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Statements of Accounting Standards
(AS 16)
BORROWING COSTS
(In this Accounting Standard, the
standard portions have been set in bold italic type. These
should be read in the context of the background material which
has been set in normal type, and in the context of the ‘Preface
to the Statements of Accounting Standards’.)
The following is the text of Accounting
Standard (AS) 16, ‘Borrowing Costs’, issued by the Council of
the Institute of Chartered Accountants of India. This Standard
comes into effect in respect of accounting periods commencing
on or after 1-4-2000 and is mandatory in nature. Paragraph 9.2
and paragraph 20 (except the first sentence) of Accounting Standard
(AS) 10, ‘Accounting for Fixed Assets’, stand withdrawn from this
date.
Objective
The objective of this Statement is to prescribe
the accounting treatment for borrowing costs.
Scope
1. This Statement should be applied in accounting
for borrowing costs.
2. This Statement does not deal with the actual
or imputed cost of owners’ equity, including preference share
capital not classified as a liability.
3. 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 period of time to get ready for its intended use or
sale.
4. Borrowing costs may include:
(a) interest and commitment charges on bank
borrowings and other short-term and long-term borrowings;
(b) amortisation of discounts or premiums relating to borrowings;
(c) amortisation of ancillary costs incurred in connection with
the arrangement of borrowings;
(d) finance charges in respect of assets acquired under finance
leases or under other similar arrangements; and
(e) exchange differences arising from foreign currency borrowings
to the extent that they are regarded as an adjustment to interest
costs.
5. Examples of qualifying assets are
manufacturing plants, power generation facilities, inventories
that require a substantial period of time to bring them to a saleable
condition, and investment properties. Other investments, and those
inventories that are routinely manufactured or otherwise produced
in large quantities on a repetitive basis over a short period
of time, are not qualifying assets. Assets that are ready for
their intended use or sale when acquired also are not qualifying
assets.
Recognition
6. Borrowing costs that are directly
attributable to the acquisition, construction or production of
a qualifying asset should be capitalised as part of the cost of
that asset. 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.
7. 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. Other borrowing costs
are recognised as an expense in the period in which they are incurred.
Borrowing Costs Eligible for Capitalisation
8. The borrowing costs that are directly
attributable to the acquisition, construction or production of
a qualifying asset are those borrowing costs that would have been
avoided if the expenditure on the qualifying asset had not been
made. When an enterprise borrows funds specifically for the purpose
of obtaining a particular qualifying asset, the borrowing costs
that directly relate to that qualifying asset can be readily identified.
9. It may be difficult to identify
a direct relationship between particular borrowings and a qualifying
asset and to determine the borrowings that could otherwise have
been avoided. Such a difficulty occurs, for example, when the
financing activity of an enterprise is co-ordinated centrally
or when a range of debt instruments are used to borrow funds at
varying rates of interest and such borrowings are not readily
identifiable with a specific qualifying asset. As a result, the
determination of the amount of 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.
10. To the extent that funds
are borrowed specifically for the purpose of obtaining a 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.
11. The financing arrangements for
a qualifying asset may result in an enterprise obtaining borrowed
funds and incurring associated borrowing costs before some or
all of the funds are used for expenditure on the qualifying asset.
In such circumstances, the funds are often temporarily invested
pending their expenditure on the qualifying asset. In determining
the amount of borrowing costs eligible for capitalisation during
a period, any income earned on the temporary investment of those
borrowings is deducted from the borrowing costs incurred.
12. To the extent that funds
are borrowed generally and used for the purpose of obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalisation
should be determined by applying a capitalisation rate to the
expenditure on that asset. 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, other
than borrowings made specifically for the purpose of obtaining
a qualifying asset. The amount of borrowing costs capitalised
during a period should not exceed the amount of borrowing costs
incurred during that period.
Excess of the Carrying Amount of the Qualifying
Asset over Recoverable Amount
13. When the carrying amount or the
expected ultimate cost of the qualifying asset exceeds its recoverable
amount or net realisable value, the carrying amount is written
down or written off in accordance with the requirements of other
Accounting Standards. In certain circumstances, the amount of
the write-down or write-off is written back in accordance with
those other Accounting Standards.
Commencement of Capitalisation
14. 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, construction
or production of a qualifying asset is being incurred;
(b) borrowing costs are being incurred; and
(c) activities that are necessary to prepare the asset for its
intended use or sale are in progress.
15. Expenditure on a qualifying asset
includes only such expenditure that has resulted in payments of
cash, transfers of other assets or the assumption of interest-bearing
liabilities. Expenditure is reduced by any progress payments received
and grants received in connection with the asset (see Accounting
Standard 12, Accounting for Government Grants). The average carrying
amount of the asset during a period, including borrowing costs
previously capitalised,is normally a reasonable approximation
of the expenditure to which the capitalisation rate is applied
in that period.
16. The activities necessary to prepare
the asset for its intended use or sale encompass more than the
physicalconstruction of the asset. They include technical and
administrative work prior to the commencement of physical construction,
such as the activities associated with obtaining permits prior
to the commencement of the physical construction. However, such
activities exclude the holding of an asset when no production
or development that changes the asset’s condition is taking place.
For example, borrowing costs incurred while land is under development
are capitalised during the period in which activities related
to the development are being undertaken. However, borrowing costs
incurred while land acquired for building purposes is held without
any associated development activity do not qualify for capitalisation.
Suspension of Capitalisation
17. Capitalisation of borrowing costs should
be suspended during extended periods in which active development
is interrupted.
18. 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 costs are costs of holding partially completed assets and
do not qualify for capitalisation. However, capitalisation of
borrowing costs is not normally suspended during a period when
substantial technical and administrative work is being carried
out. Capitalisation of borrowing costs is also not suspended when
a temporary delay is a necessary part of the process of getting
an asset ready for its intended use or sale. For example, capitalisation
continues during the extended period needed for inventories to
mature or the extended period during which high water levels delay
construction of a bridge, if such high water levels are common
during the construction period in the geographic region involved.
Cessation of Capitalisation
19. 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.
20. An asset is normally ready for
its intended use or sale when its physical construction or production
is complete even though routine administrative work might still
continue. If minor modifications, such as the decoration of a
property to the user’s specification, are all that are outstanding,
this indicates that substantially all the activities are complete.
21. 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, 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.
22. A business park comprising several
buildings, each of which can be used individually, is an example
of a qualifying asset for which each part is capable of being
used while construction continues for the other parts. 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, such as a steel mill.
Disclosure
23. The financial statements should disclose:
(a) the accounting policy adopted for borrowing
costs; and
(b) the amount of borrowing costs capitalised during the period.
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