Scope Definition What does borrowing cost include? Recognition Eligibility for capitalization Commencement of capitalization Suspension of capitalization Cessation of capitalization Disclosures Difference between Ind AS 23 and IAS23 Difference between AS-16 and Ind AS 23
This standard shall be applied in accounting for borrowing costs; This standard does not deal with actual or imputed cost of equity. An entity is not required to apply the standard to borrowing cost directly attributable to acquisition, construction, or production of: Qualifying asset measured on fair value viz Biological Asset. Inventories that are manufactured or produced in large quantities on repetitive basis.
Borrowing Costs :- Interest and other cost incurred for the borrowing of funds. Qualifying Assets :- The asset which take substantial period of time to get ready for its intended use or sale.
Constructions to be used for operations; Inventories that need substantial time to bring them to their saleable condition; Manufacturing Plants; Power generation facilities
Inventories that are normally manufactured or produced in large quantities on a repetitive basis and over a short period of time ; Assets which are ready for use or sale when acquired.
Borrowing cost may include :- Interest on bank overdraft, and short term and long term Borrowings. Finance charges related to Finance Lease. Exchange Difference arising from Foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
Borrowing cost that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized as a part of the cost of the asset; Such borrowing cost can be capitalized when: It is probable that they will result in future economic benefit to the entity; and These costs can be measured reliably. Entity shall recognize other borrowing costs as an expense in the period it incurs them.
A telecom company has acquired a 3G licence. The licence could be sold or licensed to a third party. However, management intends to use it to operate a wireless network. Development of the network starts when the licence is acquired. Should borrowing costs on the acquisition of the 3G licence be capitalized until the network is ready for its intended use?
Yes. The licence has been exclusively acquired to operate the wireless network. The fact that the licence can be used or licensed to a third party is irrelevant. The acquisition of the licence is the first step in a wider investment project (developing the network). It is part of the network investment, which meets the definition of a qualifying asset.
A real estate company has incurred expenses for the acquisition of a permit allowing the construction of a building. It has also acquired equipment that will be used for the construction of various buildings. Can borrowing costs on the acquisition of the permit and the equipment be capitalized until the construction of the building is complete?
Yes for the permit, which is specific to one building. It is the first step in a wider investment project. It is part of the construction cost of the building, which meets the definition of a qualifying asset. No for the equipment, which will be used for other construction projects. It is ready for its ‘intended use’ at the acquisition date. It does not meet the definition of a qualifying asset.
With regard to exchange difference required to betreated as borrowing costs, the manner of arrivingat the adjustments stated therein shall be as follows[Paragraph 6(e)]: An amount which is equivalent to the extent to which the exchange loss does not exceed the difference between the cost of borrowing in functional currency when compared to the cost of borrowing in a foreign currency.
where there is an unrealised exchange loss which is treated as an adjustment to interest and subsequently there is a realised or unrealised gain in respect of the settlement or translation of the same borrowing, the gain to the extent of the loss previously recognised as an adjustment should also be recognised as an adjustment to interest.
XYZ Ltd. has taken a loan of USD 10,000 on April 1, 2011, for a specific project at an interest rate of 5% p.a., payable annually. On April 1, 2011, the exchange rate between the currencies was Rs. 45 per USD. The exchange rate, as at March 31, 2012, is Rs. 48 per USD. The corresponding amount could have been borrowed by XYZ Ltd. in local currency at an interest rate of 11% per annum as on April 1, 2011.
The following computation would be made to determine the amount of borrowing costs for the purposes of paragraph 6(e) of Ind AS 23: i. Interest for the period = USD 10,000 × 5%x Rs. 48/USD = Rs. 24,000/- ii. Increase in the liability towards the principal amount = USD 10,000 × (48-45) = Rs. 30,000/- iii. Interest that would have resulted if the loan was taken in Indian currency = USD 10000 x 45 x 11% = Rs. 49,500 iv. Difference between interest on local currency borrowing and foreign currency borrowing = Rs. 49,500 – Rs. 24,000 = Rs. 25,500
Therefore, out of Rs. 30,000 increase in the liability towards principal amount, only Rs. 25,500 will be considered as the borrowing cost. Thus, total borrowing cost would be Rs. 49,500 being the aggregate of interest of Rs. 24,000 on foreign currency borrowings plus the exchange difference to the extent of difference between interest on local currency borrowing and interest on foreign currency borrowing of Rs. 25,500.
