AS 16

Borrowing Costs

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Applicability:
• Mandatory in nature w.e.f. April 1, 2000.

Objective:
• Prescribe accounting treatment for borrowing costs.

Scope:
• Should be applied in accounting for borrowing costs
• Not Applicable to:
 imputed costs of owners’ equity, including preference share capital not classified as
liability.

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Definition:

• Borrowing Costs- Interest and other costs incurred in connection with borrowing of funds.

• Qualifying Asset- An asset which necessarily takes a substantial amount of time to get ready for its intended use
or sale.

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Definition(…Contd.):
• Borrowing Costs include:
 interest and commitment charges on bank, short-term and long-term borrowings
 amortisation of premiums and discounts relating to borrowings
 amortisation of ancillary costs in connection with arrangement of borrowings
 finance charges for assets acquired on finance or similar arrangements
 exchange differences on foreign currency borrowings to the extent they are regarded as an adjustment to interest costs.

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Recognition:

• Borrowing costs directly attributable to the acquisition, construction or production of the qualifying asset should be capitalised as cost of the asset.
• Other borrowing costs should be recognised as expense in the period in which they are incurred.
• Costs to be capitalised only -
 if probable to result in future benefits; and
 such costs can be measured reliably

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Borrowing Costs eligible for capitalisation:

• Funds borrowed specifically - actual cost incurred during the period less any income on the temporary investment of those borrowing

• Funds borrowed generally - cost should be determined by applying a capitalisation rate to the expenditure on that asset
 Capitalisation Rate - the weighted average of the borrowing costs applicable to borrowings that are outstanding during the period other than funds borrowed for specific
purpose.

• Borrowing costs capitalised during a period should not exceed the total borrowing costs incurred during the period.

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Commencement of Capitalisation:
• Capitalisation of borrowing costs should commence when the following conditions are satisfied:
 expenditure for acquisition, construction or production of a qualifying asset is being incurred
 borrowing costs are being incurred
 activities for preparing the asset for its intended use or sale are in progress.

• Incase of general borrowings, the capitalisation rate should be applied to the average carrying amount of an asset including borrowing costs previously capitalised.

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Suspension of Capitalisation:
• Capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted.

• However capitalisation of borrowing costs is not suspended when substantial technical and administrative work is being
carried out or when temporary delay is a necessary part of the process to get an asset ready for intended use or sale.

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Cessation of Capitalisation:
• Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for
intended use or sale are complete.

• When construction of a qualifying asset is done in parts and a part is capable of being used while construction continues for the
other parts, capitalisation of borrowing costs in relation to the completed/ substantially completed part should cease.

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Disclosure:
• Accounting policy adopted for borrowing costs; and

• Amount of borrowing costs capitalised during the year.

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Issues:
• Does not apply to ready to use assets. Should not the interest on loan acquired for a specific asset be capitalised?

• Substantial period of time not specified in the Standard.

• ‘Average carrying amount of the asset’ i.e. The amount to which capitalisation rate is to be applied, not defined in the Standard.

• Average capitalisation rate to be applied to carrying amount plus interest previously capitalised. Should interest previously capitalised also be considered?

• Suspension of activity- problem of distinction between permanent and temporary.

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