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PAGE NO. 1.5-1.8 USERS OF AN ACCOUNTING INFORMATION AND THEIR NEEDS .

The users of accounting information include present and potential investors,management, employees, lenders, suppliers and other trade creditors, customers,government and their agencies and the public. These users use accounting information inorder to satisfy some of their varied needs for information.

Some of the users and their needs for information are shown below: UsersNeed for Information 1.Short-term Creditors Short-term creditors need information to determine[For example,suppliers ofwhether the amount owing to them will be paid whenraw-materials/goods, due and whether they should extend, maintain orsuppliers of short-termrestrict the flow of credit to an individual enterprise.loans] 2.Long-term Creditors Long-term creditors need information to determine [For example, suppliers ofwhether their principals and the interest thereof willlong-term loans] be paid when due and whether they should extend,maintain or restrict the flow of credit to an enterprise. 3.Present Investors Present investors need information to judge prospects [For example, equityfor their investment and to determine whether they share holders]should buy, hold or sell the shares.4. Potential Investors Potential investors need information to judge [For example,

thoseprospects of an enterprise and to determine whether who want to invest] they should buy the shares. 5.Management Management needs information to review the firms(a) short-term solvency, (b) long-term solvency, (c)activity (viz. effective utilisation of its resources), (d)profitability in relation to turnover, (e) profitability inrelation to investments and to decide upon the courseof action to be taken in future. 6.Employees Employees and their representative groups areinterested in information about the stability andprofitability of the employers. They are also interestedin information which enables them to assess the ability of the enterprise to pay remuneration, retirementbenefits and to provide employment opportunities. 7.Tax Authorities Tax authorities need information to assess the taxliabilities of an enterprise. 8.Customers Customers have an interest in information about thecontinuation of an enterprise, especially when they have established a long term involvement with, orare dependent on, the enterprise. 9.Government and their Government and their agencies are interested in the agencies of enterprise. They also require information in orderto regulate the activities of enterprise, determinetaxation policies and as the basis for the nationalincome and similar statistics.

10.Public: Enterprises affect members of the public in a variety of ways. For example, enterprises may make asubstantial contribution to the local economy in many ways including the number of people, they employ and their patronage of local suppliers. Financialstatements may assist the public by providing information about trends and recent developmentsin the prosperity of the enterprise and

the range of its activities. While all the information needs of these users cannotbe made by financial statements, there are some needs which are common to all users. The informationcontents of the financial statements which meetinformation needs of the investors or providers of risk capital will also meet most of the needs of otherusers. PRIMARY OBJECTIVES OF ACCOUNTING The main objectives of accounting are as follows:

Primary Objectives of Accounting To maintainTo calculate theTo ascertain theTo communicateaccounting recordsresults of operationsfinancial positionthe informationto the users Let us discuss these objectives one by one. 1.To maintain accounting records Written records are always better than oralrecords, since written records can be used by different persons for different decision-making purposes and serve as evidence of transactions. Nowadays, the volume of transactions is so large, a human memory cannot absorb each and every transaction. Accounting is done to keep a systematic record of (i) financial transactions, (ii) assets and(iii) liabilities.

2.To calculate the results Of Operations To measure the financial performanceof an enterprise, the results of operations are ascertained by preparing an IncomeStatement (also called Profit & Loss Account) which shows the matching of current costs with current revenues during a particular accounting period. A systematic record of incomes and expenses facilitates the preparation of the Income Statement. 3.To ascertain the financial position To evaluate the financial strength and weakness of an enterprise, the financial position is ascertained by preparing a Position Statement (also called Balance Sheet) which shows resources (assets) owned by an enterpriseand the sources of financing those resources. A businessman wants to know what thebusiness owes to others and what it owns, and what happened to his capital whether thecapital has increased, decreased or remained constant. A systematic record of variousassets and liabilities facilitates the

