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(continued) rincipal
maturity of
the payment
schedule under
the fixed-rate
contract or
variable-rate
contract to
which they are
being
compared,
B is the yield
on federal
government
debt
obligations
that are
nearest in
maturity but
of greater
maturity than
the weighted
average
principal
maturity of
that payment
schedule,
C is the
maturity of
federal
government
debt
obligations
that are
nearest in
maturity but
of greater
maturity than
the weighted
average
principal
maturity of
that payment
schedule,
D is the
maturity of
federal
government
debt
obligations
that are
nearest in
maturity but
of shorter
maturity than
the weighted
average
principal
maturity of
that payment
schedule, and
E is the
weighted
average
principal
maturity of
that payment
schedule;
``payment
schedule''
means the
schedule of
payments,
whether on a
weekly, bi-
weekly,
monthly,
yearly or
other basis,
of principal
and interest,
or any
combination
thereof, made
by a producer
to a lender in
accordance
with the terms
of a fixed-
rate contract
or variable-
rate contract;
``variable-rate
contract'' means a
loan contract,
installment
purchase contract
or other financing
agreement in which
the interest rate
is adjusted at
intervals during
the life of the
contract or
agreement in
accordance with
its terms;
``weighted average
principal
maturity'' means,
with respect to
fixed-rate
contracts and
variable-rate
contracts, the
number of years,
or portion
thereof, that is
equal to the
number obtained by
(a) dividing the
sum of the
weighted
principal
payments,
(i) in the case
of a fixed-
rate contract,
by the
original
amount of the
loan, and
(ii) in the
case of a
variable-rate
contract, by
the principal
balance at the
beginning of
the interest
rate period
for which the
weighted
principal
payments were
calculated,
and
(b) rounding the
amount
determined under
paragraph (a) to
the nearest
single decimal
place and, where
that amount is
the midpoint
between two such
numbers, to the
greater of those
two numbers;
``weighted
principal
payment'' means,
(a) with respect
to fixed-rate
contracts, the
amount
determined by
multiplying each
principal
payment under
the contract by
the number of
years, or
portion thereof,
between the date
the producer
entered into the
contract and the
date of that
principal
payment, and
(b) with respect
to variable-rate
contracts
(i) the amount
determined by
multiplying
each principal
payment made
during the
current
interest rate
period by the
number of
years, or
portion
thereof,
between the
beginning of
that interest
rate period
and the date
of that
payment, and
(ii) the amount
equal to the
outstanding
principal
owing, but not
necessarily
due, at the
end of the
current
interest rate
period,
multiplied by
the number of
years, or
portion
thereof,
between the
beginning and
the end of
that interest
rate period;
``yield on federal
government debt
obligations''
means
(a) in the case
of a producer
located in
Canada, the
yield for
federal
government debt
obligations set
out in the Bank
of Canada's
Weekly Financial
Statistics
(i) where the
interest rate
is adjusted at
intervals of
less than one
year, under
the title
``Treasury
Bills'', and
(ii) in any
other case,
under the
title
``Selected
Government of
Canada
benchmark bond
yields'',
for the week that
the producer
entered into the
contract or the
week of the most
recent interest
rate adjustment
date, if any,
under the
contract,
(b) in the case
of a producer
located in
Mexico, the
yield for
federal
government debt
obligations set
out in La
Seccion de
Indicadores
Monetarios,
Financieros, y
de Finanzas
Publicas, de los
Indicadores
Economicos,
published by the
Banco de Mexico
under the title
``Certificados
de la Tesoreria
de la
Federacion'' for
the week that
the producer
entered into the
contract or the
week of the most
recent interest
rate adjustment
date, if any,
under the
contract, and
(c) in the case
of a producer
located in the
United States,
the yield for
federal
government debt
obligations set
out in the
Federal Reserve
statistical
release (H.15)
Selected
Interest Rates
(i) where the
interest rate
is adjusted at
intervals of
less than one
year, under
the title
``U.S.
government
securities,
Treasury
bills,
Secondary
market'', and
(ii) in any
other case,
under the
title ``U.S.
Government
Securities,
Treasury
constant
maturities'',
for the week that
the producer
entered into the
contract or the
week of the most
recent interest
rate adjustment
date, if any,
under the
contract.
General
SECTION 2.
For purposes of
calculating non-
allowable interest
costs
(a) with respect
to a fixed-rate
contract, the
interest rate
under that
contract shall
be compared with
the yield on
federal
government debt
obligations that
have maturities
of the same
length as the
weighted average
principal
maturity of the
payment schedule
under the
contract (that
yield determined
by linear
interpolation,
where
necessary);
(b) with respect
to a variable-
rate contract
(i) in which
the interest
rate is
adjusted at
intervals of
less than or
equal to one
year, the
interest rate
under that
contract shall
be compared
with the yield
on federal
government
debt
obligations
that have
maturities
closest in
length to the
interest rate
adjustment
period of the
contract, and
(ii) in which
the interest
rate is
adjusted at
intervals of
greater than
one year, the
interest rate
under the
contract shall
be compared
with the yield
on federal
government
debt
obligations
that have
maturities of
the same
length as the
weighted
average
principal
maturity of
the payment
schedule under
the contract
(that yield
determined by
linear
interpolation,
where
necessary);
and
(c) with respect
to a fixed-rate
or variable-rate
contract in
which the
weighted average
principal
maturity of the
payment schedule
under the
contract is
greater than the
maturities
offered on
federal
government debt
obligations, the
interest rate
under the
contract shall
be compared to
the yield on
federal
government debt
obligations that
have maturities
closest in
length to the
weighted average
principal
maturity of the
payment schedule
under the
contract.
ADDENDUM
``EXAMPLE''
ILLUSTRATING THE
APPLICATION OF THE
METHOD FOR
CALCULATING NON-
ALLOWABLE INTEREST
COSTS IN THE CASE
OF A FIXED-RATE
CONTRACT
The following
example is based
on the figures set
out in the table
below and on the
following
assumptions:
(a) a producer in
a NAFTA country
borrows
$1,000,000 from
a person of the
same NAFTA
country under a
fixed-rate
contract;
(b) under the
terms of the
contract, the
loan is payable
in 10 years with
interest paid at
the rate of 6
percent per year
on the declining
principal
balance;
(c) the payment
schedule
calculated by
the lender based
on the terms of
the contract
requires the
producer to make
annual payments
of principal and
interest of
$135,867.36 over
the life of the
contract;
(d) there are no
federal
government debt
obligations that
have maturities
equal to the 6-
year weighted
average
principal
maturity of the
contract; and
(e) the federal
government debt
obligations that
are nearest in
maturity to the
weighted average
principal
maturity of the
contract are of
5- and 7-year
maturities, and
the yields on
them are 4.7
percent and 5.0
percent,
respectively.






