This document compares Ind AS 23 and AS 16 on accounting for borrowing costs. Some key differences are that Ind AS 23 requires disclosure of the capitalization rate used for borrowing costs, provides exemptions for certain biological and inventory assets, and defines borrowing costs more broadly. Ind AS 23 also prescribes the effective interest method from Ind AS 39 for calculating interest expense. It provides guidance on qualifying assets, capitalization criteria, suspension and cessation of capitalization, and disclosure requirements for borrowing costs capitalized.

1. IND AS VS AS

2. INDEX
 Decoding of differences Between Ind
AS- 23 & AS-16
 Brief About Ind AS-23

3. DECODING OF DIFFERENCES

4. Ind AS 23 AS 16
Accounting policy adopted for
borrowing cost not required to disclose.
Accounting policy adopted for
borrowing cost should be disclosed.
Capitalization rate used to determine
the borrowing cost should be disclosed.
It is not required to disclose the
capitalization rate.
An entity is not required to apply
this standard to borrowing costs
directly attributable to the acquisition,
construction or production of a
qualifying asset –
 Measured at fair value for e.g.
Biological Assets.
 Inventories that are manufactured,
or otherwise produced, in large
quantities on a repetitive basis.
AS -16 Does not provide for such
relaxation.

5. Ind AS 23 AS 16
This Ind AS does not provide the
definition of Substantial period of time.
This AS provide the definition of
Substantial period of time.
Under Ind AS-23 Borrowing cost
include the followings:-
Interest expense calculated using
effective interest method as described
in Ind AS 39.
Finance charges in respect of finance
leases recognized in accordance with
Leases .
Exchange difference arising from
foreign currency borrowings to the
extent that they are regarded as an
adjustment to interest cost.
Under AS-16 Borrowing cost inter alia
include the followings:-
 Interest and commitment charges on
bank borrowings & other short term &
long term borrowings.
Amortization of discounts or premiums
relating to borrowings.
Amortization of ancillary costs
incurred in connection with
arrangement of borrowings.
Exchange difference arising from
foreign currency borrowings to the
extent that they are regarded as an
adjustment to interest cost.

6. METHOD PRESCRIBED UNDER IND AS-39
The effective interest method is a method of calculating the
amortized cost of a financial asset or a financial liability (or
group of financial assets or financial liabilities) and of allocating
the interest income or interest expense over the relevant
period. The effective interest rate is the rate that exactly
discounts estimated future cash payments or receipts through
the expected life of the financial instrument or, when
appropriate, a shorter period to the net carrying amount of the
financial asset or financial liability. When calculating the
effective interest rate, an entity shall estimate cash flows
considering all contractual terms of the financial instrument (for
example, prepayment, call and similar options) but shall not
consider future credit losses.

7. The calculation includes all fees and points paid or received
between parties to the contract that are an integral part of
the effective interest rate (see Ind AS 18 Revenue),
transaction costs, and all other premiums or discounts. There
is a presumption that the cash flows and the expected life of
a group of similar financial instruments can be estimated
reliably. However, in those rare cases when it is not possible
to estimate reliably the cash flows or the expected life of a
financial instrument (or group of financial instruments), the
entity shall use the contractual cash flows over the full
contractual term of the financial instrument (or group of
financial instruments).
CONT…

8. ANALYSIS OF METHOD GIVEN UNDER
IND AS-39 RELEVANT TO CALCULATE
INTEREST EXPENSE
Interest Expense
=
[Gross outflow over the expected life
(Including any fees payable)
-
Discounted future cash outflow in expected
life (Including any fees payable)] /expected life

9. BRIEF ABOUT IND AS-23

10. SCOPE
This standard shall be applied in accounting
for borrowing costs;
This standard does not deal with actual or
imputed cost of equity.

11. BORROWING COSTS
Relates to Qualifying
Assets-Eligible for
capitalization
Other Borrowing
Costs-Chargeable to
P/L
CONT…

12. DEFINITIONS
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.

13. EXAMPLES OF QUALIFYING ASSET
Constructions to be used for operations;
Manufacturing Plants;
Power generation facilities

14. EXAMPLES OF NOT A QUALIFYING ASSET
Inventories that are normally manufactured or
produced in large quantities on a repetitive
basis ;
Assets which are ready for use or sale when
acquired.

15. WHAT DOES BORROWING COST INCLUDES?
Borrowing cost may include :-
Interest on bank overdraft, and short term and long
term Borrowings calculated according to method
prescribed under Ind AS-39.
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.

16. RECOGNITION
 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.

17. FOREIGN EXCHANGE DIFFERENCE TO BE
CAPITALIZED
With regard to exchange difference required to be treated as borrowing costs, the
manner of arriving at the adjustments stated therein shall be as follows :
 An amount which is equivalent to the extent to which the exchange loss does
not exceed the difference between the cost of borrowing in home currency
when compared to the cost of borrowing in a foreign currency.
 Where there is an unrealized loss which is treated as an adjustment to interest
and subsequently there is realized or unrealized gain in respect of settlement
or translation of same borrowings,the gain to the extent of loss previously
recognised as an adjustment should also be recognised as an adjustment to
interest.

18. ELIGIBILITY FOR CAPITALIZATION
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:

19. CONT…
Borrowing Cost Eligible for Capitalization =
Actual Borrowing Cost Incurred – Investment
income on the temporary investment of those
borrowings

20. COMMENCEMENT OF CAPITALIZATION
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.

21. CAPITALIZATION RATE
 In case where general borrowings are applied, 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.

22. EXCESS OF CARRYING OVER RECOVERABLE
AMOUNT
 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.

23. COMMENCEMENT OF CAPITALIZATION
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.

24. SUSPENSION OF CAPITALIZATION
 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.

25. CESSATION OF CAPITALIZATION
 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.

26. DISCLOSURE
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.

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