(as) -16 Borrowing Costs

8/6/2019 (as) -16 Borrowing Costs

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Accounting Standard (AS)Accounting Standard (AS) --1616Borrowing CostsBorrowing Costs

VINOD JAIN,VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISAFCA, FCS, FCWA , LL.B.,DISA

CHAIRMANCHAIRMAN

INMACS MANAGEMENT SERVICES LTD.INMACS MANAGEMENT SERVICES LTD.Mobile: 98110 40004Mobile: 98110 40004

EE--mail:mail: [email protected]@[email protected]@gmail.com

Vinod Jain, FCA, FCS, FCWAVinod Jain, FCA, FCS, [email protected]@inmacsindia.com INMACSINMACS



Borrowing Costs


Applicability : Effective from accounting

periods commencing on or after

1st April, 2000.

Nature : Mandatory for all enterprises

Objective of AS ± 16 : To prescribe the accountingtreatment for borrowing costs.



Borrowing Costs


Borrowing Costs

Interest &

commitment

charges

on Borrowings

Amortisation

of Discount/ Premium

on Borrowings

Amortisationof ancillary costs

relating to

Borrowings

Finance charges

for assetsacquired on

Finance Lease

Exchange

Differences*

*To the extent they are regarded as an adjustment to interest cost




A ns: To the extent regarded as adjustment tointerest cost.

The adjustment is restricted to amount of exchange loss on principal due todevaluation of currency

Q: Exchange Differences When to be treatedas Borrowing Costs?

A djustment =Interest on local currency borrowing

Interest on foreign currency borrowing




Treatment of Exchange Differences

Loan A mount : USD 10,000

Rate of Interest (in U.S. A .) : 8% p.a.

Exchange rate as at 01.04.2005 : Rs. 40 per USD

Exchange rate as at 31.03.2006 : Rs. 45 per USD

Rate of Interest (in India) : 12%

Contd..





Computations to be made:

1. Interest for the Period = USD 10,000 x 8% x Rs. 45

= Rs. 36,000-

2. Increase in liability towards the principal amount

= USD 10,000 x (45-40)

= Rs. 50,000/-3. Interest if loan was raised in India

= USD 10,000 x 48 x 12%= Rs. 57,600/-

4. Difference (2-1) = Rs. 57,600 Rs. 36,000

= Rs. 21,600/- Contd..





Treatment of Exchange Differences of Rs. 50,000/-

Rs. 21,600/- Rs. 28,400/-

To be treatedas borrowing cost

as per A S -16

To be capitalisedto loan obligation

as per SCH VI

Note: The amount of borrowing costs capitalised during a period shouldnot exceed the amount of borrowing costs incurred during the period




Qualifying A ssets

Definition:

an asset

that takes substantial period of time

to get ready for intended sale or usage

A ccording to A SI 1, a rebuttable presumption of aperiod of 12 months is considered as a substantial periodof time.

Qualifying asset may be:

- Fixed assets

- Inventories




Treatment of Borrowing Costs

Borrowing Costs

Directly attributable* for: acquisition construction

production of

Qualifying A ssetsA ssets other thanQualifying assets

Capitalised as part of asset

Treated asrevenue expenditure

*or that could have been avoided if the expenditure on qualifying assets had not been made




Criteria for Capitalisation

Criteria

Future Economic Benefits

Reliable Measurement

Note : Expenses not fulfilling the criteria to betreated as revenue expenditure




Borrowings Cost (Interest)

Borrowings Cost

Specifically for

Qualifying A ssetsGenerally but part used

for Qualifying A ssets

Capitalise the Borrowing Costsless interest income, if any

A pply actualrate of Interest

A pply weightedaverage rate of interest




Calculation of Weighted A verage Rate of Interest Illustration

A BC Co. Ltd. undertakes significant expansion program and incurs following capital

expenditure:

Facility Capex

(in Rs.)

Remarks Date

of Start

Date ofCompletion

Plant I 30 Lacs Specific Borrowing to theextent of Rs. 22 Lacs

June 1,2005

December 31,2005

Plant II 20 Lacs Specific Borrowing to theextent of Rs. 8 Lacs

June 1,2005

November 30,2005

A dditional Information:

1. Rs. 20 Lacs , 11% p.a. secured debentures raised on July2004

redeemable in four equal installments commencing July 1, 20052. Loan from financial institutions amounting to Rs. 30 Lacs bearing interest

at 14% p.a. obtained for construction of Plant I & II on May 1,2005

3. Rs. 5 Lacs, 14% working capital loan obtained on A pril 1, 2005 andrepaid Rs. 1 Lac on December 31, 2005. Contd..




Calculation of Weighted A verage Rate of Interest Solution A . Calculation of borrowing costs for the year ended on March 31, 2006

1. Secured debentures= 20,00,000 x 11% x 3 / 12 = 55,000/-

= 15,00,000 x 11% x 9 /12 = 1,23,750/-

2. Loan from financial Institutions

= 30,00,000 x 14% x 11 / 12 = 3,85,000/-

3. Working Capital Loan= 5,00,000 x 14% x 9 / 12 = 52,500/-

= 4,00,000 x 14% x 3 / 12 = 14,000/-

B. Calculation of average unspecified borrowings outstanding during the year

1. Secured debentures

= 20,00,000 x 3 / 12 = 5,00,00/-

= 15,00,000 x 9/12 = 11,25,000/-

2. Secured working capital loan

= 5,00,000 x 9 / 12 = 3,75,000/-

= 4,00,000 x 3 / 12 =1,00,000/-

Total (1+2) 21,00,000/- Contd..