--------------------------------------------------------------------------------------------------------------------------------------------------------
Weighted
Years of loan Principal balance Interest payment Principal payment Payment schedule principal payment
\1\ \2\ \3\ \4\
--------------------------------------------------------------------------------------------------------------------------------------------------------
1....................................................... $924,132.04 $60,000.00 $75,867.96 $135,867.96 $75,867.96
2....................................................... 843,712.00 55,447.92 80,420.04 135,867.96 160,840.08
3....................................................... 758,466.76 50,622.72 85,245.24 135,867.96 255,735.72
4....................................................... 668,106.81 45,508.01 90,359.95 135,867.96 361,439.82
5....................................................... 572,325.26 40,086.41 95,781.55 135,867.96 478,907.76
6....................................................... 470,796.81 34,339.52 101,528.44 135,867.96 609,170.67
7....................................................... 363,176.66 28,247.81 107,620.15 135,867.96 753,341.06
8....................................................... 249,099.30 21,790.60 114,077.36 135,867.96 912,618.88
9....................................................... 128,177.30 14,945.96 120,922.00 135,867.96 1,088,298.02
10...................................................... (0.00) 7,690.66 128,177.32 135,867.96 1,281,773.22
------------------
.................. ................. ................. ................. $5,977,993.19
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The principal balance represents the loan balance at the end of each full year the loan is in effect and is calculated by subtracting the current
year's principal payment from the prior year's ending loan balance.
\2\ Interest payments are calculated by multiplying the prior year's ending loan balance by the contract interest rate of 6 percent.
\3\ Principal payments are calculated by subtracting the current year's interest payments from the annual payment schedule amount.
\4\ The weighted principal payment is determined by, for each year of the loan, multiplying that year's principal payment by the number of years the
loan had been in effect at the end of that year.
\5\ The weighted average principal maturity of the contract is calculated by dividing the sum of the weighted principal payments by the original loan
amount and rounding the amount determined to the nearest decimal place.







