IV Semester M.Com

1. BARROWING COST
Ind AS - 23
Mr. Sathish V
Assistant Professor
PES Institute of Advanced Management Studies
NH-206, Sagar Road Shivamogga

2. IND AS 23 – BARROWING COST
• Cost incurred for barrowing Fund, nothing but interest.
• Interest is a part asset so it should not separable from the value of asset.

3. MEANING
 Borrowing Costs that are Directly attributable to the acquisition, construction or
production of qualifying asset form part of that asset.
 If an particular entity barrows funds from outside and use it for acquisition,
construction or production or for making of qualifying asset, such barrowing cost
can be considered as part of asset.
 And it should not be debited to P&L account but it needs be capitalized. an item
when it capitalized its going to be considered as part asset rather than expenses.
 Since during the period of construction if any barrowing cost incurred, such cost
also needs be capitalized.
 Ones asset is ready for use or intended for sale, if any further BC incurs that cost
needs to be debited to P&L account.
SCOPE OF THE STANDARD
• An entity shall apply this standard in accounting for barrowing cost.
• This standard does not deal with actual/ imputed cost of equity, including preferred
capital not classified as liability(Non redeemable).
• Redeemable preference share capital can be considered as part of barrowing cost.
• Standard does not deal with barrowing cost attributable to qualifying asset measured
at fair value.

4. E.g. Biological assets – Cow, buffalo, sheep's, living plants and animals.
And Standard does not apply to manufactured or produced inventories on a large
scale repetitively over a short period of time.
DEFINITIONS
This Standard uses the following terms with the meanings specified:
• Borrowing costs are interest and other costs that an entity incurs in connection
with the borrowing of funds.
• A qualifying asset is an asset that necessarily takes a substantial period of time
to get ready for its intended use or sale.
Substantial period not defined but usually 12 months.
Example : Inventories, manufacturing plants, power generation facilities,
intangible assets, investment properties, bearer plants.
• Non qualifying assets
Financial assets, inventories are manufactures over a short period of time, asset
which are ready for sale or intended use.

5. AS PER STANDARD BARROWING COST INCLUDES 3 ITEMS
(a) Interest expense: Interest expense calculated using the effective interest method as
described
in Ind AS 39 Financial Instruments: Recognition and Measurement;
(b) Finance charges: finance charges in respect of finance leases recognized in accordance
with Leases
If you purchase an asset for lease, the payment of amount includes principal
amount + interest portion, since both of this can be considered as BC.
(c) Exchange differences: exchange differences arising from foreign currency borrowings
to the extent
that they are regarded as an adjustment to interest costs.
For e.g. if we barrowed money on foreign bank, we have an advantage of interest compared
to Indian banks.
• The adjustment should be of 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.

6. Types of barrowing
• Specific barrowing
Loan barrowed specifically for the purpose of construction, acquisition of
qualifying asset .
and cost eligible for capitalization will be calculated as actual barrowing cost on asset
(-) any income from temporary investment of funds during the period of construction.
• General barrowing
Loan which is barrowed for the qualifying asset as well as for general purpose.
And cost eligible for capitalization computed as, the expenditure on the qualifying asset
during the accounting period will be multiplied by weighted avg BC percentage of the entity
in respect of the loans which were outstanding during the accounting period.
Commencement of capitalization
The commencement date for capitalization is the date when the entity first meets all of the
following condition.
• When it incurs expenditure for assets
• When it undertakes activities that are necessarily to prepare the asset for its intended use
or sale.
• when it incurs barrowing cost

7. Borrowing costs eligible for capitalization
• When an entity borrows funds specifically for the purpose of obtaining a particular
qualifying asset, the borrowing costs that directly relate to that qualifying asset can
be readily identified.
• To the extent that an entity borrows funds specifically for the purpose of obtaining a
qualifying asset, the entity shall determine the amount of borrowing costs eligible
for capitalization as the actual borrowing costs incurred on that borrowing during the
period less any investment income on the temporary investment of those
borrowings.
• To the extent that an entity borrows funds generally and uses them for the purpose of
obtaining a qualifying asset, the entity shall determine the amount of borrowing
costs eligible for capitalization by applying a capitalization rate to the expenditures
on that asset.

