The document discusses the accounting treatment for borrowing costs under Ind AS 23. It defines key terms like borrowing costs and qualifying assets. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset must be capitalized. Capitalization should commence when expenditures for the asset are being incurred and cease when the asset is substantially ready. The disclosure requirements and differences between Ind AS 23, IAS 23 and the previous AS 16 are also outlined.

2. INDEX
 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. SCOPE
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. 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.

5. EXAMPLES OF QUALIFYING ASSET
Investment Properties;
Inventories that need substantial time to bring
them to their saleable condition;
Manufacturing Plants;
Power generation facilities

6. EXAMPLES OF NOT A QUALIFYING
ASSET
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.

7. WHAT DOES BORROWING COST
INCLUDES?
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.

8. 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.

9. CAN ANY ONE ANSWER
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?

10. CHECK WHETHER YOU ARE
CORRECT
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.

11. AGAIN YOUR TURN
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?

12. THE ANSWER IS HERE
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.

13. 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 functional currency when compared to the
cost of borrowing in a foreign currency.

14. CONT…
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.

15. ILLUSTRATION
 XYZ Ltd. has taken a loan of USD 10,000 on April 1, 2016, for a
specific project at an interest rate of 5% p.a., payable annually.
 On April 1, 2016, the exchange rate between the currencies was Rs.
45 per USD. The exchange rate, as at March 31, 2017, 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,
2016.

16. SOLUTION
 The following computation would be made to determine the amount
of borrowing costs for the purposes 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

17. COND…
 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.

18. CONT…
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.

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

20. CONT….
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.

21. QUALIFYING
ASSET
Specific Borrowing cost to
be Capitalised
Borrowing Cost
Less
Income from Investment
General Borrowing cost
to be Capitalised
Capitalisation Rate
x
Expenditure Incurred

22. CAPITALIZATION RATE
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.

23. 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.

24. 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.

25. 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.

26. 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.

27. 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.

28. DIFFERENCE BETWEEN IND-AS 23 AND
IAS 23
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.

29. Ind AS 23 AS 16
This explanation is not included in the
Ind AS 23
Existing AS 16 gives explanation for
meaning of ‘substantial period of time’
appearing in the definition of the term
‘qualifying asset
Capitalzation rate used to determine
the borrowing cost should be disclosed
It is not required to disclose the
capitalization rate
Does not require an entity to apply
this standard to borrowing costs
directly attributable to the acquisition,
construction or production of a
qualifying asset
1.measured at fair value
2. inventories that are manufactured,
or otherwise produced, in large
quantities on a repetitive basis
AS -16 Does not provide for such
relaxation