Thus, Rs.49,500 would be considered as the borrowing cost to be accounted for as per Ind AS 23 and the remaining Rs.4,500 would be considered as the exchange difference to be accounted for as per Ind AS 21 - The Effects of Changes in Foreign Exchange Rates.
Borrowing cost that would have been avoided if the expenditure on qualifying asset had not been made should be capitalized. The amount OF cost eligible for capitalization shall be of borrowing determined as: Borrowing Cost Eligible for Capitalization = Actual Borrowing Cost Incurred – Investment income on the temporary investment of those borrowings
It may be difficult to identify direct relationship between particular borrowing & qualifying asset and to determine the borrowing that could have been avoided. In this case exercise of judgment is required.
QUALIFYING ASSETSpecific Borrowing cost to General Borrowing cost be Capitalised to be Capitalised Borrowing Cost Capitalisation Rate Less xIncome from Investment Expenditure Incurred
In some instance, amount of borrowing cost eligible for capitalization shall be determined by applying a capitalization rate to the expenditure on that asset. Capitalization Rate = Weighted Average of the borrowing Cost The amount of borrowing cost capitalized during the period shall not exceed the amount of borrowing cost it incurred during the period.
When the carrying amount or expected ultimate cost of the qualifying asset exceeds its recoverable amount or net realizable value, the carrying amount is written off in accordance with the requirements of other Standards. In certain circumstances, the amount of the write down or write-off is written back in accordance with those other standards.
The capitalization process shall begin when: Expenditure for asset are being incurred; Borrowing costs are being incurred; Activities that are necessary to prepare the asset for its intended use or sale are in progress.
An entity shall suspend capitalization of borrowing costs during extended periods in which it suspends active development of a qualifying asset. Exceptions: If extension is due to substantial technical and administrative work. If it is a part of the process of getting an asset ready for its intended use or sale.
Capitalization of borrowing costs shall cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. When the construction of a qualifying asset is completed in parts and each part is capable of being used while construction continues on other parts, capitalization of borrowing costs shall cease when substantially all the activities necessary to prepare that part for its intended use or sale are completed.
Following shall be disclosed:- The amount of borrowing cost capitalized during the period; The capitalization rate used to determine the amount of borrowing cost eligible for capitalization.
Ind-AS 23 provides specific guidelines on computation of exchange difference arising from foreign currency borrowings to the extent they are regarded as adjustment to the Borrowing Cost. HOWEVER this guideline is not there in IAS 23.
Ind AS 23 AS 16Not required to disclose accounting Accounting policy adopted forpolicy adopted for capitalization borrowing cost should be disclosedCapitalzation rate used to determine It is not required to disclose thethe borrowing cost should be disclosed capitalization rateDoes not require an entity to applythis standard to borrowing costsdirectly attributable to the acquisition,construction or production of a AS -16 Does not provide for suchqualifying asset relaxation1.measured at fair value2. inventories that are manufactured,or otherwise produced, in largequantities on a repetitive basis
Q.1 Whether borrowing cost avoidable or unavoidable?Said to be unavoidable if expenditure on qualifying assets hadbeen incurred and borrowing is taken but for Existing borrowingexercise of judgment required.Q.2 Borrowing cost shall be capitalized for borrowingmade during the period of expenditure OR borrowingmade for the whole year?Borrowing made during period of expenditure are to becapitalized.
Q.1 Is it necessary to capitalize commissionedpackage when capitalization of remainingpending package is pending?It is necessary to capitalize commissioned packages.Q.2 On which date borrowing cost should becapitalized?Date on which package is ready to commencecommercial production.