HOW BANK CHARGES SHOULD BE CLASSIFIED IN THE FINANCIAL STATEMENT AND IF IT SHOULD BE CONSIDERED AS FINANCE COST
Over the years, there is an ongoing misconception from many finance professionals as to if Bank charges should be accounted for and classified as part of finance cost in the Financial Statement.
Finance costs are interest and other costs which were incurred by a company in connection with ‘borrowing funds’ e.g. annual interest expense, fees charged by the banks e.g. advisory fees relating to loans, facilities charges incurred for the purpose of negotiating the loan.
Finance cost is not limited to borrowing a loan, it also include interest accrued on lease liability, unwinding interest of decommissioning liability, etc. Finance cost is also known as borrowing cost which serves as the reward to the provider of funds that can either be expensed or capitalized depending on the nature.
On the other hand, bank charges are costs charged by the bank to a company for the banking services rendered by the bank to the company. Bank charges basically are charges imposed by financial institutions on their personal and business customers for account set up, maintenance, and other transactional services which may be charged on a time or ongoing basis. Bank charges are very essential costs to the operations of the entity because the entity’s Bank will not honor the transaction if there are insufficient funds to cover the charges and in fact, it is non-negotiated as interest on borrowed funds and other facilities charges are negotiated.
On a number of occasions, accountants erroneously classify bank charges as part of the company’s finance costs while preparing the Financial Statements. It may be deciphered from the above definitions and analysis that bank charges shouldn’t be treated as finance cost because it does not directly relate to the financing of business activities.
The appropriate classification of Bank charges is to be classified as part of the company’s administrative expenses or other operating expenses. Bank charges should not be classified as part of finance costs.
This pitfall in accounting for Bank charges as part of finance costs has also led to the wrong presentation in the Statement of cash flows because those Accountants classifying Bank charges as finance costs also presented it as part of Financing activities in the cash flows statement which is inconsistent with IAS 7 – Statement of cash flow definition of financing activities.
IAS 7 – state that financing activities are activities that cause changes to contributed equity and borrowings of the entity which Bank charges as explained above does not meet this definition, but bank charges can be said to meet operating activities definition because it failed financing and Investing activities definitions in line with IAS 7.
In conclusion, Bank charges should be accounted for as part of “Administrative expenses or other operating expenses” and not as Finance costs or Interest expenses and should be presented under operating activities in the cash flow statements.
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