preparation of a Position Statement (also known asBalance Sheet) which answers all these questions. 4. To communicate the information to the users Accounting communicatesinformation to internal users and external users. The internal users include all theorganizational participants at all levels of management (i.e. top, middle and lower). Toplevel management requires information for planning, middle level management requiresinformation for controlling the operations. For internal use, the information is usually provided in the form of reports, for instance Cash Budget Reports, Production Reports,Idle Time Reports, Feedback Reports, Whether to Retain or Replace an EquipmentDecision Reports, Project Appraisal Report, and the like.Since the external users (e.g. Banks, Creditors) do not have direct access to all therecords of an enterprise, they have to rely on financial statements as the source of information. External users are basically interested in the solvency and profitability of anenterprise. TYPES OF ACCOUNTING INFORMATION Accounting information may be classified in number of ways on the basis of purposeof accounting information, on the basis of measurement criteria and so on. The varioustypes of accounting information are given below:1. Accounting Information relating to financial transactions and events.Financial Position Information about financial position is primarily provided ina balance sheet. The financial position of an enterprise is affected by the economic resources itcontrols, its financial structure, its liquidity and solvency, and its capacity to adapt tochanges in the environment in which it operates. (a)Information about the economic resources controlled by the enterprise and its capacityin the past to alter these resources is useful in predicting the ability of the enterpriseto generate cash and cash equivalents in the future.(b)Information about financial structure is useful in predicting future borrowing needsand how future profits and cash flows will be distributed among those with an interestin the enterprise; it is also useful in predicting how successful the enterprise is likelyto be in raising further finance.(c)Information about liquidity and solvency is useful in predicting the ability of theenterprise to meet its financial commitments as they fall due. Liquidity refers to theavailability of cash in the near future to meet financial commitments over this period.Solvency refers to the availability of cash over the longer term to meet financialcommitments as they fall due. Financial Performance Information about financial performance is primarily provided in a Statement of Profit and Loss (also known as Income Statement).Information about the performance of an enterprise, in particular its profitability, isrequired in order to assess potential changes in the economic resources that it is likely tocontrol in the future. Information about variability of performance is important in thisrespect. Information about performance is useful in predicting the capacity of the enterprise to generate cash flows from its existing resource base. It is also useful in forming judgementsabout the effectiveness with which the enterprise might employ additional resources.Cash Flows

Information about cash flows is provided in the financial statementsby means of a cash flow statement.Information concerning cash flows of an enterprise is useful in order to evaluate itsinvesting, financial and operating activities during the reporting period. This informationis useful in providing the users with a basis to assess the ability of the enterprise togenerate cash and cash equivalents and the needs of the enterprise to utilise those cashflows.Such information may further be classified as follows: (i)on the basis of Historical Cost(ii)on the basis of Current Cost (iii) on the basis of Realizable Value (iv) onthe basis of Present Value 2. Accounting information relating to cost of a product, operation or function.3.

Accounting information relating to planning and controlling the activitiesof enterprise for internal reporting. Such information may further be classified as follows: (a)Information relating to Finance Area(b)Information relating to Production Area(c)Information relating to Marketing Area(d)Information relating to Personnel Area(e)Information relating to Other Areas (such as Research & Development) 4. Accounting information relating to Social Effects of business decisions.5.

Accounting information relating to Environment and Ecology.6.

Accounting information relating to Human Resources.

PAGE 2.7-2.10 ACCOUNTING STANDARDS Accounting as a language of business communicates the financial performance andposition of an enterprise to various interested parties by means of financial statements which have to exhibit a true and fair view of financial results and its state of affairs.Like any other language, accounting has its own complicated set of rules. The basicconventions or rules used in preparing financial statements had evolved over many yearsas a product of the collective experience of practising accountants. As a result a wide variety of accounting methods were used by different companies. It was, then, felt thatthere should be some standardised set of rules and accounting principles to reduce oreliminate confusing variations in the methods used to prepare financial statements. However,such accounting rules should have a reasonable degree of flexibility in view of specificcircumstances of an enterprise and also in line with the changes in the

economicenvironment, social needs, legal requirements and technological developments. In orderto suggest rules and criteria of accounting measurements several accounting standardsetting bodies were established in developed and developing countries. The setting of accounting standards is a social decision. Standards place restrictions on behaviour andtherefore they must be accepted by affected parties.

Meaning of Accounting Standard An accounting standard is a selected set of accounting policies or broad guidelinesregarding the principles and methods to be chosen out of several alternatives. Standardsconform to applicable laws, customs, usage and business environment. So there is nouniversally acceptable set of standards.

