case of loan with interest payment later:
- Periodically, when calculating loan interest and bond interest payable during the period, if included in financial expenses:
- Debit account 635;
- Credit to account 335 – Expenses payable.
- At the end of the loan term and when the unit repays the principal and interest of the loan:
- Debit account 341 – Loans and financial lease debts (the principal amount of the loan that must be paid);
- Debit account 335 – Payable expenses (interest on loans from previous periods);
- Debit to account 635 – Financial expenses (interest on maturing periods);
- Credit accounts 111 and 112…
>> See more: How to account for account 335.
V. Frequently asked questions about corporate finance costs
1. On December 20, company A sold 5,000 shares of company B that it owned to company X and collected money from the bank for 49,000,000 VND. The cost paid to the broker in cash was 1,500,000 VND. Knowing that 1 share of company B is worth 10,000 VND. How does the accountant record the arising economic transactions?
Company A applies the accounting regime according to Circular 200.
Based on the instructions in Circular 200, company A’s accountant performs the following accounting:
- Record sale of shares to enterprise X:
- Debit account 112: 49,000,000;
- Debit account 635: 1,000,000;
- Credit account 228: 50,000,000 (5,000 x 10,000).
- Recording financial costs of brokerage:
- Debit account 635: 1,500,000;
- Credit account 111: 1,500,000.
>> See more: Financial cost accounting.
2. If a business’s financial costs increase, what will it show?
If the financial costs of a business increase, it shows the following two cases:
- Case 1: Your business is on the rise and is looking to expand and boost its operations;
- Case 2: The business is no longer effective, loses control and is likely to incur large losses.
>> See more: Meaning of financial costs.