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Dear Sir;
How interest on short term borrowings is different from interest on long term borrowings?
Can we treat interest on overdraft, trade finance, trust receipt discounting and invoice discounting as operating expense or it is a finance cost.
When we calculate ROCE and we take EBIT/Capital Employed at this moment do we need to deduct all type of interest and bank charges to Reach EBIT and leave interest on long term debt as finance cost. If a company is continuously using overdraft which is three time more than its share capital and it has other credit line from bank which is being used most of the time but only to fund working capital, Would that be treated as long term debt or can we use interest in it as finance cost?
ThanksP4 is not an accounting exam, and so to be honest the first part of your question isn’t really relevant to P4.
Where it can be relevant is when calculating the WACC. There is no strict rule (it depends on assumptions as so much of P4 does – you are always required to state your assumptions, and provided they are sensible then you get the marks. Certainly the 50 mark question rarely has just one ‘correct’ answer – it depends on your assumptions.
However, it really a matter of whether the overdraft is being treated effectively as a long-term source of finance or not. If the information given suggests that it is, then it should be included in the calculation of the WACC. If not, then it shouldn’t.
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