Objective of Accounting Standard The main objective of accounting standards is to harmonise the diverse accounting policies and practices at present in use in India. However, harmonisation does not meanthat accounting standards should become very rigid. In fact, harmonisation of accounting standards do permit flexibility to make the necessary adjustments to suit their purpose. Borrowing Costs (This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards 1.)The following is the text of Accounting Standard (AS) 16, Borrowing Costs, issued by the Council of the Institute of Chartered Accountants of India. This Standard comes into effect in respect of accounting periods commencing on or after 1-4-2000 and is mandatory in nature.

Objective The objective of this Statement is to prescribe the accounting treatment for borrowing costs. Scope 1. This Statement should be applied in accounting for borrowing costs. 2. This Statement does not deal with the actual or imputed cost of ownersequity, including preference share capital not classified as a liability.

1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting Standards are intended to apply only to items which are material. 2 Reference may be made to the section titled Announcements of the Council regarding status of various documents issued by the Institute of Chartered Accountants of India appearing at the beginning of this Compendium for a detailed discussion on the implications of the mandatory status of an accounting standard. Definitions 3. The following terms are used in this Statement with the meanings specified: Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. A qualifying asset is an asset that necessarily takes a substantial periodof timeto get ready for its intended use or sale. 4. Borrowing costs may include: (a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings; (b) amortisation of discounts or premiums relating to borrowings; (c) amortisation of ancillary costs incurred in connection with the arrangement of borrowings; (d) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and (e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs 5. Examples of qualifying assets are manufacturing plants, power generation facilities, inventories that require a substantial period of time to bring them to a saleable condition, and investment properties. Other investments, and those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired also are not qualifying assets. Recognition Borrowing Costs 305

6. Borrowing costs that are directly attributable to the acquisition,construction or production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Statement. Other borrowing costs should be recognised as an expense in the period in which they are incurred. 7. Borrowing costs are capitalised as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. Other borrowing costs are recognised as an expense in the period in which they are incurred.

Borrowing Costs Eligible for Capitalisation

8. The borrowing costs that are directly attributable to the acquisition,construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the ualifying asset had not been made. When an enterprise borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified.

9. It may be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowingsthat could otherwise have been avoided. Such adifficultyoccurs, for example,when the financing activity of an enterprise is co-ordinated centrally or when a rangeof debt instruments are used to borrow funds at varying rates of interest and such borrowings are not readily identifiable with a specific qualifying asset. As a result, the determination of the amount of borrowing costs that aredirectly attributable to the acquisition, construction or production of a qualifying asset is often difficult and the exercise of judgement is required. 10. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings. 11. The financing arrangements for a qualifying asset may result in anenterprise obtaining borrowed funds and incurring associated borrowing costs before some or all of the funds are used for expenditure on the qualifying asset. In such circumstances, the funds are often temporarily invested pending their expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalisation during a period, any

income earned on the temporary investment of those borrowingsis deducted from the borrowing costs incurred.

12. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation should be determined by applying a capitalisation rate to the expenditure on that asset. The capitalisation rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalised during a period should not exceed the amount of borrowing costs incurred during that period.

Excess of the Carrying Amount of the Qualifying Asset over Recoverable Amount

13. When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its recoverable amount or net realisable value, the carrying amount is written down or written off in accordance with the requirements of other Accounting Standards. In certain circumstances, the amount of the write-down or write-off is written back in accordance with those other Accounting Standards.

Commencement of Capitalisation

14. The capitalisation of borrowing costs as part of the cost of a qualifying asset should commence when all the following conditions are satisfied: (a) expenditure for the acquisition, construction or production of a qualifying asset is being incurred; (b) borrowing costs are being incurred; and (c) activities that are necessary to prepare the asset for its intended use or sale are in progress.

15. Expenditure on a qualifying asset includes only such expenditure thathas resulted in payments of cash, transfers of other assets or the assumption of interest-bearing liabilities. Expenditure is reduced by any progress payments received and grants received in connection with the asset (see Accounting Standard 12, Accounting for Government Grants). The averagecarrying amount of the asset during a period, including borrowing costs previously capitalised, is normally a reasonable approximation of the expenditure to which the capitalisation rate is applied in that period.