Weighted Average
Principal Maturity
$5,977,993.19/
$1,000,000=5.9
77993 or 6
years \5\
By applying the
above method:
(1) the weighted
average
principal
maturity of the
payment schedule
under the 6
percent contract
is 6 years;
(2) the yields on
the closest
maturities for
comparable
federal
government debt
obligations of 5
years and 7
years are 4.7
percent and 5.0
percent,
respectively;
therefore, using
linear
interpolation,
the yield on a
federal
government debt
obligation that
has a maturity
equal to the
weighted average
principal
maturity of the
contract is 4.85
percent. This
number is
calculated as
follows:
4.7+[((5.0-
4.7)x(6-5))/(7-
5)]
=4.7+0.15
=4.85%; and
(3) the
producer's
contract
interest rate of
6 percent is
within 700 basis
points of the
4.85 percent
yield on the
comparable
federal
government debt
obligation;
therefore, none
of the
producer's
interest costs
are considered
to be non-
allowable
interest costs
for purposes of
the definition
``non-allowable
interest
costs.''
``EXAMPLE''
ILLUSTRATING THE
APPLICATION OF THE
METHOD FOR
CALCULATING NON-
ALLOWABLE INTEREST
COSTS IN THE CASE
OF A VARIABLE-RATE
CONTRACT
The following
example is based
on the figures set
out in the tables
below and on the
following
assumptions:
(a) a producer in
a NAFTA country
borrows
$1,000,000 from
a person of the
same NAFTA
country under a
variable-rate
contract;
(b) under the
terms of the
contract, the
loan is payable
in 10 years with
interest paid at
the rate of 6
percent per year
for the first
two years and 8
percent per year
for the next two
years on the
principal
balance, with
rates adjusted
each two years
after that;
(c) the payment
schedule
calculated by
the lender based
on the terms of
the contract
requires the
producer to make
annual payments
of principal and
interest of
$135,867.96 for
the first two
years of the
loan, and of
$146,818.34 for
the next two
years of the
loan;
(d) there are no
federal
government debt
obligations that
have maturities
equal to the 1.9-
year weighted
average
principal
maturity of the
first two years
of the contract;
(e) there are no
federal
government debt
obligations that
have maturities
equal to the 1.9-
year weighted
average
principal
maturity of the
third and fourth
years of the
contract; and
(f) the federal
government debt
obligations that
are nearest in
maturity to the
weighted average
principal
maturity of the
contract are 1-
and 2-year
maturities, and
the yields on
them are 3.0
percent and 3.5
percent
respectively.






--------------------------------------------------------------------------------------------------------------------------------------------------------
Weighted
Beginning of year Principal Interest rate Interest Principal Payment principal
balance (%) payment payment schedule payment
--------------------------------------------------------------------------------------------------------------------------------------------------------
1................................................. $1,000,000.00 6.00 $60,000.00 $75,867.96 $135,867.96 $75,867.96
2................................................. 924,132.04 6.00 55,447.92 80,420.04 135,867.96 1,848,264.08
----------------
............... ............... ............... ............... ............... $1,924,132.04
--------------------------------------------------------------------------------------------------------------------------------------------------------







Weighted Average
Principal Maturity
$1,924,132.04/
$1,000,000=1.9
2413204 or 1.9
years
By applying the
above method:
(1) the weighted
average
principal
maturity of the
payment schedule
of the first two
years of the
contract is 1.9
years;
(2) the yield on
the closest
maturities of
federal
government debt
obligations of 1
year and 2 years
are 3.0 and 3.5
percent,
respectively;
therefore, using
linear
interpolation,
the yield on a
federal
government debt
obligation that
has a maturity
equal to the
weighted average
principal
maturity of the
payment schedule
of the first two
years of the
contract is 3.45
percent. This
amount is
calculated as
follows:
3.0+[((3.5-
3.0)x(1.9-
1.0))/(2.0-
1.0)]
=3.0+0.45
=3.45%; and
(3) the
producer's
contract rate of
6 percent for
the first two
years of the
loan is within
700 basis points
of the 3.45
percent yield on
federal
government debt
obligations that
have maturities
equal to the 1.9-
year weighted
average
principal
maturity of the
payment schedule
of the first two
years of the
producer's loan
contract;
therefore, none
of the
producer's
interest costs
are considered
to be non-
allowable
interest costs
for purposes of
the definition
``non-allowable
interest
costs''.






