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 a
liability
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OVERVIEW
No
Ascertain whether
there is a borrowing
AS-16 not
applicable
Yes
Is it a general
borrowing
No
Is it a specific
borrowing for acquisition
of a qualifying asset
No
Yes
Yes
Capitalise & Yes
disclose
Whether borrowing
costs have been
incurred
Yes
•Are borrowing costs directly attributable
to the construction / acquisition / production
of a qualifying asset
No Expense off the
•Are funds, that are generally borrowed, used
borrowing cost
for obtaining a qualifying asset
3
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
4
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
5
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
6
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
7
RECOGNITION
• Capitalise borrowing costs that are directly
attributable to the acquisition, construction or
production of a qualifying asset
• Other borrowing costs to be expensed off
• Capitalise if it is probable that they will result in
future economic benefits to the enterprise and
costs can be measured reliably
8
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
9
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
10
COMMENCEMENT OF
CAPITALISATION
Commence capitalisation when all the following conditions
are satisfied:
•
Expenditure for the acquisition, construction or
production 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
11
CRITICAL ISSUES
• Expenditure on a qualifying asset includes only such expenditure:
> that has resulted in payment of cash
> transfer of other assets
> assumption of interest bearing liabilities
•
Expenditure to be reduced by progress payments and grants
• Average carrying amount of the asset during a period including
borrowing costs previously capitalised is normally a reasonable
approximation of the expenditure to which capitalisation rate is
applied in that period
12
CRITICAL ISSUES
• When the carrying amount or the expected ultimate cost
of the qualifying asset exceeds its recoverable amount or
NRV, the carrying amount is written down or written off
in accordance with the requirements of other accounting
standards
• In certain circumstances such write down or write off
may be written back as per those other accounting
standards
13
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
14
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
15
SEQUENCE OF
CAPITALISATION
•
SPECIFIC BORROWINGS
•
GENERAL BORROWINGS
•
OWN FUNDS
16
•
•
•
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
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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
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THANK YOU
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