2. 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
3. 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.
4. BORROWING
COSTS
Other
Qualifying
Borrowing
Assets
Costs
5. 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.
6. Constructions to be used for operations;
Inventories that need substantial time to
bring them to their saleable condition;
Manufacturing Plants;
Power generation facilities
7. 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.
8. 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.
9. 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.
10. 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?
11. 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.
12. 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?
13. 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.
14. 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
[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.
15. 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.
16. 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.
17. 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
18. 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.
19. 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.
20. 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
21. 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.
22. QUALIFYING
ASSET
Specific Borrowing cost to General Borrowing cost
be Capitalised to be Capitalised
Borrowing Cost Capitalisation Rate
Less x
Income from Investment Expenditure Incurred
23. 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.
24. 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.
25. 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.
26. 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.
27. 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.
28. 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.
29. 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.
30.
31. Ind AS 23 AS 16
Not required to disclose accounting Accounting policy adopted for
policy adopted for capitalization borrowing cost should be disclosed
Capitalzation rate used to determine It is not required to disclose the
the borrowing cost should be disclosed capitalization rate
Does not require an entity to apply
this standard to borrowing costs
directly attributable to the acquisition,
construction or production of a
AS -16 Does not provide for such
qualifying asset
relaxation
1.measured at fair value
2. inventories that are manufactured,
or otherwise produced, in large
quantities on a repetitive basis
33. Q.1 Whether borrowing cost avoidable or unavoidable?
Said to be unavoidable if expenditure on qualifying assets had
been incurred and borrowing is taken but for Existing borrowing
exercise of judgment required.
Q.2 Borrowing cost shall be capitalized for borrowing
made during the period of expenditure OR borrowing
made for the whole year?
Borrowing made during period of expenditure are to be
capitalized.
34. Q.1 Is it necessary to capitalize commissioned
package when capitalization of remaining
pending package is pending?
It is necessary to capitalize commissioned packages.
Q.2 On which date borrowing cost should be
capitalized?
Date on which package is ready to commence
commercial production.