--------------------------------------------------------------------------------------------------------------------------------------------------------
Weighted
Beginning of year Principal Interest rate Interest Principal Payment principal
balance (%) payment payment schedule payment
--------------------------------------------------------------------------------------------------------------------------------------------------------
1................................................. $1,000,000.00 6.00 $60,000.00 $75,867.96 $135,867.96
2................................................. 924,132.04 6.00 55,447.92 80,420.04 135,867.96
3................................................. 843,712.01 8.00 67,496.96 79,321.38 146,818.34 $79,321.38
4................................................. 764,390.62 8.00 61,151.25 85,667.09 146,818.34 1,528,781.24
----------------
............... ............... ............... ............... ............... $1,608,102.62
--------------------------------------------------------------------------------------------------------------------------------------------------------







Weighted Average
Principal Maturity
$1,608,102.62/
$843,712.01=1.
905985 or 1.9
years
By applying the
above method:
(1) the weighted
average
principal
maturity of the
payment schedule
under the first
two years of the
contract is 1.9
years;
(2) the federal
government debt
obligations that
are nearest in
maturities to
the weighted
average
principal
maturity of the
contract are 1-
and 2-year
maturities, and
the yields on
them are 3.0 and
3.5 percent,
respectively;
therefore, using
linear
interpolation,
the yield on a
federal
government debt
obligation that
has a maturity
equal to the
weighted average
principal
maturity of the
payment schedule
of the first two
years of the
contract is 3.45
percent. This
amount is
calculated as
follows:
3.0+[((3.5-
3.0)x(1.9-
1.0))/(2.0-
1.0)]
=3.0+0.45
=3.45%
(3) the
producer's
contract
interest rate,
for the third
and fourth years
of the loan, of
8 percent is
within 700 basis
points of the
3.45 percent
yield on federal
government debt
obligations that
have maturities
equal to the 1.9-
year weighted
average
principal
maturity of the
payment schedule
under the third
and fourth years
of the
producer's loan
contract;
therefore, none
of the
producer's
interest costs
are considered
to be non-
allowable
interest costs
for purposes of
the definition
``non-allowable
interest
costs''.
SCHEDULE XII
GENERALLY ACCEPTED
ACCOUNTING
PRINCIPLES
SECTION 1.
Generally Accepted
Accounting
Principles means
the recognized
consensus or
substantial
authoritative
support in the
territory of a
NAFTA country with
respect to the
recording of
revenues,
expenses, costs,
assets and
liabilities,
disclosure of
information and
preparation of
financial
statements. These
standards may be
broad guidelines
of general
application as
well as detailed
standards,
practices and
procedures.
SECTION 2.
For purposes of
Generally Accepted
Accounting
Principles, the
recognized
consensus or
authoritative
support are
referred to or set
out in the
following
publications:
(a) with respect
to the territory
of Canada, The
Canadian
Institute of
Chartered
Accountants
Handbook, as
updated from
time to time;
(b) with respect
to the territory
of Mexico, Los
Principios de
Contabilidad
Generalmente
Aceptados,
issued by the
Instituto
Mexicano de
Contadores
Públicos
A.C. (IMCP),
including the
boletines
complementarios,
as updated from
time to time;
and
(c) with respect
to the territory
of the United
States,
(i) the
following
publications
of the
American
Institute of
Certified
Public
Accountants
(AICPA), as
updated from
time to time:
(A) AICPA
Professional
Standards,
(B) Committee
on
Accounting
Procedure
Accounting
Research
Bulletins,
(C)
Accounting
Principles
Board
Opinions and
Statements,
(D) APB
Accounting
and Auditing
Guides,
(E) AICPA
Statements
of Position,
and
(F) AICPA
Issues
Papers and
Practice
Bulletins,
(ii) the
following
publications
of the
Financial
Accounting
Standards
Board (FASB),
as updated
from time to
time:
(A) FASB
Accounting
Standards
and
Interpretati
ons,
(B) FASB
Technical
Bulletins,
and
(C) FASB
Concepts
Statements.



[T.D. 95–68, 60 FR 46364, Sept. 6, 1995, as amended by T.D. 02–15, 67 FR 15482, Apr. 2, 2002; 67 FR 19810, Apr. 23, 2002]