16. The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction,such asthe activities associated with obtaining permits prior to the commencement of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the assets condition is taking place. For example, borrowing costs incurred while land is under development are capitalised during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is heldwithout any associated development activity do not qualifyfor capitalisation.

Suspension of Capitalisation

17. Capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted. 18. Borrowing costs may be incurred during an extended period in which the activities necessary to prepare an asset for its intended use or sale are interrupted. Such costs are costs of holding partially completed assets and do not qualify for capitalisation. However, capitalisation of borrowing costs is not normally suspended during a period when substantial technical and administrative work is being carried out. Capitalisation of borrowing costsisalso not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. For example,capitalisation continues during the extended period needed forinventoriesto mature or the extended period during which high water levels delay construction of a bridge, if such high water levels are common during theconstruction period in the geographic region involved.

Cessation of Capitalisation

19. Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. 20. An asset is normally ready for itsintended use or sale when its physical construction or production is complete even though routine administrative work mightstill continue. If minor modifications,such asthe decoration of a property to the usersspecification, are all that are outstanding, thisindicates that substantially all the activities are complete. 21. When the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalisation of borrowing costs in relation to a part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are complete. 22. A business park comprising several buildings, each of which can be used individually, is an example of a qualifying asset for which each part is capable of being used while construction continues for the other parts. An example of a qualifying asset that needs to be complete before any part can be used is an industrial plant involving several processes which are carried out in sequence at different parts of the plant within the same site, such as a steel mill.

Disclosure 23. The financial statements should disclose: (a) the accounting policy adopted for borrowing costs; and (b) the amount of borrowing costs capitalised during the period.

Significance of Accounting Standard The adoption and application of accounting standards ensures uniformity,comparability and qualitative improvement in the preparation and presentation of financialstatements. The accounting standards seek to describe the accounting principles, the valuationtechniques and the methods of applying the accounting principles in the preparation andpresentation of financial statements so that they may give a true and fair view. Theostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other parties having aninterest in companies economic performance.

Advantages of setting Accounting Standards 1.Reduction in Variations Standards reduce to a reasonable extent or eliminatealtogether confusing variations in the accounting treatments used to prepare financialstatements. 2.Disclosure Beyond that Required by Law There are certain areas where importantinformation is not statutorily required to be disclosed. Standards may call for disclosure

beyond that required by law.3. Facilitates Comparison The application of accounting standards would, to a limitedextent, facilitate comparison of financial statements of companies situated in differentparts of the world and also of different companies situated in the same country. However,it should be noted in this respect that differences in the institutions, traditions and legalsystems from one country to another give rise to differences in accounting standardspractised in different countries.

Arguments against setting Accounts Standards However there are some arguments against setting accounting standards: 1.Restriction on Choice of Alternative Treatments Alternative solutions to certainaccounting problems may each have arguments to recommend them. A standard whichinsists on one particular solution may be unduly restrictive. This can sometimes be avoidedeither by allowing a permitted choice between different accounting treatments, or by defining closely the circumstances where different treatments may be appropriate.2.

Rigidity There may be a trend towards rigidity in applying the accounting standards.Michael Alexander, Director of Research and Technical Activities at the Financial Accounting Standards Board (FASB) said, the demand for standards comes largely froman insatiable appetite for rules. The reliance on judgment in technical accounting mattersseems to have gone.3. Cannot Override the Statute Accounting standards cannot override the statute. Thestandards are required to be framed within the ambit of prevailing statutes.

DEVELOPMENT OF ACCOUNTING STANDARDS Prior to the 1970s, few academics paid much attention to the standard-setting processin accounting. Beginning in the 1970s, however, it became clear that standard setting wasa fascinating process that had become intertwined with the economic self-interests of affected parties. Currently, standard-setting boards or committees are active in a numberof countries, including the United States, United Kingdom, Australia, Canada, New Zealand,the Netherlands, Japan and India. At International level In 1972 International Accounting Standards Committee(IASC), was formed for developing International Accounting Standards (IASs). The IASCcomprises the professional accountancy bodies of over 75 countries (including The Instituteof Chartered Accountants of India). During these three decades the IASC has issued 40IASs through a due process involving the worldwide accountancy profession, the preparersand users of financial statements and the national standardsetting bodies. However theIASs are not accepted worldwide.In 1978, another professional body, the International Federation of Accountants(IFAC) was established.

