Accounting Standard 16 outlines the accounting treatment for borrowing costs related to qualifying assets. It requires that borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset be capitalized as part of the cost of that asset. Other borrowing costs should be recognized as an expense. Capitalization of borrowing costs should commence when funds are borrowed and activities to prepare the asset are underway, and cease when the asset is ready for its intended use or sale. Certain disclosures regarding capitalized borrowing costs are also required.

1. ACCOUNTING STANDARD-16 BORROWING COSTS

2. 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

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 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

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. 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. SEQUENCE OF CAPITALISATION SPECIFIC BORROWINGS GENERAL BORROWINGS OWN FUNDS

17. SUSPENSION /CESSATION OF CAPITALISATION 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

18. DISCLOSURE The accounting policy adopted for borrowing costs The amount of borrowing costs capitalised during the period

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