Interest expense

In accounting, interest expense is the period-related operating expense for borrowed capital - interest that is included in cost and performance accounting . The corresponding income is called interest income .

General

Borrowing costs burden as expenses the income statement and as output the liquidity of a company . Companies with high equity capital have to bear less interest expenses than comparable companies with weak equity capital. Therefore they reach earlier the break as equity weak companies. Increases in interest rates therefore have a significantly more negative effect on companies with low equity than on companies with high equity and vice versa ( leverage effect ).

The interest expense is called “Interest and similar expenses” under commercial law and is to be shown separately in accordance with Section 275 (2) No. 13 HGB ( total cost method ) or No. 12 HGB ( cost of sales method ). According to Section 255 (3) of the German Commercial Code (HGB), the interest expense can only be capitalized within the production costs if loans were specifically taken out for the production of an asset. It means that interest paid does not appear in the income statement, but is shown as assets . This in turn results in higher profits or lower losses.

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The position of the interest expense belongs to

• Type of credit interest rates : interest rates fixed or variable interest rates , interest on debt , overdraft interest , default interest , and in foreign currency;
• Lending interest creditors : bank loans , borrowed bonds , borrower's note loans , shareholder loans .

The prerequisite is that interest must contain a term-dependent component.

Special cases are the cash discount and the interest component of the pension expenses (see pension provisions ).

• The economic nature of the discount is controversial. According to the interest theory, the unclaimed supplier discount counts as interest expense for a supplier credit ; according to the price reduction theory, it is a price reduction if payment is made within the discount period. In any case, they are to be treated as a purchase price reduction under commercial law (Section 255 (1) HGB) and therefore not part of the interest expense;
• The interest component of the pension expenses is expenses from the discounting , which are to be booked as interest expenses according to § 277 Abs. 5 HGB. In contrast, IAS 19.61 (2011) does not specify whether this interest expense is to be recognized in the pension provisions or allocated to a specific expense item in the income statement (IAS 19.119).

Key figures

The interest expense is a component of various business indicators for assessing the debt situation of a company. The average interest rate that a company pays on its debt is determined as follows:

${\displaystyle {\mbox{Durchschnittszins Fremdkapital}}={\frac {\mbox{Zinsaufwand}}{\mbox{zinstragende Passiva}}}}$

The interest expense ratio (interest intensity) describes the percentage of the interest expense in the total output:

${\displaystyle {\mbox{Zinsintensität}}={\frac {\mbox{Zinsaufwand}}{\mbox{Gesamtleistung}}}}$

It is the result of the operational financing structure, i.e. in particular the share of equity and debt capital in the overall financing of a company. Capital-intensive, especially debt-intensive companies have high interest expense ratios. Since the interest expense is a fixed cost , it can lead to losses in a phase of underemployment . With the help of another financing lever, the interest expense can be reduced by increasing the equity. The interest coverage ratio is often found as a "financial covenant" in loan agreements , it is calculated as follows:

${\displaystyle {\mbox{Zinsdeckungsgrad}}={\frac {\mbox{EBIT}}{\mbox{Zinsaufwand}}}}$

When debt service coverage ratio is debt service earnings before interest and taxes ( EBITDA ) to interest expense and amortization compared with a period. The higher the EBITDA, the easier it is for a company to service its debt.

${\displaystyle {\mbox{Schuldendienstdeckungsgrad}}={\frac {\mbox{EBITDA}}{\mbox{Zinsaufwand + Tilgung}}}}$

Companies with strong equity capital tend to be better able to service their debts than debt-dependent companies. Correspondingly, the debt service coverage ratio is more favorable for companies with high equity capital. It worsens if additional debt is taken out or if the level of debt remains the same, interest rates rise. The coverage ratio must be at least 1: 1 in order to guarantee the payment of interest and amortization on the debt. The debt situation for companies - depending on the sector - is critical when the debt service permanently exceeds 50% of the EBITDA, i.e. the cash flow falls below twice the debt service. If these limits are not only exceeded temporarily, a company finds itself in a corporate crisis .

The return on investment

${\displaystyle {\mbox{Gesamtkapitalrentabilität}}={\frac {{\mbox{Reingewinn}}+{\mbox{Zinsaufwand}}}{\mbox{Gesamtkapital}}}}$

indicates the profitability of the total capital employed in the company (equity and debt).

Switzerland

The following applies in Switzerland: Interest expenses must be shown in the income statement of a stock corporation in accordance with Art. 663 Paragraph 3 OR ( total cost method only ) under “Financial expenses”.

See also

• Interest barrier
• Discount

Individual evidence

1. ↑ Hans-Georg Ruppe: Commentary on the Value Added Tax Act , 2005, p. 537
2. ↑ Stefan Müller: Accounting Law Modernization Act - Effects on Company Pensions from the Perspective of Science , in: Company Pensions, Volume 64, Issue No. 4, 2009, p. 303
3. ↑ Ann-Kristin Achleitner, Oliver Everäng, Karl A. Niggemann: Financial rating: design options to improve creditworthiness , 2007, p. 215 f.
4. ↑ Günter Wöhe u. a .: Principles of Corporate Financing , 2013, p. 54

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