ACCOUNTING STANDARDS BOARD OF INDIA Formation of the Accounting Standards Board The institute of Chartered Accountants of India, recognising the need to harmonise the diverse accounting policies and practices at present in use in India, constituted an Accounting StandardsBoard (ASB) on April 21, 1977. Scope and function of Accounting Standards Board The main function of ASB is to formulate accounting standards so that such standards may be establishedby the Council of the Institute in India. While formulating the accounting standards, ASBwill take into consideration the applicable law, customs, usages and business environment. The Institute is one of the members of the International Accounting StandardsCommittee (IASC) and has agreed to support the objectives of IASC. While formulating the accounting standards, ASB

will give due consideration to International Accounting Standards issued by IASC and try to integrate them, to the extent possible, in the light of the conditions and practices prevailing in India. The accounting standards will be issued under the authority of the Council. ASB hasalso been entrusted with the responsibility of propagating the accounting standards andof persuading the concerned parties to adopt them in the preparation and presentationof financial statements. ASB will issue guidance notes on the accounting standards andgive clarifications on issues arising therefrom. ASB will also review the accounting standardsat periodical intervals.Procedure for issuing Accounting Standards Broadly, the following procedure willbe adopted for formulating Accounting Standards: Step 1 To determine the broad areas in which accounting standards need to beformulated and the priority in regard to the selection thereof. Step 2 To hold a dialogue with the representatives of the government, publicsector undertakings, industry and other organizations for ascertaining their views. Step 3 On the basis of the work of the study groups and the dialogue with therepresentatives, to prepare and issue the exposure of draft of the proposed standard forcomments by members of the Institute and the public at large. Step 4 To finalise the draft of the proposed standard after talcing into considerationthe comments received. Step 5 To submit the final draft of the proposed standard to the Council of theInstitute. The Council of the Institute will consider the final draft of the proposed standard,and if found necessary, modify the same in consultation with ASB. The accounting standard on the relevant subject will then be issued under the authority of the Council. Accounting Standards issued so far In India. The Council of the Institute of .Characterd Accountants of India has so far issued twenty nitme accounting standards.Some of these standards are mandatory. These accounting standards are mandatory inthe sense that these are binding on the members of the Institute. These standards are asfollows: allocation of resources and, therefore, the activitiesAccounting Standard 16: Borrowing Costs

Statement to be applied in accounting for borrowing costs. Statement does not deal with the actual or imputed cost of owners equity/preference capital.

Borrowing costs that are directly attributable to the acquisition, construction or production of any qualifying asset (assets that takes a substantial period of time to get ready for its intended use or sale) should be capitalized. Generally, a period of 12 months is considered as a substantial period of time (ASI-1 Incorporated in (AS) 16 "Borrowing Costs" as an explanation below para 3.2). Borrowing costs may include: Interest and commitment charges on Bank Borrowings, Other short-term and other long-term borrowings. Amortisation of ancillary costs incurred in connection with the arrangement of borrowings. Amortisation of discounts or premium relating to borrowings. Finance charges in respect of assets acquired under finance leases or under other similar arrangements; and Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Income on the temporary investment of the borrowed funds be deducted from borrowing costs. In case of funds obtained generally and used for obtaining a qualifying asset, the borrowing cost to be capitalized is determined by applying weighted average of borrowing cost on outstanding borrowings, other than borrowings for obtaining qualifying asset. Capitalization of borrowing cost should commence when expenditure for acquisition, construction or production is being incurred, borrowing costs is incurred and activities necessary to prepare the asset for its intended use or sale are in progress. Capitalization of borrowing costs should be suspended during extended periods in which development is interrupted. When the expected cost of the qualifying asset exceeds its recoverable amount or Net Realizable Value, the carrying amount is written down. Capitalization should cease when activity is completed substantially or if completed in parts, in respect of that part, all the activities for its intended use or sale are complete. Financial statements to disclose accounting policy adopted for borrowing cost and also the amount of borrowing costs capitalized during the period. In case exchange difference on foreign currency borrowings represent saving in interest, compared to interest rate for the local currency borrowings, it should be treated as part of interest cost for AS 16 (ASI-10 Incorporated in (AS) 16 "Borrowing Costs" as an explanation below para 4(e))