8. Expenditure on assets
Expenses on qualifying assets includes below
 Expenses that have resulted in payment of cash
 Transfer of other assets or the assumption of interest bearing liabilities
 Expenditures are reduced by any progressive payment received and grants received
in connection with asset (Ind as 20 – Accounting for Govt grants and disclosure of
govt assets)
Suspension of capitalization
 Entity shall suspend capitalization of barrowing cost during extended period in
which it suspends active development of a qualifying asset.
 And firm will not suspend the capitalization of barrowing cost when temporary
delays are necessary. In case part of the process getting an asset ready for its
intended use or sale.
For e.g. capitalization continues during the extended period that high water
level delays construction of bridge. ( Here have to suspend the work but not the
capitalization)

9. Cessation of Capitalization
• An entity shall cease capitalizing borrowing costs when substantially all the
activities necessary to prepare the qualifying asset for its intended use or sale are
complete.
• When an entity completes the construction of a qualifying asset in parts and each
part is capable of being used while construction continues on other parts, the entity
shall cease capitalizing borrowing costs when it completes substantially all the
activities necessary to prepare that part for its intended use or sale.
• An asset is normally ready for its intended use or sale when physical construction of
the asset is complete even though routine administrative work still continues.
Disclosure
• Amount of barrowing cost capitalized during the period, and
• The capitalization rate used to determine the amount of barrowing cost eligible for
capitalization

10. Illustration 1
Alpha Ltd on 1-04-2011 barrowed 30,00,000 with 9% interest to finance the
construction of two qualifying assets, construction started on 1-04-2011, the loan
facility availed on 01-04-2011 and remaining funds invested temporarily at 7%.
The amount utilized as follows
Compute cost of asset and barrowing cost to be capitalized.
Particulars Factory Building Office Building
01-04-2011 500,000 10,00,000
01-10-2011 500,000 10,00,000

11. Illustration 2
Nice Ltd is constructing a stadium as on 31-03-2017, the construction of stadium is
completed to a large extent, but the ticket collecting counter of stadium is only the area
yet be completed. The accountant of Nice Ltd seeks your advice whether capitalization
of barrowing should be close on 31-03-2017 ?
Illustration 3
An entity barrowed $1000 on 01-04-2011, when price of $1= Rs 40 and the rate of
interest was 4%, same time if entity barrowed same amount from Indian bank the
interest eligible to pay was 12%. At the end of the year as on 31-03-2012 Exchange
rate was $1=Rs 50.
And the loan is used for qualifying asset.
Find out interest eligible for capitalization and how much it will be of the closing
exchange rate if Rs 41 and Rs 39 ?

12. Illustration 4
AB Ltd. started the construction of an asset on 1 January 2013 with a loan of 40,000
borrowed at an interest rate of 9% per annum.
The loan was used on the asset as follows:
The construction of the asset was completed on 31 December 2013. However, during
the accounting period AB Ltd. has invested the surplus funds at an interest rate of 3%
on temporary basis before these were required for spending.
Required:
(a) The Borrowing Cost eligible for capitalization at 31.12.2013.
(b) The Cost of Asset to be reported in the statement of financial position at 31.12.2013.
Amt
1 January 2013 15,000
1 May 2013 20,000
1 October 2013 5,000

13. Solution:
Determination of the Purpose Nature & of the Loan/Funds
• The loan in the scenario is specific loan as the whole amount of the loan 40,000 is used for
the construction the asset.
• The asset is a Qualifying Asset as the asset in scenario is completed in a period of 1 year
which is substantial time period.
• As the borrowing Cost is related to the qualifying asset, the whole amount of borrowing cost
will be capitalized in the cost of qualifying asset.
Calculation of Eligible Borrowing Cost:
As the loan is specific loan, so the Eligible Borrowing Cost will be calculated as follows:
Eligible Borrowing Cost = Actual Borrowing Cost – Income from temporary investment of
funds.
= (40,000 * 9%) = 3600 – 312.5
Eligible Borrowing Cost = 3,287.5
Income from temporary Investment of Surplus funds:
(25,000 * 3%) * 4/12 + (5,000 * 3%) * 5/12 = 312.5
Cost of the asset at 31.12.2013
(15,000+20,000+5,000) + 3,287.5 = 43,287.5

