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PAGE NO. 1.5-1.8 USERS OF AN ACCOUNTING INFORMATION AND THEIR NEEDS .

The users of accounting information include present and potential investors,management, employees, lenders, suppliers and other trade creditors, customers,government and their agencies and the public. These users use accounting information inorder to satisfy some of their varied needs for information.

Some of the users and their needs for information are shown below: UsersNeed for Information 1.Short-term Creditors Short-term creditors need information to determine[For example,suppliers ofwhether the amount owing to them will be paid whenraw-materials/goods, due and whether they should extend, maintain orsuppliers of short-termrestrict the flow of credit to an individual enterprise.loans] 2.Long-term Creditors Long-term creditors need information to determine [For example, suppliers ofwhether their principals and the interest thereof willlong-term loans] be paid when due and whether they should extend,maintain or restrict the flow of credit to an enterprise. 3.Present Investors Present investors need information to judge prospects [For example, equityfor their investment and to determine whether they share holders]should buy, hold or sell the shares.4. Potential Investors Potential investors need information to judge [For example,

thoseprospects of an enterprise and to determine whether who want to invest] they should buy the shares. 5.Management Management needs information to review the firm’s(a) short-term solvency, (b) long-term solvency, (c)activity (viz. effective utilisation of its resources), (d)profitability in relation to turnover, (e) profitability inrelation to investments and to decide upon the courseof action to be taken in future. 6.Employees Employees and their representative groups areinterested in information about the stability andprofitability of the employers. They are also interestedin information which enables them to assess the ability of the enterprise to pay remuneration, retirementbenefits and to provide employment opportunities. 7.Tax Authorities Tax authorities need information to assess the taxliabilities of an enterprise. 8.Customers Customers have an interest in information about thecontinuation of an enterprise, especially when they have established a long term involvement with, orare dependent on, the enterprise. 9.Government and their Government and their agencies are interested in the agencies of enterprise. They also require information in orderto regulate the activities of enterprise, determinetaxation policies and as the basis for the nationalincome and similar statistics.

10.Public: Enterprises affect members of the public in a variety of ways. For example, enterprises may make asubstantial contribution to the local economy in many ways including the number of people, they employ and their patronage of local suppliers. Financialstatements may assist the public by providing information about trends and recent developmentsin the prosperity of the enterprise and

To calculate the results Of Operations To measure the financial performanceof an enterprise. there are some needs which are common to all users. the results of operations are ascertained by preparing an IncomeStatement (also called Profit & Loss Account) which shows the matching of current costs with current revenues during a particular accounting period. and what happened to his capital whether thecapital has increased. 1. the financial position is ascertained by preparing a Position Statement (also called Balance Sheet) which shows resources (assets) owned by an enterpriseand the sources of financing those resources.the range of its activities. A systematic record of incomes and expenses facilitates the preparation of the Income Statement. decreased or remained constant.To ascertain the financial position To evaluate the financial strength and weakness of an enterprise. The informationcontents of the financial statements which meetinformation needs of the investors or providers of risk capital will also meet most of the needs of otherusers. a human memory cannot absorb each and every transaction. A businessman wants to know what thebusiness owes to others and what it owns. Accounting is done to keep a systematic record of (i) financial transactions. PRIMARY OBJECTIVES OF ACCOUNTING The main objectives of accounting are as follows: Primary Objectives of Accounting To maintainTo calculate theTo ascertain theTo communicateaccounting recordsresults of operationsfinancial positionthe informationto the users Let us discuss these objectives one by one. Nowadays. the volume of transactions is so large. A systematic record of variousassets and liabilities facilitates the . (ii) assets and(iii) liabilities. 2. 3. since written records can be used by different persons for different decision-making purposes and serve as evidence of transactions. While all the information needs of these users cannotbe made by financial statements.To maintain accounting records Written records are always better than oralrecords.