AS 16: Borrowing Costs Take a look at the following love story

The hero of our story is an employee and heroine is a studentstudying CA. Everyday evening they both will meet at a spot, the boy usually givesmany gifts. As and when he gives gift, he thinks that it is an investment formarriage.A twist in the story, the hero while going in his car watches the girl sittingwith another boy in the restaurant. Our heros heart broke into pieces and hebecame a mini Devdas. The fact is that the boy with whom the girl was sitting is hercousin.----- A break in the Love and Interval for our story -------The hero has ordered a Diamond ring for his love. Without knowing what hashappened, the jewellery shop owner sent the ring to girls house and bill to boyshouse. Now our hero has to pay the bill. At the time of paying the bill , hero willcertainly think it as a wasteful expenditure.There should be a good climax, other wise audience wont accept the story.So, A common friend to hero and heroine enters the scene and makes all the doubtsof hero clear and again they both will be same as before. Again the hero startsgiving gifts. Now he will think it as an investment for marriage.---------- They both got married -----------One fine day, sorry one bad day, Our heroine asks his husband for a mobile(N 97) as the mobile with her which he has gifted is very old (1100). Our hero didntaccept for that and heroine starts crying. The hero has no other alternative andhas to buy the mobile. Now he will think it as expenditure. Right???What is borrowing cost?When we borrow funds we have to incur costs, like

they are regarded as an adjustment to interest costs This accounting standard states whether the borrowing costs has to be capitalizedor to be charged to profit & Loss A/C. The following table shows in brief theaccounting treatment.

Amortization of ancillary costs incurred in connection with the arrangementof borrowings

Particulars : During the development ofthe Asset(Asset as defined underAS 16)

Treatment : Capitalize

Correlation with ourstory : Gifts given will be treatedas investment formarriage when their loveis developing

Particulars : Interruption in thedevelopment of asset Treatment : Charge it to P&L A/C(Revenue Exp.)

Correlation with ourstory : A break in their love andthe diamond ring

Particulars : When the development ofasset again continues

Treatment : Capitalize

Correlation with ourstory : The story after interval.Common friend joins heroand heroine

Particulars : Asset is completed andready for use. Ifborrowing cost is incurredafter completion

Treatment : Charge it to P&L A/C(Revenue Exp.)

Correlation with ourstory : After marriage andquarrel for mobile.

FAQs on AS 16:

1. What is an asset? Asset under AS 16 means the qualifying asset which takes substantialperiod of time for its intended use or for sale. Eg: Turnkey projects, Construction, power generation facilities, Investmentproperties, Inventories that require substantial period to bring them to saleablecondition, Development of steel plants.

2. What is substantial period of time? As per the consensus, it is 12 months but may be more or less than 12months, which depends on the facts and circumstances of each case.3. When capitalization shall commence, whether from the date of borrowing offunds or whether from the start of construction of asset or whether at any othertime?

The following conditions has to be satisfied (a)Expenditure for the acquisition, Construction or production of a qualifyingasset is being incurred. (b)Borrowing costs are being incurred on the other hand (c)Activities necessary to prepare the asset for its intended use or sale is inprogress.

Borrowing cost that has to be capitalized= Exp. On that asset X Capitalization rate. Capitalization rate = Weighted averagecost of borrowingNote: Borrowing cost capitalized should notexceed Actual borrowing cost incurredduring the period.

