As 16

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As 16

  1. 1. ACCOUNTING STANDARD-16 BORROWING COSTS
  2. 2. OBJECTIVE & SCOPE <ul><li>To prescribe the accounting treatment for borrowing costs </li></ul><ul><li>Does not deal with the actual or imputed cost of owners’ </li></ul><ul><li>equity, including preference share capital not classified as a </li></ul><ul><li>liability </li></ul>
  3. 3. 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 <ul><li>Are borrowing costs directly attributable to the construction / acquisition / production of a qualifying asset </li></ul><ul><li>Are funds, that are generally borrowed, used for obtaining a qualifying asset </li></ul>
  4. 4. DEFINITIONS <ul><li>Borrowing costs are interest and other costs incurred by an </li></ul><ul><li>enterprise in connection with the borrowing of funds </li></ul><ul><li>Qualifying asset is an asset that necessarily takes a </li></ul><ul><li>substantial period of time to get ready for its intended </li></ul><ul><li>use or sale </li></ul>
  5. 5. BORROWING COSTS <ul><li>Interest and commitment charges on bank & other short term </li></ul><ul><li>borrowings </li></ul><ul><li>Amortisation of discounts or premiums relating to </li></ul><ul><li>borrowings </li></ul><ul><li>Amortisation of ancillary costs incurred in connection with </li></ul><ul><li>the arrangement of borrowings </li></ul><ul><li>Finance charges of assets acquired under finance leases or </li></ul><ul><li>under other similar arrangements </li></ul><ul><li>Exchange differences arising from foreign currency </li></ul><ul><li>borrowings to the extent that they are regarded as an </li></ul><ul><li>adjustment to interest costs </li></ul>
  6. 6. QUALIFYING ASSETS <ul><li>Examples: </li></ul><ul><li>Manufacturing plants </li></ul><ul><li>Power generation facilities </li></ul><ul><li>Inventories that require a substantial period of time to </li></ul><ul><li>bring them to a saleable condition </li></ul><ul><li>Investment properties </li></ul>
  7. 7. QUALIFYING ASSETS <ul><li>Not to be included as qualifying assets: </li></ul><ul><li>Other Investments </li></ul><ul><li>Inventories that are routinely manufactured or otherwise </li></ul><ul><li>produced in large quantities on repetitive basis over a short </li></ul><ul><li>period of time </li></ul><ul><li>Assets that are ready for their intended use or sale when </li></ul><ul><li>acquired </li></ul>
  8. 8. RECOGNITION <ul><li>Capitalise borrowing costs that are directly </li></ul><ul><li>attributable to the acquisition, construction or </li></ul><ul><li>production of a qualifying asset </li></ul><ul><li>Other borrowing costs to be expensed off </li></ul><ul><li>Capitalise if it is probable that they will result in </li></ul><ul><li>future economic benefits to the enterprise and </li></ul><ul><li>costs can be measured reliably </li></ul>
  9. 9. CAPITALISATION <ul><li>Specific borrowings </li></ul><ul><li>Borrowing costs that would have been avoided if the </li></ul><ul><li>expenditure on the qualifying asset had not been made </li></ul><ul><li>Actual borrowing costs incurred less any income on </li></ul><ul><li>temporary investment of those borrowings to be capitalised </li></ul>
  10. 10. CAPITALISATION <ul><li>General Borrowings </li></ul><ul><li>Determine borrowing costs by applying a </li></ul><ul><li>capitalisation rate </li></ul><ul><li>Capitalisation rate should be the weighted average of </li></ul><ul><li>the borrowing costs that are outstanding during the </li></ul><ul><li>period </li></ul><ul><li>Borrowing costs capitalised not to exceed amount of </li></ul><ul><li>borrowing costs incurred </li></ul>
  11. 11. COMMENCEMENT OF CAPITALISATION <ul><li>Commence capitalisation when all the following conditions </li></ul><ul><li>are satisfied: </li></ul><ul><li>Expenditure for the acquisition, construction or </li></ul><ul><li>production of a qualifying asset is being incurred </li></ul><ul><li>Borrowing costs are being incurred </li></ul><ul><li>Activities that are necessary to prepare the asset for its </li></ul><ul><li>intended use or sale are in progress </li></ul>
  12. 12. CRITICAL ISSUES <ul><li>Expenditure on a qualifying asset includes only such expenditure: </li></ul><ul><ul><li>that has resulted in payment of cash </li></ul></ul><ul><ul><li>transfer of other assets </li></ul></ul><ul><ul><li>assumption of interest bearing liabilities </li></ul></ul><ul><li>Expenditure to be reduced by progress payments and grants </li></ul><ul><li>Average carrying amount of the asset during a period including </li></ul><ul><li>borrowing costs previously capitalised is normally a reasonable </li></ul><ul><li>approximation of the expenditure to which capitalisation rate is </li></ul><ul><li>applied in that period </li></ul>
  13. 13. CRITICAL ISSUES <ul><li>When the carrying amount or the expected ultimate cost </li></ul><ul><li>of the qualifying asset exceeds its recoverable amount or </li></ul><ul><li>NRV, the carrying amount is written down or written off </li></ul><ul><li>in accordance with the requirements of other accounting </li></ul><ul><li>standards </li></ul><ul><li>In certain circumstances such write down or write off </li></ul><ul><li>may be written back as per those other accounting </li></ul><ul><li>standards </li></ul>
  14. 14. 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
  15. 15. 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
  16. 16. SEQUENCE OF CAPITALISATION <ul><li>SPECIFIC BORROWINGS </li></ul><ul><li>GENERAL BORROWINGS </li></ul><ul><li>OWN FUNDS </li></ul>
  17. 17. SUSPENSION /CESSATION OF CAPITALISATION <ul><li>Suspend during extended periods in which active </li></ul><ul><li>development is interrupted </li></ul><ul><li>Capitalisation should cease when substantially all </li></ul><ul><li>activities necessary to prepare the qualifying asset for its </li></ul><ul><li>intended use or sale are complete </li></ul><ul><li>In case of construction of a qualifying asset in parts and </li></ul><ul><li>a completed part is capable of being used while </li></ul><ul><li>construction continues for the other parts, capitalization </li></ul><ul><li>of borrowing costs in relation to a part should cease </li></ul><ul><li>when substantially all the activities necessary to prepare </li></ul><ul><li>that part for its intended use or sale are complete </li></ul>
  18. 18. DISCLOSURE <ul><li>The accounting policy adopted for borrowing costs </li></ul><ul><li>The amount of borrowing costs capitalised during the </li></ul><ul><li>period </li></ul>
  19. 19. THANK YOU

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