Calculation of Weighted A verage Rate of Interest

Solution

C. Calculation of average interest on unspecified borrowings for the year

1. Secured debentures

= 20,00,000 x 11% x 3 / 12 = 55,000/-

= 15,00,000 x 11% x 9 /12 = 1,23,750/-

2. Working Capital Loan

= 5,00,000 x 14% x 9 / 12 = 52,500/-

= 4,00,000 x 14% x 3 / 12 = 14,000/-

TOTAL (1+2) 2,45,250/-

D. A verage interest rate for the year ( C / B )

= (2,45,250 / 21,00,000) * 100 = 11.67%

Contd..




Calculation of Weighted A verage Rate of Interest

Solution

Interest Capitalised

1. Plant I

On specific borrowings: 22,00,000 X 14% X 7 / 12 = 1,79,667/-

On general Borrowings: 8,00,000 x 11.67% x 7 / 12 = 54,460/-

2. Plant II

On specific borrowings: 8,00,000 X 14% X 6 / 12 = 56,000/-

On general Borrowings: 12,00,000 x 11.67% x 6 / 12 = 70,020/-




Excess of the Carrying amount of the Qualifying asset over recoverable A mount

A ctual Cost of the A sset Recoverable+ Borrowing Cost Capitalised amount

of the A sset <=




Commencement of Capitalisation

Conditions Borrowing costs are being incurred

Expenditure for the

acquisition construction production

of a qualifying asset is being incurred

Necessary activities for preparation

of qualifying assets are in progress




Suspension of Capitalisation

Criteria

Capitalisation to be suspended duringextended periods in which activedevelopment 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 (seasonalrains etc.)




Cessation of CapitalisationCriteria

Capitalisation should cease when substantially all thethe activities necessary to prepare the qualifying

asset for its intended use or sale are complete.

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




Disclosure Requirements

The financial statements should disclose:

1. the accounting policy adopted for borrowing costs

2. The amount of borrowing costs capitalised





The financial statements should disclose:

1. the accounting policy adopted for borrowing costs

2. The amount of borrowing costs capitalised




Disclosure RequirementsExample 1

Name of the Company : MRFFinancial Year : 2004-05

A uditors : Sastri & Shah

M.M. Nissim & Co.

Significant A ccounting PolicyBorrowing costs that are attributable to the acquisition of orconstruction of qualifying assets are capitalized as part of the cost of such assets. A qualifying asset is one that necessarily takes substantialperiod of time to get ready for intended use. A ll other borrowing costsare charged to revenue.

Notes to A ccounts

The total borrowing cost capitalized during the year is Rs. 4.13 Crores.



Vinod Jain, FCA, FCS, FCWAVinod Jain, FCA, FCS, FCWA

[email protected]@inmacsindia.com INMACSINMACS


Example 4

Name of the Company : EIH LIMITED

Financial Year : 2004-05

A uditors : Ray & Ray

Significant A ccounting PolicyBorrowing Costs that are attributable to the acquisition / constructionof fixed assets are capitalized as part of the cost of the respectiveassets. Other borrowing costs are recognized as expenses in the yearin which they arise.

Notes to A ccounts

Interest debited to the Profit & Loss A ccount is net of interest capitalized amounting to Rs. Nil (2004 Rs. 233,156,467)





COP - Capitalisation of Borrowing Costs

Q. Whether borrowing cost avoidable or unavoidable?

A . Said to be unavoidable if expenditure on qualifying assets had beenincurred and borrowing is taken ,Existing borrowing exercise of

judgement required.

Q. Factors to be considered as to whether and to what extent generalborrowings have been so used

A . Information of cash inflows and outflows, close scrutiny required.

Q. General borrowings made but equity specifically infused for financingqualifying assets

A . No question of capitalizing borrowing cost.

Q. Calculation of weighted average borrowing rate?

A . Based on borrowing during period of expenditure and not borrowingsmade for the whole year.





COP - Capitalisation of completed parts of a project

Q. Capitalisation of commissioned packages when capitalization of

remaining incomplete packages is pending? A . Necessary to capitalize commissioned packages .

Q. Date of capitalization?

A . Date on which package is ready to commence commercial production.

Q. A llocation of incidental expenditure during construction?

A . On appropriate basis.

Q. Capitalisation of independent packages which are complete whencapitalization of main packages is pending ?

A . Capitalised when ready for their intended use.





COP - Capitalisation of completed parts of a project

Q. Capitalisation of main packages when capitalization of ancillarypackages is pending or vice versa?

A . Capitalisation of main packages to be done when ready to commence

commercial production or ready for use.

Q. Treatment of general and administrative overheads after part

capitalisation?

A . Segregation on appropriate basis between P/L A /C & Expenditure

during construction A /C

Q. Treatment of depreciation on infrastructure?

A . A llocation on appropriate basis to P & L A /c and Expenditure during

construction A /c



Thank YouThank You

VINOD JAIN,VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISAFCA, FCS, FCWA , LL.B.,DISA

CHAIRMANCHAIRMAN

INMACS MANAGEMENT SERVICES LTD.INMACS MANAGEMENT SERVICES LTD.Mobile: 98110 40004Mobile: 98110 40004

EE--mail:mail: [email protected]@inmacsindia.com

[email protected]@gmail.com



(as) -16 Borrowing Costs

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