(second art )Borrowing cost has to be capitalized

Borrowing cost =Borrowing cost during the period(-) Income from temporary investment ofborrowed amount

Disclosure under AS 16: a) Accounting Policy adopted b) Amount of borrowing cost capitalized during the accounting period 302 Accounting Standard (AS) 16 (issued 2000) Borrowing Costs Contents

OBJECTIVE SCOPE DEFINITIONS RECOGNITION Borrowing Costs Eligible for Capitalisation Excess of the Carrying Amount of the Qualifying Asset over Recoverable Amount Commencement of Capitalisation Suspension of Capitalisation Cessation of Capitalisation DISCLOSURE

Objective
The objective of this Statement is to prescribe the accounting treatment for borrowing costs. ISSUE 1. Accounting Standard (AS) 16, Borrowing Costs, defines the term qualifyin g asset as an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

2. The issue is what is the meaning of the expression substantial period of time for the purpose of this definition.

CONSENSUS

3. The issue as to what constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale should be considered. 1. ISSUE 1. Paragraph 4 (e) of AS 16, Borrowing Costs, provides that borrowing costs may include exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest

costs. 2. The issue is which exchange differences are covered under paragraph 4 (e) of AS 16. CONSENSUS 3. Paragraph 4 (e) of AS 16 covers exchange differences on the amount of principal of the foreign currency borrowings to the extent of difference between interest on local currency borrowings and intereston foreign currency borrowings. For this purpose, the interest rate for the local currency borrowings should be considered as that rate at which the enterprise would have raised the borrowings locally had the enterprise not decided to raise the foreign currency borrowings. If the difference between the interest on local currency borrowings and the interest on foreign currency borrowings is equal to or more than the exchange difference on the amount of principal of the foreign currency borrowings, the entire amount of exchange difference is covered under paragraph 4 (e) of AS 16.
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Accounting Standards

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Notional saving of interest whether to be accounted for


A. Facts of the Case 1. A public sector company having operations all over India manages its funds through a centrally controlled bank account. All receipts/expenditures are transferred to the bank account on daily basis. All the borrowings, whether specific for projects or general, are deposited into a common pool of funds. 2. The company allocates the interest on specific borrowings to the projects irrespective of its utilisation from the date of borrowings. As a result the interest on unutilised loan amount which is actually used for other purposes (through common pool of funds) also gets capitalised. 3. The querist has referred to paragraph 10 of Accounting Standard (AS) 16, Borrowing Costs, which states as below: "10. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings. 4. The querist has also referred to paragraph 11 of AS 16 which states that where the funds are temporarily invested out of the funds specifically borrowed for projects pending their expenditure on qualifying asset, in determining the amount of borrowing cost eligible for capitalisation during a period, any income earned on such temporary investment is to be deducted from the borrowing cost incurred. 5. In the case of the company, the funds are not specifically invested and no income is earned on the unutilised funds. However, the funds borrowed specifically for projects are deposited in common pool and the surplus funds are utilised for meeting working capital requirement on short term basis resulting in reduction in overdraft in cash credit account. B. Queries 6. The querist has sought the opinion of the Expert Advisory Committee on the following issues: (a) Whether notional saving of interest on cash credit account should be deducted from the borrowing cost (i) when there is no overdraft in the cash credit account; and (ii) when there is overdraft in the cash credit account. (b) In case the notional saving of interest is to be deducted from the borrowing cost incurred on the funds borrowed specifically for projects, whether the rate to be considered should be (i) the interest rate of the specific borrowing; or (ii) the interest rate of cash credit C. Points Considered by the Committee 7. The Committee restricts itself to the specific issue raised by the querist relating to the deduction of notional savings in interest from the costs of borrowings for specific assets for the purpose of capitalisation. The Committee has not examined any other accounting issue contained in the query. 8. The Committee notes the requirements of AS 16 as stated in paragraphs 3 and 4 above. 9. The Committee notes that in the case of the company, there is no income from the temporary investment of funds as such. There is only a notional income in the form of

savings in interest cost that would have been otherwise incurred on cash credit account. 10. From the above, the Committee is of the view that under the present accounting framework notional saving in interest from the temporary use of funds for the companys working capital requirements can not be construed as income from the temporary investment of borrowings as contemplated in AS 16. Therefore, such notional savings can not be deducted from the borrowing costs for the purpose of capitalistion. D. Opinion 11. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 6: (a) The notional saving of interest on cash credit account should not be deducted from the borrowing costs whether there is overdraft or no overdraft in the cash credit account. (b) This issue is not relevant in view of (a) above.