Whether to Retain or Replace an EquipmentDecision Reports. It is also useful in forming judgementsabout the effectiveness with which the enterprise might employ additional resources. The varioustypes of accounting information are given below:1. Accounting Information relating to financial transactions and events. For internal use. 4.Idle Time Reports. The financial position of an enterprise is affected by the economic resources itcontrols. The internal users include all theorganizational participants at all levels of management (i. middle and lower). Financial Performance —Information about financial performance is primarily provided in a Statement of Profit and Loss (also known as Income Statement). Production Reports. its financial structure.g. in particular its profitability. Liquidity refers to theavailability of cash in the near future to meet financial commitments over this period. Toplevel management requires information for planning.Since the external users (e. External users are basically interested in the solvency and profitability of anenterprise. To communicate the information to the users Accounting communicatesinformation to internal users and external users. isrequired in order to assess potential changes in the economic resources that it is likely tocontrol in the future. they have to rely on financial statements as the source of information.Solvency refers to the availability of cash over the longer term to meet financialcommitments as they fall due. and the like. (a)Information about the economic resources controlled by the enterprise and its capacityin the past to alter these resources is useful in predicting the ability of the enterpriseto generate cash and cash equivalents in the future. it is also useful in predicting how successful the enterprise is likelyto be in raising further finance. middle level management requiresinformation for controlling the operations.Cash Flows .e.Financial Position —Information about financial position is primarily provided ina balance sheet. its liquidity and solvency. top. TYPES OF ACCOUNTING INFORMATION — Accounting information may be classified in number of ways on the basis of purposeof accounting information. for instance Cash Budget Reports. Information about performance is useful in predicting the capacity of the enterprise to generate cash flows from its existing resource base. Project Appraisal Report. Banks. Creditors) do not have direct access to all therecords of an enterprise. on the basis of measurement criteria and so on. Information about variability of performance is important in thisrespect.Information about the performance of an enterprise.(b)Information about financial structure is useful in predicting future borrowing needsand how future profits and cash flows will be distributed among those with an interestin the enterprise.(c)Information about liquidity and solvency is useful in predicting the ability of theenterprise to meet its financial commitments as they fall due. and its capacity to adapt tochanges in the environment in which it operates.preparation of a Position Statement (also known asBalance Sheet) which answers all these questions. the information is usually provided in the form of reports. Feedback Reports.

As a result a wide variety of accounting methods were used by different companies. Accounting information relating to Human Resources.Such information may further be classified as follows: (i)on the basis of Historical Cost(ii)on the basis of Current Cost (iii) on the basis of Realizable Value (iv) onthe basis of Present Value 2. accounting has its own complicated set of rules. Accounting information relating to planning and controlling the activitiesof enterprise for internal reporting. The basicconventions or rules used in preparing financial statements had evolved over many yearsas a product of the collective experience of practising accountants. Such information may further be classified as follows: (a)Information relating to Finance Area(b)Information relating to Production Area(c)Information relating to Marketing Area(d)Information relating to Personnel Area(e)Information relating to Other Areas (such as Research & Development) 4. Accounting information relating to cost of a product. then.5.10 ACCOUNTING STANDARDS Accounting as a ‘language of business’ communicates the financial performance andposition of an enterprise to various interested parties by means of financial statements which have to exhibit a ‘true and fair’ view of financial results and its state of affairs. financial and operating activities during the reporting period.Information concerning cash flows of an enterprise is useful in order to evaluate itsinvesting. PAGE 2. Accounting information relating to Environment and Ecology.—Information about cash flows is provided in the financial statementsby means of a cash flow statement.Like any other language. Accounting information relating to Social Effects of business decisions. However.6. It was.7-2.3. This informationis useful in providing the users with a basis to assess the ability of the enterprise togenerate cash and cash equivalents and the needs of the enterprise to utilise those cashflows. operation or function. felt thatthere should be some standardised set of rules and accounting principles to reduce oreliminate confusing variations in the methods used to prepare financial statements.such accounting rules should have a reasonable degree of flexibility in view of specificcircumstances of an enterprise and also in line with the changes in the .

Objective The objective of this Statement is to prescribe the accounting treatment for borrowing costs. Standards place restrictions on behaviour andtherefore they must be accepted by affected parties. So there is nouniversally acceptable set of standards. This Statement does not deal with the actual or imputed cost of owners’equity. social needs. In fact. harmonisation does not meanthat accounting standards should become very rigid. Scope 1. including preference share capital not classified as a liability. customs. Objective of Accounting Standard The main objective of accounting standards is to harmonise the diverse accounting policies and practices at present in use in India. harmonisation of accounting standards do permit flexibility to make the necessary adjustments to suit their purpose. This Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards 1. In orderto suggest rules and criteria of accounting measurements several accounting standardsetting bodies were established in developed and developing countries. legal requirements and technological developments.economicenvironment. which have equal authority. This Standard comes into effect in respect of accounting periods commencing on or after 1-4-2000 and is mandatory in nature.)The following is the text of Accounting Standard (AS) 16. Standardsconform to applicable laws. The setting of accounting standards is a social decision. Meaning of Accounting Standard An accounting standard is a selected set of accounting policies or broad guidelinesregarding the principles and methods to be chosen out of several alternatives. usage and business environment. This Statement should be applied in accounting for borrowing costs. ‘Borrowing Costs’. issued by the Council of the Institute of Chartered Accountants of India. However. Borrowing Costs (This Accounting Standard includes paragraphs set in bold italic type and plain type. . 2. Paragraphs in bold italic type indicate the main principles.

