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Accounting Standard (AS) -16 Borrowing Costs

VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA
CHAIRMAN INMACS MANAGEMENT SERVICES LTD. Mobile: 98110 40004 E-mail: vinodjain@inmacsindia.com vinodjainca@gmail.com
Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

INMACS

Borrowing Costs
Applicability : Effective from accounting periods commencing on or after 1st April, 2000.

Nature Objective of AS – 16

: Mandatory for all enterprises

: To prescribe the accounting treatment for borrowing costs.

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

INMACS

Borrowing Costs Borrowing Costs Interest & commitment charges on Borrowings Amortisation of Discount / Premium on Borrowings Amortisation of ancillary costs relating to Borrowings Finance charges for assets acquired on Finance Lease Exchange Differences* *To the extent they are regarded as an adjustment to interest cost Vinod Jain. FCWA Vinodjain@inmacsindia. FCS. FCA.com INMACS .

FCWA Vinodjain@inmacsindia. FCS.Q: Exchange Differences – When to as Borrowing Costs? be treated Ans: To the extent regarded as ‘adjustment to interest cost’.com INMACS . Adjustment = Interest on local currency borrowing – Interest on foreign currency borrowing The adjustment is restricted to amount of exchange loss on principal due to devaluation of currency Vinod Jain. FCA.

2006 Rate of Interest (in India) : Rs.S.. FCS.) Exchange rate as at 01. FCA.03. Vinod Jain. : Rs.2005 : 8% p. 45 per USD : 12% Contd.A.a.04.com INMACS . 40 per USD Exchange rate as at 31. FCWA Vinodjain@inmacsindia.Treatment of Exchange Differences Loan Amount : USD 10.000 Rate of Interest (in U.

000 = Rs. Interest for the Period = USD 10. FCS.600/4. 57. FCA.0002.600/Contd.000 x 8% x Rs. 21. FCWA Vinodjain@inmacsindia. Increase in liability towards the principal amount = USD 10. Interest if loan was raised in India = USD 10. Vinod Jain.com INMACS .Treatment of Exchange Differences Computations to be made: 1.000/3. 36. 57. 36.. 45 = Rs. 50.600 – Rs. Difference (2-1) = Rs.000 x 48 x 12% = Rs.000 x (45-40) = Rs.

50.600/To be treated as borrowing cost as per AS -16 Rs. FCS.000/- Rs.com INMACS .400/To be capitalised to loan obligation as per SCH VI Note: The amount of borrowing costs capitalised during a period should not exceed the amount of borrowing costs incurred during the period Vinod Jain. 28. 21. FCWA Vinodjain@inmacsindia. FCA.Treatment of Exchange Differences Treatment of Exchange Differences of Rs.

FCA. FCS.Qualifying Assets Definition: • an asset • that takes substantial period of time • to get ready for intended sale or usage According to ASI – 1. FCWA Vinodjain@inmacsindia.Inventories Vinod Jain. a rebuttable presumption of a period of 12 months is considered as a substantial period of time.com INMACS .Fixed assets . Qualifying asset may be: .

FCA. FCS.Treatment of Borrowing Costs Borrowing Costs Directly attributable* for: • acquisition • construction • production of Assets other than Qualifying assets Qualifying Assets Capitalised as part of asset Vinod Jain. FCWA Vinodjain@inmacsindia.com Treated as revenue expenditure *or that could have been avoided if the expenditure on qualifying assets had not been made INMACS .

FCS. FCA. FCWA Vinodjain@inmacsindia.com INMACS .Criteria for Capitalisation Criteria  Future Economic Benefits  Reliable Measurement Note : Expenses not fulfilling the criteria to be treated as revenue expenditure Vinod Jain.

if any Vinod Jain.com INMACS . FCS. FCWA Vinodjain@inmacsindia.Borrowings Cost (Interest) Borrowings Cost Specifically for Qualifying Assets Generally but part used for Qualifying Assets Apply actual rate of Interest Apply weighted average rate of interest Capitalise the Borrowing Costs less interest income. FCA.

obtained for construction of Plant I & II on May 1. FCWA Vinodjain@inmacsindia.2005 Rs. 1 Lac on December 31. secured debentures raised on July2004 redeemable in four equal installments commencing July 1.com INMACS . 2005 June 1.Calculation of Weighted Average Rate of Interest Illustration ABC Co. 2005. 30 Lacs bearing interest at 14% p. 5 Lacs. Vinod Jain. 14% working capital loan obtained on April 1. Ltd.) Remarks Date of Start Date of Completion Plant I Plant II 30 Lacs 20 Lacs Specific Borrowing to the extent of Rs. 8 Lacs June 1. 2005 Additional Information: 1. 11% p. 20 Lacs . Loan from financial institutions amounting to Rs. 2005 and repaid Rs. 22 Lacs Specific Borrowing to the extent of Rs. FCS. 2005 November 30.a. Rs. 2005 December 31. 3.. Contd. FCA.a. 2005 2. undertakes significant expansion program and incurs following capital expenditure: Facility Capex (in Rs.

