Borrowing Cosct - As 16

7/29/2019 Borrowing Cosct - As 16

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Borrowing cost AS 16

Prashant M Maharishi


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Application

Applies to accounting period commencingon or after 1/4/2000.

Mandatory in nature

Relevant Para 9.2 of AS 10 of financing

cost treatment is withdrawn Relevant part of Para 20 related to Finance

cost is also withdrawn

Does not apply to actual or imputed cost of

owners equity including preference sharecapital not classified as liability

Other ASI 1 Substantial period of time, ASI10 interpretation of Para 4 (e),


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Need for standard

Huge borrowing cost are incurred by the

company in putting up Infrastructure for

which no guidance available existence of

AS 10

Some of the corporate also capitalized

interest in inventory valuation which was

not fair- existence of AS 2


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What is borrowing cost

It is interest and other

cost

Incurred by an enterprise

In connection with

borrowing of funds.


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Borrowing cost may include

a) Interest & commitment charges

b) Amortization of discounts or

premium on borrowing

c) Amortization of ancillary cost forarrangement of borrowing

d) Finance charges on assets

acquired on finance leasee) Exchange difference on FCB as an

adjustment to interest cost


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What is a qualifying asset?

It is an asset.

It may be tangible or intangible

It may be current assets fixed

assets

It applies to Investment properties

That necessarily takes

Substantial period of time To get ready for its intended use or sale


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Recognition

a) BC directly attributable to be

capitalized

if probable future economic

benefits to the enterprise

Bc can be measured reliably.

a) Other BC are to be expensedin the period of incurring


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Capitalization of BC

BC that would have been avoided ifexp on qualifying assets is not madeis cost directly attributable to QA

In complex situation, exercise your

judgment in recognizing fordetermine BC

Temporary income of fundsborrowed specifically should be

adjusted from BC General borrowing apply weighted

average cost of borrowing


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Capitalization of BC

IF carrying amount of

QA


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Commencement &

Suspension of capitalization

Capitalization on satisfaction of :- Exp on QA for acquisition/ construction /

production incurred.

Borrowing cost is incurred

Activities for preparing QA intended use or sale

in progress

Total amt of exp incurred including BC shall be

the amount on which capitalization rate is

applied

Period of No activity in which QAs condition

does not change is excluded.


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Suspension of capitalization

BC capitalization suspended during

extended periods in which active

development is interrupted.

Such cost are cost of partially developed

QA

No suspension allowed during temporary

delay which is a necessary part of process

of getting QA ready.


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Cessation of Capitalization of

BC

Substantially all activities arecomplete

Pending routine administrative

matters does not allowcapitalization of BC

Part completion when part is

capable of use independently,provision should be applied as ifit is an independent QA


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Disclosure

A. Accounting policy adopted for

borrowing cost

B. The amount of borrowing cost

capitalized during the period


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Auditors Checklist

C:\Documents and Settings\pmm\Desktop\Checklist for Auditor Accounting standard 16

borrowing Costs.doc
http://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.doc


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Issues

Whether BC of preference share capital can becapitalized?

Treatment of fees paid for prepayment of loan

Restructuring of loans and interest payablethereon whether eligible for capitalization?

BC on working capital finance can be capitalized?

What happens to waiver of Interest alreadycapitalized?

Interest payments on Inventory can be included inthe valuation of closing stock?

Addition of Interest to the cost of investments ispossible?

What is substantial period of time? ASI 1 - says 12months time.


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Practical issues

1. R ltd has borrowed Rs.25 crores from financial

institution during the financial year 2001-02. these

borrowings are used to invest in shares of A Ltd, a

subsidiary company, which is implementing a new

project estimated to cost 50 crores. As on 31st March,

2002 since the said project was not yet complete, theDirectors of R Ltd, resolved to capitalize the interest on

the borrowings amounting to Rs. 3 crores and add it to

the cost of investments. As statutory auditor, please

comment.

2. A fast food chain takes about 6 months to open a new

retail outlet. Can it capitalize borrowing cost incurred inconnection with setting up the new outlet?


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Practical issues ASI 10

3. XYZ Ltd. has taken a loan of USD 10,000 on April 1, 20X3 fora specific project at an interest rate of 5% p.a. payableannually. On April 1, 20X3, the exchange rate between thecurrencies was Rs. 45 per USD. The exchange rate, as atMarch 31, 20X4, is Rs.48 per USD. The correspondingamount could have been borrowed by XYZ Ltd. in localcurrency at an interest rate of 11 percent per annum as on

April 1, 20X3.

The following computation would be made to determine theamount of borrowing costs for the purposes of paragraph 4(e)of AS 16;

Interest for the period = USD 10,000 x 5% x Rs. 48/USD =Rs. 24,000/-

Increase in the liability towards the principal amount = USD10,000 x (48-45) = Rs. 30,000/-

Interest that would have resulted if the loan was taken inIndian currency = USD 10000 x 45 x 11%) = Rs. 49,500

Difference between interest local currency borrowing andforeign currency borrowing = Rs.49,5000 Rs.24,000 = Rs.25,500


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Practical issues

4. A Refinery started erecting in June 1997. Till2001 erection work continued. In 2001 work wassuspended because of financial crunches. In2005 work was restarted. In September 2006refinery started its operation in part and sellingrefined petrol etc. However it could refine only

sweet crude till may 2007 because of one unit ofrefinery could not be set up. It is contended byCompany that Till May 2007 all production andsales is trial run of the company. Huge borrowingcost are incurred by the company during theperiod 1997 to 2007. Till now all expensesincluding interest cost is debited in expenditureduring construction period. Please advise :-What will happen to Interest cost a) from 1997to 2001 b) 2001 to 2005 c) September 2006 tomarch 2007 d) March 2007 to May 2007.


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Practical Issues

5. On April 1, 2005, MGH constructions undertook construction of a factorybuilding for expansion purpose. Total cost of project was Rs. 3,00,00,000.The Building was completed by end of March 2006 and during the periodfollowing payments were made:

Payment made

1 April 2005 - 20,00,000 ,

30 June 2005 - 60,00,000 ,

31 December 2005 - 1,80,00,000

and 31 March 2006 - 40,00,000Total 3,00,00,000

MGH constructions borrowings as at March 31, 2006 were as follows;

9% term loan amounting to Rs.80,00,000 taken on December 31, 2004.Simple interest is payable annually. Amount outstanding as at March 31,2005 and during 05-06 is Rs.80,00,000. the loan was taken specifically forthe project.

11% debentures issued on March 31, 2004 with simple interest payable

annually. Amount outstanding for the year 05-06 is rs.1,50,00,000.10% bonds issued on December 31,2003 amounting to Rs.1,70,00,000.simple interest payable at annual rest. Amount outstanding for the year 05-06 is rs.1,60,00,000.

How much borrowing cost should be capitalized for construction of thebuilding as per AS-16 borrowing Cost?


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Practical issues

6. A company obtained term loan during the yearended 31st March, 2002 to the extent of Rs. 650lakhs for modernization and development of itsfactory. Buildings worth Rs. 120 lakhs werecompleted and Plant and Machinery worth Rs. 350lakhs were installed by 31st March, 2002. A sum of

Rs. 70 lakhs has been advanced for assets, theinstallation of which is expected in the followingyear. Rs. 100 lakhs has been utilized for WorkingCapital requirements. Interest paid on the loan ofRs. 650 lakhs during the year 2001-2002 amountedto Rs. 25.50 lakhs. How should the interest amountbe treated in the Accounts of the Company?

Borrowing Cosct - As 16

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