and those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time. (c) amortisation of ancillary costs incurred in connection with the arrangement of borrowings. inventories that require a substantial period of time to bring them to a saleable condition. (b) amortisation of discounts or premiums relating to borrowings. Examples of qualifying assets are manufacturing plants. 2 Reference may be made to the section titled ‘Announcements of the Council regarding status of various documents issued by the Institute of Chartered Accountants of India’ appearing at the beginning of this Compendium for a detailed discussion on the implications of the mandatory status of an accounting standard. Assets that are ready for their intended use or sale when acquired also are not qualifying assets. and (e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs 5. and investment properties. are not qualifying assets.3 of the Preface. The following terms are used in this Statement with the meanings specified: Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. A qualifying asset is an asset that necessarily takes a substantial periodof timeto get ready for its intended use or sale. according to which Accounting Standards are intended to apply only to items which are material. 4.1 Attention is specifically drawn to paragraph 4. Other investments. Definitions 3. (d) finance charges in respect of assets acquired under finance leases or under other similar arrangements. Recognition Borrowing Costs 305 . power generation facilities. Borrowing costs may include: (a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings.

the determination of the amount of borrowing costs that aredirectly attributable to the acquisition. The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Statement. Other borrowing costs should be recognised as an expense in the period in which they are incurred. the borrowing costs that directly relate to that qualifying asset can be readily identified. The borrowing costs that are directly attributable to the acquisition. any . Borrowing costs that are directly attributable to the acquisition. construction or production of a qualifying asset is often difficult and the exercise of judgement is required. 9. It may be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowingsthat could otherwise have been avoided.when the financing activity of an enterprise is co-ordinated centrally or when a rangeof debt instruments are used to borrow funds at varying rates of interest and such borrowings are not readily identifiable with a specific qualifying asset. Other borrowing costs are recognised as an expense in the period in which they are incurred.construction or production of a qualifying asset should be capitalised as part of the cost of that asset. As a result. 7.6. Borrowing Costs Eligible for Capitalisation 8. In such circumstances. Borrowing costs are capitalised as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset. 11. The financing arrangements for a qualifying asset may result in anenterprise obtaining borrowed funds and incurring associated borrowing costs before some or all of the funds are used for expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalisation during a period. Such adifficultyoccurs. the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings. for example.construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the ualifying asset had not been made. When an enterprise borrows funds specifically for the purpose of obtaining a particular qualifying asset. the funds are often temporarily invested pending their expenditure on the qualifying asset. 10.

and (c) activities that are necessary to prepare the asset for its intended use or sale are in progress. Commencement of Capitalisation 14. (b) borrowing costs are being incurred. 12. The capitalisation rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period.income earned on the temporary investment of those borrowingsis deducted from the borrowing costs incurred. The capitalisation of borrowing costs as part of the cost of a qualifying asset should commence when all the following conditions are satisfied: (a) expenditure for the acquisition. the carrying amount is written down or written off in accordance with the requirements of other Accounting Standards. In certain circumstances. construction or production of a qualifying asset is being incurred. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset. When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its recoverable amount or net realisable value. The amount of borrowing costs capitalised during a period should not exceed the amount of borrowing costs incurred during that period. the amount of borrowing costs eligible for capitalisation should be determined by applying a capitalisation rate to the expenditure on that asset. the amount of the write-down or write-off is written back in accordance with those other Accounting Standards. . Excess of the Carrying Amount of the Qualifying Asset over Recoverable Amount 13. other than borrowings made specifically for the purpose of obtaining a qualifying asset.

