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ACCOUNTING STANDARD- 16

ACCOUNTING STANDARD- 16. BORROWING COSTS. DEFINITIONS (Para 3). Borrowing Costs are interests and other costs incurred by an enterprise in connection with the borrowing of funds.

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ACCOUNTING STANDARD- 16

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  1. ACCOUNTING STANDARD- 16 BORROWING COSTS

  2. DEFINITIONS(Para 3) • Borrowing Costs are interests 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.

  3. Para 4. Borrowing Costs may include: Interest and commitment charges on bank borrowings and other short term and long term borrowings; Amortization of discounts or premiums relating to borrowings; Amortization of ancillary costs incurred in connection with the arrangement of borrowings; Finance charges in respect of assets acquired under finance leases or under similar arrangements; and Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

  4. The Standard requires that the amount of borrowing costs capitalized during a period should not exceed the amount of borrowing costs incurred during the period.

  5. ISSUE Para 4(e) in which foreign exchange differences are covered . CONSIDERATIONS (A.) Foreign Exchange Differences on amount of principal foreign currency borrowings + Interest on foreign currency borrowings COMPARED WITH (B.) Interest on local currency borrowings (enterprise capable to borrow locally) If (B.) is higher, then exchange difference would become part of borrowing cost.

  6. QUALIFYING ASSETS (Para 5) Qualifying assets include: • Manufacturing plants • Power generation facilities • Inventories that requires substantial periods of time to bring them to saleable condition.

  7. RECOGNITION OF COST All Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of a qualifying assets Other Borrowing costs Future economic benefits Charge to P&L Measurement possible Capitalize as apart of the cost of qualifying asset

  8. a. In case of funds specifically borrowed for qualifying assets: Borrowing Costs = Actual borrowing - Income on temporary to be capitalized cost incurred investment of funds b. In case of general borrowings: Borrowing Costs = Capitalization Rate * Expenditure on the asset • Capitalization rate = Weighted Average of outstanding borrowing • cost (excluding cost of specific borrowings)

  9. CAPITALIZATION OF BORROWING COST

  10. COMMENCEMENT(Para 14) The capitalization of borrowing cost is to be commenced when all the three conditions are satisfied: • expenditure for the acquisition, construction or production of a qualifying asset is being incurred; • Borrowing costs are being incurred; and • Activities that are necessary to prepare the asset for its intended use or sale are in progress.

  11. EXPENDITURE ON QUALIFYING ASSETS (Para 15) It includes expenditures which results in: • Payment of cash • Transfer of other assets • Incurrence of interest bearing liabilities Deduct: • Progress Payments • Grant received in connection with asset *Consider Average carrying cost during reporting period

  12. SUSPENSION(Para 17) Capitalization of borrowing costs are should be suspended during extended periods in which active development is interrupted. • Except when: • Substantial technical/ administrative work being done. • Temporary delay is inherent in the process.

  13. CESSATION Para 19 When substantially all the activities necessary to prepare the qualifying assets for its intended use or sale are completed. Para 21 In case of completion of parts, when completed part is capable of being used independently or no substantial activity necessary for its intended use or sale.

  14. DISCLOSURE The financial statements should disclose: • the accounting policy adopted for borrowing costs; and • the amount of borrowing costs capitalized during the period.

  15. ILLUSTRATIVE ACCOUNTING POLICY “ The Company capitalizes interest and other costs incurred by it in connection with funds borrowed for the acquisition of fixed assets. Where specific borrowings are identified to a fixed asset, the Company uses the interest rates applicable to that specific borrowing as the capitalization rate. Where borrowings cannot be specifically identified to fixed assets , the capitalization rate applied is the weighted average of the interest rates applicable to all the borrowings of the Company. Capitalization of borrowing costs ceases when all the activities necessary to prepare the fixed assets for their intended use are substantially complete.”

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