14. Illustration 5
AB Ltd. started the construction of an asset on 1 January 2013. For this purpose three
loans were outstanding at the start of the year as follows:
Amount Int rate%
The funds were used on the asset as follows:
The construction of the asset was completed on 31 December 2013.
Required:
(a) The Borrowing Cost eligible for capitalization at 31.12.2013.
(b) The Cost of Asset to be reported in the statement of financial position at 31.12.2013
Loan 1 80,000 11
Loan 2 70,000 15
Loan 3 40,000 17
1 January 2013 25,000
1 May 2013 20,000
1 October 2013 15,000

15. Solution:
Determination of the Purpose & Nature of the Loan/Funds
• The loan in the scenario is General loan as only 60,000 is used for the construction
of asset out of total loans of 190,000.
• The asset is a Qualifying Asset as the asset in scenario is completed in a period of 1
year which is substantial time period.
• As the borrowing Cost is related to the qualifying asset, therefore the whole amount
of borrowing cost will be capitalized in the cost of qualifying asset.
Calculation of Eligible Borrowing Cost:
As the loan is General loan, so the Eligible Borrowing Cost will be calculated as
follows:
Eligible Borrowing Cost = Average amount invested * Weighted Average
Into asset borrowing Cost Rate

16. Average Amount Invested into Asset:
Weighted Average Borrowing Cost Rate:
(80,000 / 190,000) * 11% + (70,000 / 190,000) * 15% + (40,000 / 190,000) * 17% =
13.72%
Since 42,083 * 13.72%
Eligible Borrowing Cost = 5774
Cost of the Asset at 31.12.2013
(25,000+20,000+15,000) + 5774 = 67,774
25,000 * 12/12 = 25,000
20,000 * 8/12 = 13,333
15,000 * 3/12 = 3750
42083

17. Illustration 6
AB Ltd. raised a 20 million loan having interest rate of 7.5% on 1
January 2013.The loan was specifically raised for the construction of
an office building which meets the definition of a qualifying asset
under Ind AS 23. The construction of the office building started on 1
February 2013 and the construction was completed on 30 November
2013. However, the construction of the office building was suspended
for two months period because of the shortage of material and labor
strikes during July and August 2013. The loan was temporarily
invested for the month of January 2013 and earned interest of 80,000.
Required
Calculate the eligible borrowing cost that will be capitalized as part of
the cost of the office building and the finance cost that should be
reported in profit or loss for the year ended 31 December 2013.

18. Solution:
The total Borrowing cost for the year is 1,500,000 (20m x 7.5%).However,
the capitalization of borrowing cost will commence when:
• The expenditure on the asset has been started;
• Borrowing cost is being incurred;
• The activities necessary to complete the asset are in progress
But borrowing cost will not be capitalized, when development of the
asset is suspended, or when the construction is completed, therefore:
The borrowing cost for the period of four months will not be capitalized
and will be charged to profit and loss as expense as follows:
- January (the construction was not started in this month)
- July & August(the period when development was suspended) and
- December (the construction was completed in November)
Borrowing Cost to be charge to profit or loss = 1,500,000 x 4/12 = 500,000

19.  The borrowing cost that relates to the qualifying asset and which will be capitalized,
in case of specific loan, will be calculated as follows:
Borrowing cost to be capitalized = Actual borrowing cost – Income from temporary
investment
= (1,500,000 x 8/12) – 0 = 1,000,000
 As the interest income is earned during the period (January) when borrowing cost
was not being capitalized. Therefore the interest received of 80,000 will be charged
to statement of profit or loss as income and will not be deducted from the capitalized
borrowing costs.
Cost of the Asset in the Statement of Financial Position = 20,000,000 + 1,000,000 =
210,00,000.