However. borrowing costs incurred while land acquired for building purposes is heldwithout any associated development activity do not qualifyfor capitalisation. Accounting for Government Grants). such activities exclude the holding of an asset when no production or development that changes the asset’s condition is taking place. Expenditure is reduced by any progress payments received and grants received in connection with the asset (see Accounting Standard 12. For example.15. The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. Capitalisation of borrowing costsisalso not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. is normally a reasonable approximation of the expenditure to which the capitalisation rate is applied in that period. The averagecarrying amount of the asset during a period. For example. Suspension of Capitalisation 17. Capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted. borrowing costs incurred while land is under development are capitalised during the period in which activities related to the development are being undertaken. . Borrowing costs may be incurred during an extended period in which the activities necessary to prepare an asset for its intended use or sale are interrupted.such asthe activities associated with obtaining permits prior to the commencement of the physical construction.capitalisation continues during the extended period needed forinventoriesto mature or the extended period during which high water levels delay construction of a bridge. Such costs are costs of holding partially completed assets and do not qualify for capitalisation. transfers of other assets or the assumption of interest-bearing liabilities. if such high water levels are common during theconstruction period in the geographic region involved. However. 16. Expenditure on a qualifying asset includes only such expenditure thathas resulted in payments of cash. 18. including borrowing costs previously capitalised. They include technical and administrative work prior to the commencement of physical construction. capitalisation of borrowing costs is not normally suspended during a period when substantial technical and administrative work is being carried out. However.

are all that are outstanding. . An example of a qualifying asset that needs to be complete before any part can be used is an industrial plant involving several processes which are carried out in sequence at different parts of the plant within the same site. If minor modifications. 22. An asset is normally ready for itsintended use or sale when its physical construction or production is complete even though routine administrative work mightstill continue. each of which can be used individually. such as a steel mill. Disclosure 23. 20. A business park comprising several buildings.such asthe decoration of a property to the user’sspecification. capitalisation 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. Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. 21. is an example of a qualifying asset for which each part is capable of being used while construction continues for the other parts.Cessation of Capitalisation 19. thisindicates that substantially all the activities are complete. When the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts. The financial statements should disclose: (a) the accounting policy adopted for borrowing costs. and (b) the amount of borrowing costs capitalised during the period.

Arguments against setting Accounts Standards However there are some arguments against setting accounting standards: 1. the valuationtechniques and the methods of applying the accounting principles in the preparation andpresentation of financial statements so that they may give a true and fair view. facilitate comparison of financial statements of companies situated in differentparts of the world and also of different companies situated in the same country.it should be noted in this respect that differences in the institutions.3.2. However. Advantages of setting Accounting Standards 1.Reduction in Variations —Standards reduce to a reasonable extent or eliminatealtogether confusing variations in the accounting treatments used to prepare financialstatements. Theostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other parties having aninterest in companies’ economic performance. traditions and legalsystems from one country to another give rise to differences in accounting standardspractised in different countries. A standard whichinsists on one particular solution may be unduly restrictive.comparability and qualitative improvement in the preparation and presentation of financialstatements. Standards may call for disclosure beyond that required by law. . 2. Facilitates Comparison —The application of accounting standards would.Disclosure Beyond that Required by Law —There are certain areas where importantinformation is not statutorily required to be disclosed. This can sometimes be avoidedeither by allowing a permitted choice between different accounting treatments. The accounting standards seek to describe the accounting principles. to a limitedextent.Restriction on Choice of Alternative Treatments —Alternative solutions to certainaccounting problems may each have arguments to recommend them.Significance of Accounting Standard The adoption and application of accounting standards ensures uniformity. or by defining closely the circumstances where different treatments may be appropriate.