FCA.000/= 3. 1. Loan from financial Institutions = 30.00.com INMACS .000 x 14% x 11 / 12 Working Capital Loan = 5. 3.000/= 52.000 x 14% x 3 / 12 = 14.000/=1.000 x 3 / 12 Total (1+2) = 5. Contd.00. FCS.00.000/- 2. Vinod Jain.000 x 9/12 Secured working capital loan = 5.750/= 3.000 x 11% x 3 / 12 = 15.00.00.000/= 1.00.000 x 14% x 9 / 12 = 4.000 x 11% x 9 /12 = 55. Calculation of borrowing costs for the year ended on March 31..000 x 9 / 12 = 4. 2006 Secured debentures = 20.25.85. FCWA Vinodjain@inmacsindia.00.00/= 11.23. Calculation of average unspecified borrowings outstanding during the year Secured debentures = 20.00.000 x 3 / 12 = 15.Calculation of Weighted Average Rate of Interest Solution A. 1.000/21.00.500/- 2.00.000/- B.00.00.75.

Working Capital Loan = 5. FCS.00.000 x 11% x 3 / 12 = 15.23. FCA.000/= 1.250 / 21. FCWA Vinodjain@inmacsindia.000/2.250/- D.00.00.000) * 100 = 11. Calculation of average interest on unspecified borrowings for the year Secured debentures = 20.000 x 14% x 3 / 12 TOTAL (1+2) = 52..00.45.750/- 2. 1.45.com INMACS .00. Average interest rate for the year ( C / B ) = (2.67% Contd.Calculation of Weighted Average Rate of Interest Solution C.000 x 14% x 9 / 12 = 4. Vinod Jain.500/= 14.000 x 11% x 9 /12 = 55.

FCS.79. Plant I On specific borrowings: 22.000 x 11.00. FCA.Calculation of Weighted Average Rate of Interest Solution Interest Capitalised 1.667/= 54.67% x 6 / 12 = 56.020/- Vinod Jain.000 X 14% X 6 / 12 On general Borrowings: 12. Plant II On specific borrowings: 8.00.00.000 x 11. FCWA Vinodjain@inmacsindia.460/- 2.00.67% x 7 / 12 = 1.com INMACS .000/= 70.000 X 14% X 7 / 12 On general Borrowings: 8.

FCA. FCS. FCWA Vinodjain@inmacsindia.com INMACS .Excess of the Carrying amount of the Qualifying asset over recoverable Amount Actual Cost of the Asset + Borrowing Cost Capitalised <= Recoverable amount of the Asset Vinod Jain.

FCS. FCWA Vinodjain@inmacsindia.Commencement of Capitalisation Expenditure for the • acquisition • construction • production of a qualifying asset is being incurred Conditions Borrowing costs are being incurred Necessary activities for preparation of qualifying assets are in progress Vinod Jain. FCA.com INMACS .

Suspension of Capitalisation Criteria  Capitalisation to be suspended during extended periods in which active development is hampered. Suspension not to take place in case: • substantial technical & administrative work is being carried on • temporary delays necessary for preparation of qualifying assets (seasonal rains etc. FCA.) Vinod Jain.com INMACS . FCS. FCWA Vinodjain@inmacsindia.

Cessation to take place even if: • • routine administrative work still continues minor modifications to property as per users’ specifications is to be made Cessation to take place in part if: • Construction of qualifying asset is completed in parts and a part is capable of being used separately INMACS Vinod Jain.com . FCA. FCS.Cessation of Capitalisation Criteria  Capitalisation should cease when substantially all the the activities necessary to prepare the qualifying asset for its intended use or sale are complete. FCWA Vinodjain@inmacsindia.

the accounting policy adopted for borrowing costs 2. FCS.Disclosure Requirements The financial statements should disclose: 1. The amount of borrowing costs capitalised Vinod Jain. FCWA Vinodjain@inmacsindia. FCA.com INMACS .

