ACCOUNTING STANDARD-16

BORROWING COSTS

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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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Ascertain whether there is a borrowing

AS-16 not applicable

Is it a general borrowing

Is it a specific borrowing for acquisition of a qualifying asset

Whether borrowing costs have been

incurred

Capitalise &disclose

Expense off the borrowing cost

OVERVIEW

No

No

Yes

No

Yes

Yes No

Yes

Yes

•Are borrowing costs directly attributable to the construction / acquisition / production of a qualifying asset

•Are funds, that are generally borrowed, used for obtaining a qualifying asset

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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SEQUENCE OF CAPITALISATION

• SPECIFIC BORROWINGS

• GENERAL BORROWINGS

• OWN FUNDS

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SUSPENSION /CESSATION OFCAPITALISATION

• 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

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DISCLOSURE

• The accounting policy adopted for borrowing costs

• The amount of borrowing costs capitalised during the

period

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THANK YOU