ACCOUNTING STANDARDS BOARD OF INDIA Formation of the Accounting Standards Board The institute of Chartered Accountants of India. recognising the need to harmonise the diverse accounting policies and practices at present in use in India. ASB . At International level In 1972 International Accounting Standards Committee(IASC).the Netherlands. ASBwill take into consideration the applicable law. Currently. Canada. was formed for developing International Accounting Standards (IASs). During these three decades the IASC has issued 40IASs through a due process involving the worldwide accountancy profession. another professional body. constituted an Accounting StandardsBoard (ASB) on April 21. Cannot Override the Statute —Accounting standards cannot override the statute. Scope and function of Accounting Standards Board The main function of ASB is to formulate accounting standards so that such standards may be establishedby the Council of the Institute in India. While formulating the accounting standards. standard-setting boards or committees are active in a numberof countries.Michael Alexander. While formulating the accounting standards. customs.3. Beginning in the 1970s. 1977. DEVELOPMENT OF ACCOUNTING STANDARDS Prior to the 1970s. usages and business environment. Director of Research and Technical Activities at the Financial Accounting Standards Board (FASB) said. United Kingdom.In 1978.Rigidity —There may be a trend towards rigidity in applying the accounting standards. however. However theIASs are not accepted worldwide. The IASCcomprises the professional accountancy bodies of over 75 countries (including The Instituteof Chartered Accountants of India). including the United States. The Institute is one of the members of the International Accounting StandardsCommittee (IASC) and has agreed to support the objectives of IASC. Australia. New Zealand. ‘the demand for standards comes largely froman insatiable appetite for rules. The reliance on judgment in technical accounting mattersseems to have gone’. Thestandards are required to be framed within the ambit of prevailing statutes. the preparersand users of financial statements and the national standardsetting bodies. the International Federation of Accountants(IFAC) was established. Japan and India. few academics paid much attention to the standard-setting processin accounting. it became clear that standard setting wasa fascinating process that had become intertwined with the economic self-interests of affected parties.

the activitiesAccounting Standard 16: Borrowing Costs   Statement to be applied in accounting for borrowing costs.and if found necessary. publicsector undertakings. The Council of the Institute of . Statement does not deal with the actual or imputed cost of owner‟s equity/preference capital. the following procedure willbe adopted for formulating Accounting Standards: Step 1 — To determine the broad areas in which accounting standards need to beformulated and the priority in regard to the selection thereof. in the light of the conditions and practices prevailing in India. modify the same in consultation with ASB.Characterd Accountants of India has so far issued twenty nitme accounting standards. industry and other organizations for ascertaining their views.Some of these standards are mandatory. Step 2 —To hold a dialogue with the representatives of the government. therefore. to the extent possible. These standards are asfollows: allocation of resources and. Step 3 —On the basis of the work of the study groups and the dialogue with therepresentatives. Accounting Standards issued so far In India. These accounting standards are mandatory inthe sense that these are binding on the members of the Institute. . Step 4 —To finalise the draft of the proposed standard after talcing into considerationthe comments received.Procedure for issuing Accounting Standards Broadly. ASB will issue guidance notes on the accounting standards andgive clarifications on issues arising therefrom.will give due consideration to International Accounting Standards issued by IASC and try to integrate them. ASB hasalso been entrusted with the responsibility of propagating the accounting standards andof persuading the concerned parties to adopt them in the preparation and presentationof financial statements. Step 5 —To submit the final draft of the proposed standard to the Council of theInstitute. The accounting standard on the relevant subject will then be issued under the authority of the Council. to prepare and issue the exposure of draft of the proposed standard forcomments by members of the Institute and the public at large. The accounting standards will be issued under the authority of the Council. The Council of the Institute will consider the final draft of the proposed standard. ASB will also review the accounting standardsat periodical intervals.

other than borrowings for obtaining qualifying asset. In case exchange difference on foreign currency borrowings represent saving in interest. Amortisation of ancillary costs incurred in connection with the arrangement of borrowings. Other short-term and other long-term borrowings. Amortisation of discounts or premium relating to borrowings. the carrying amount is written down. Capitalization of borrowing costs should be suspended during extended periods in which development is interrupted. Capitalization should cease when activity is completed substantially or if completed in parts. Capitalization of borrowing cost should commence when expenditure for acquisition. and Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs that are directly attributable to the acquisition. in respect of that part. all the activities for its intended use or sale are complete. Income on the temporary investment of the borrowed funds be deducted from borrowing costs. construction or production of any qualifying asset (assets that takes a substantial period of time to get ready for its intended use or sale) should be capitalized.2). Finance charges in respect of assets acquired under finance leases or under other similar arrangements. Generally. When the expected cost of the qualifying asset exceeds its recoverable amount or Net Realizable Value. compared to interest rate for the local currency borrowings. it should be treated as part of interest cost for AS 16 (ASI-10 Incorporated in (AS) 16 "Borrowing Costs" as an explanation below para 4(e))                           AS – 16: Borrowing Costs Take a look at the following love story . Financial statements to disclose accounting policy adopted for borrowing cost and also the amount of borrowing costs capitalized during the period. In case of funds obtained generally and used for obtaining a qualifying asset. a period of 12 months is considered as a substantial period of time (ASI-1 Incorporated in (AS) 16 "Borrowing Costs" as an explanation below para 3. Borrowing costs may include: Interest and commitment charges on Bank Borrowings. borrowing costs is incurred and activities necessary to prepare the asset for its intended use or sale are in progress. construction or production is being incurred. the borrowing cost to be capitalized is determined by applying weighted average of borrowing cost on outstanding borrowings.