FCA. The amount of borrowing costs capitalised Vinod Jain. FCWA Vinodjain@inmacsindia. FCS. the accounting policy adopted for borrowing costs 2.Disclosure Requirements The financial statements should disclose: 1.com INMACS .

com INMACS . 4. Significant Accounting Policy Borrowing costs that are attributable to the acquisition of or construction of qualifying assets are capitalized as part of the cost of such assets. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are charged to revenue. FCWA Vinodjain@inmacsindia.Disclosure Requirements Example 1 Name of the Company : MRF Financial Year Auditors : 2004-05 : Sastri & Shah M. FCA. Notes to Accounts The total borrowing cost capitalized during the year is Rs.13 Crores. Vinod Jain. FCS.M. Nissim & Co.

Disclosure Requirements Example 2 Name of the Company : NICHOLAS PIRAMAL INDIA LIMITED Financial Year Auditors Notes to Accounts Interest amounting to Rs. FCWA Vinodjain@inmacsindia. : 2004-05 : Price Waterhouse Vinod Jain.4 Million has been capitalized during the year in compliance with AS-16.com INMACS . 2. FCA. FCS.

Notes to Accounts Borrowing Costs capitalized during the year Rs. 8. FCA.Disclosure Requirements Example 3 Name of the Company : GHCL Financial Year Auditors : 2004-05 : Jayantilal Thakkar & Co. 5. Rahul Gautam Divan & Associates Significant Accounting Policy Borrowing Costs that are attributable to the acquisition . FCS.54 Million) Vinod Jain. The capitalized rate is the weighted average of the borrowing costs applicable to the borrowings of the company that are outstanding during the period. All other borrowing costs are recognized as an expense in the period in which they are incurred. construction or production of qualifying assets are capitalized as part of cost of such assets.com INMACS . FCWA Vinodjain@inmacsindia.26 Million (Previous Year Rs.

Notes to Accounts Interest debited to the Profit & Loss Account is net of interest capitalized amounting to Rs.156. FCS. Other borrowing costs are recognized as expenses in the year in which they arise. Nil (2004 – Rs. FCWA Vinodjain@inmacsindia.com INMACS .467) Vinod Jain. FCA. 233.Disclosure Requirements Example 4 Name of the Company : EIH LIMITED Financial Year Auditors : 2004-05 : Ray & Ray Significant Accounting Policy Borrowing Costs that are attributable to the acquisition / construction of fixed assets are capitalized as part of the cost of the respective assets.

close scrutiny required. Q.Capitalisation of Borrowing Costs Q. Whether borrowing cost avoidable or unavoidable? A. FCWA Vinodjain@inmacsindia. Factors to be considered as to whether and to what extent general borrowings have been so used A.Existing borrowing exercise of judgement required. Vinod Jain. Based on borrowing during period of expenditure and not borrowings made for the whole year.COP . Q. FCS. Information of cash inflows and outflows. Said to be unavoidable if expenditure on qualifying assets had been incurred and borrowing is taken . General borrowings made but equity specifically infused for financing qualifying assets A. No question of capitalizing borrowing cost. Q.com INMACS . Calculation of weighted average borrowing rate? A. FCA.

Capitalisation of commissioned packages when capitalization of remaining incomplete packages is pending? A. Allocation of incidental expenditure during construction? A. Necessary to capitalize commissioned packages . FCWA Vinodjain@inmacsindia. Capitalisation of independent packages which are complete when capitalization of main packages is pending ? A.COP . Q. Date on which package is ready to commence commercial production. Date of capitalization? A. Capitalised when ready for their intended use. Q. On appropriate basis. Q.com INMACS . Vinod Jain. FCA.Capitalisation of completed parts of a project Q. FCS.

Segregation on appropriate basis between P/L A/C & Expenditure during construction A/C Q.COP . Allocation on appropriate basis to P & L A/c and Expenditure during construction A/c Vinod Jain. Capitalisation of main packages when capitalization of ancillary packages is pending or vice versa? A. Capitalisation of main packages to be done when ready to commence commercial production or ready for use.com INMACS .Capitalisation of completed parts of a project Q. FCWA Vinodjain@inmacsindia. Q. FCS. Treatment of general and administrative overheads after part capitalisation? A. Treatment of depreciation on infrastructure? A. FCA.

FCA.Thank You VINOD JAIN. FCWA . FCWA Vinodjain@inmacsindia. FCA.com INMACS . FCS. Mobile: 98110 40004 E-mail: vinodjain@inmacsindia.DISA CHAIRMAN INMACS MANAGEMENT SERVICES LTD..B. FCS.com Vinod Jain. LL.com vinodjainca@gmail.

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