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ACCOUNTING STANDARD-16

BORROWING COSTS

OBJECTIVE & SCOPE

To prescribe the accounting treatment for


borrowing costs
Does not deal with the actual or imputed cost
of owners
equity, including preference share capital not
classified as liability.

DEFINITIONS

Borrowing costs are interest and other costs incurred by an


enterprise in connection with the borrowing of funds

Qualifying asset is an asset that necessarily takes a substantial


period of time to get ready for its intended use or sale

BORROWING COSTS

Interest and commitment charges on bank & other short term


borrowings
Amortisation of discounts or premiums relating to
borrowings
Amortisation of ancillary costs incurred in connection with
the arrangement of borrowings
Finance charges of assets acquired under finance leases or
under other similar arrangements
Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs

QUALIFYING ASSETS
Examples:
Manufacturing

plants
Power generation facilities
Inventories that require a substantial
period of time to bring them to a saleable
condition.
Investment properties

QUALIFYING ASSETS
Not

to be included as qualifying assets:


Other Investments
Inventories that are routinely manufactured or
otherwise produced in large quantities on
repetitive basis over a short period of time.
Assets that are ready for their intended use or sale
when acquired.

RECOGNITION
Capitalise borrowing costs that are directly attributable
to the acquisition, construction or production of a
qualifying asset
These should be capitalised only if it is probable that they will
result in
future economic benefits to the enterprise and
costs can be measured reliably
Other borrowing costs to be expensed off.

BORROWING COST ELIGIBLE


FOR CAPITALISATION

SPECIFIC BORROWINGS

Borrowing costs that would have been avoided if the expenditure


on the qualifying asset had not been made.

Actual borrowing costs incurred less any income on temporary


investment of those borrowings to be capitalised

BORROWING COST ELIGIBLE


FOR CAPITALISATION
GENERAL BORROWINGS

Determine borrowing costs by applying a

capitalisation rate.

Capitalisation rate should be the weighted average of the


borrowing costs that are outstanding during the period.

Borrowing costs capitalised not to exceed amount of borrowing


costs incurred.

COMMENCEMENT OF
CAPITALISATION.

Capitalisation commences when all the following conditions


are satisfied:

Expenditure for the acquisition, construction or


of a qualifying asset is being incurred.

Borrowing costs are being incurred

Activities that are necessary to prepare the asset for its


intended use or sale are in progress

production

EXAMPLE

Total exp. on a qualifying asset in a month


10 crores
Average exp. for the month
5 crores
Specific borrowings
3 crores
General borrowings
6.5 crores
Debentures (14%)
1.50 crores
Long term borrowings (11%)
3.00 crores
Short term borrowings (12%)
2.00 crores
Exp. out of general borrowings
2 crores

EXAMPLE

Weighted average rate 12%

Capitalisation of borrowing costs on the above expenditure of


Rs 2 crores should be at the rate of 12% p.a. for the said month
apart from capitalisation of interest on specific borrowings

SUSPENSION /CESSATION OF
CAPITALISATION

Suspend during extended periods in which active development


is interrupted.

Capitalisation should cease when substantially all activities


necessary to prepare the qualifying asset for its intended use or
sale are complete.

In case of construction of a qualifying asset in parts and a


completed part is capable of being used while construction
continues for the other parts, capitalization 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

DISCLOSURE

The accounting policy adopted for borrowing costs.

The amount of borrowing costs capitalised during the period.