he thinks that it is an investment formarriage. sorry one bad day. the jewellery shop owner sent the ring to girl‟s house and bill to boy‟shouse. hero willcertainly think it as a wasteful expenditure. the boy usually givesmany gifts.They both got married -----------One fine day. Now our hero has to pay the bill. Now he will think it as an investment for marriage. Now he will think it as expenditure. Again the hero startsgiving gifts. Everyday evening they both will meet at a spot. The following table shows in brief theaccounting treatment.----. Our heroine asks his husband for a mobile(N 97) as the mobile with her which he has gifted is very old (1100).So. Right???What is borrowing cost?When we borrow funds we have to incur costs.There should be a good climax. At the time of paying the bill .A break in the Love and Interval for our story -------The hero has ordered a Diamond ring for his love. The fact is that the boy with whom the girl was sitting is hercousin. Our hero‟s heart broke into pieces and hebecame a mini Devdas. The hero of our story is an employee and heroine is a studentstudying CA. A common friend to hero and heroine enters the scene and makes all the doubtsof hero clear and again they both will be same as before.) Correlation with ourstory : A break in their love andthe diamond ring . the hero while going in his car watches the girl sittingwith another boy in the restaurant. Our hero didn‟taccept for that and heroine starts crying. other wise audience wont accept the story. Without knowing what hashappened.A twist in the story.        Amortization of ancillary costs incurred in connection with the arrangementof borrowings Particulars : During the development ofthe Asset(Asset as defined underAS – 16) Treatment : Capitalize Correlation with ourstory : Gifts given will be treatedas investment formarriage when their loveis developing Particulars : Interruption in thedevelopment of asset Treatment : Charge it to P&L A/C(Revenue Exp.---------. The hero has no other alternative andhas to buy the mobile. like they are regarded as an adjustment to interest costs This accounting standard states whether the borrowing costs has to be capitalizedor to be charged to profit & Loss A/C. As and when he gives gift.

Inventories that require substantial period to bring them to saleablecondition. it is 12 months but may be more or less than 12months. Eg: Turnkey projects.Common friend joins heroand heroine Particulars : Asset is completed andready for use.Particulars : When the development ofasset again continues Treatment : Capitalize Correlation with ourstory : The story after interval.3. power generation facilities. Investmentproperties. whether from the date of borrowing offunds or whether from the start of construction of asset or whether at any othertime? . What is an asset? Asset under AS – 16 means the qualifying asset which takes substantialperiod of time for its intended use or for sale. Ifborrowing cost is incurredafter completion Treatment : Charge it to P&L A/C(Revenue Exp.) Correlation with ourstory : After marriage andquarrel for mobile. Construction. which depends on the facts and circumstances of each case. What is substantial period of time? As per the consensus. Development of steel plants. FAQ‟s on AS – 16: 1. 2. When capitalization shall commence.

Construction or production of a qualifyingasset is being incurred.The following conditions has to be satisfied (a)Expenditure for the acquisition. On that asset X Capitalization rate. (b)Borrowing costs are being incurred on the other hand (c)Activities necessary to prepare the asset for its intended use or sale is inprogress. Capitalization rate = Weighted averagecost of borrowingNote: Borrowing cost capitalized should notexceed Actual borrowing cost incurredduring the period. Borrowing cost that has to be capitalized= Exp. (second art )Borrowing cost has to be capitalized Borrowing cost =Borrowing cost during the period(-) Income from temporary investment ofborrowed amount .

ISSUE 1. Accounting Standard (AS) 16. Borrowing Costs. CONSENSUS . 2. The issue is what is the meaning of the expression „substantial period of time‟ for the purpose of this definition. defines the term „qualifyin g asset‟ as “an asset that necessarily takes a substantial period of time to get ready for its intended use or sale”.Disclosure under AS – 16: a) Accounting Policy adopted b) Amount of borrowing cost capitalized during the accounting period 302 Accounting Standard (AS) 16 (issued 2000) Borrowing Costs Contents OBJECTIVE SCOPE DEFINITIONS RECOGNITION Borrowing Costs Eligible for Capitalisation Excess of the Carrying Amount of the Qualifying Asset over Recoverable Amount Commencement of Capitalisation Suspension of Capitalisation Cessation of Capitalisation DISCLOSURE Objective The objective of this Statement is to prescribe the accounting treatment for borrowing costs.

For this purpose. 1. to get it ready for its intended use or sale should be considered.3. Paragraph 4 (e) of AS 16 covers exchange differences on the amount of principal of the foreign currency borrowings to the extent of difference between interest on local currency borrowings and intereston foreign currency borrowings. 2. However.180 . time which an asset takes. ordinarily. a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. technologically and commercially. Paragraph 4 (e) of AS 16. The issue is which exchange differences are covered under paragraph 4 (e) of AS 16. the interest rate for the local currency borrowings should be considered as that rate at which the enterprise would have raised the borrowings locally had the enterprise not decided to raise the foreign currency borrowings. 11:47 AM#4 Accounting Standards Super Senior Member Join Date Mar 2010 Posts 1.7 KB. provides that borrowing costs may include “exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs”. If the difference between the interest on local currency borrowings and the interest on foreign currency borrowings is equal to or more than the exchange difference on the amount of principal of the foreign currency borrowings. The issue as to what constitutes a substantial period of time primarily depends on the facts and circumstances of each case. CONSENSUS 3. ISSUE 1. „Borrowing Costs‟.pdf (29. Attached Files o Reply With Quote ASI10. 9 views) 2. 07-04-2010. In estimating the period. the entire amount of exchange difference is covered under paragraph 4 (e) of AS 16.

The Committee restricts itself to the specific issue raised by the querist relating to the deduction of notional savings in interest from the costs of borrowings for specific assets for the purpose of capitalisation. 8. there is no income from the temporary investment of funds as such. There is only a notional income in the form of . are deposited into a common pool of funds. 3. The Committee has not examined any other accounting issue contained in the query. The Committee notes that in the case of the company.” 4. ‘Borrowing Costs’. the funds are not specifically invested and no income is earned on the unutilised funds. Facts of the Case 1. B. The company allocates the interest on specific borrowings to the projects irrespective of its utilisation from the date of borrowings. Queries 6. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset. The querist has referred to paragraph 10 of Accounting Standard (AS) 16. All the borrowings. the funds borrowed specifically for projects are deposited in common pool and the surplus funds are utilised for meeting working capital requirement on short term basis resulting in reduction in overdraft in cash credit account. 5. 2. 9. The Committee notes the requirements of AS 16 as stated in paragraphs 3 and 4 above. All receipts/expenditures are transferred to the bank account on daily basis. In the case of the company. whether the rate to be considered should be (i) the interest rate of the specific borrowing. The querist has also referred to paragraph 11 of AS 16 which states that where the funds are temporarily invested out of the funds specifically borrowed for projects pending their expenditure on qualifying asset. the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings.Blog Entries 1 Notional saving of interest – whether to be accounted for A. in determining the amount of borrowing cost eligible for capitalisation during a period. Points Considered by the Committee 7. (b) In case the notional saving of interest is to be deducted from the borrowing cost incurred on the funds borrowed specifically for projects. As a result the interest on unutilised loan amount which is actually used for other purposes (through common pool of funds) also gets capitalised. or (ii) the interest rate of cash credit C. The querist has sought the opinion of the Expert Advisory Committee on the following issues: (a) Whether notional saving of interest on cash credit account should be deducted from the borrowing cost (i) when there is no overdraft in the cash credit account. which states as below: "10. and (ii) when there is overdraft in the cash credit account. any income earned on such temporary investment is to be deducted from the borrowing cost incurred. whether specific for projects or general. However. A public sector company having operations all over India manages its funds through a centrally controlled bank account.

the Committee is of the view that under the present accounting framework notional saving in interest from the temporary use of funds for the company’s working capital requirements can not be construed as ‘income’ from the temporary investment of borrowings as contemplated in AS 16.savings in interest cost that would have been otherwise incurred on cash credit account. such notional savings can not be deducted from the borrowing costs for the purpose of capitalistion. the Committee is of the following opinion on the issues raised in paragraph 6: (a) The notional saving of interest on cash credit account should not be deducted from the borrowing costs whether there is overdraft or no overdraft in the cash credit account. . Therefore. D. 10. Opinion 11. On the basis of the above. From the above. (b) This issue is not relevant in view of (a) above.