1. ACCOUNTING STANDARD-16
BORROWING COSTS

2. OBJECTIVE & SCOPE
To prescribe the accounting treatment for borrowing costs
Does not deal with the actual or imputed cost of owners’
equity, including preference share capital not
classified as liability.

3. DEFINITIONS
Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds
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
Interest and commitment charges on bank & other short term
borrowings
Amortisation of discounts or premiums relating to
Amortisation of ancillary costs incurred in connection with
the arrangement of borrowings
Finance charges of assets acquired under finance leases or
under other similar arrangements
Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs

5. QUALIFYING ASSETS Examples: Manufacturing plants
Power generation facilities
Inventories that require a substantial period of time to bring them to a saleable condition.
Investment properties

6. QUALIFYING ASSETS Not to be included as qualifying assets:
Other Investments
Inventories that are routinely manufactured or otherwise produced in large quantities on repetitive basis over a short period of time.
Assets that are ready for their intended use or sale when acquired.

7. RECOGNITION Capitalise borrowing costs that are directly attributable
to the acquisition, construction or production of a
qualifying asset
These should be capitalised only if it is probable that they will result in
future economic benefits to the enterprise and
costs can be measured reliably
Other borrowing costs to be expensed off.

8. BORROWING COST ELIGIBLE FOR CAPITALISATION
SPECIFIC BORROWINGS
Borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made.
Actual borrowing costs incurred less any income on temporary investment of those borrowings to be capitalised

9. BORROWING COST ELIGIBLE FOR CAPITALISATION
GENERAL BORROWINGS
Determine borrowing costs by applying a capitalisation rate.
Capitalisation rate should be the weighted average of the borrowing costs that are outstanding during the period.
Borrowing costs capitalised not to exceed amount of borrowing costs incurred.

10. COMMENCEMENT OF CAPITALISATION.
Capitalisation commences when all the following conditions are satisfied:
Expenditure for the acquisition, construction or production of a qualifying asset is being incurred.
Borrowing costs are being incurred
Activities that are necessary to prepare the asset for its intended use or sale are in progress

11. EXAMPLE Total exp. on a qualifying asset in a month 10 crores
Average exp. for the month crores
Specific borrowings crores
General borrowings crores
Debentures (14%) crores
Long term borrowings (11%) crores
Short term borrowings (12%) crores
Exp. out of general borrowings crores

12. EXAMPLE Weighted average rate 12%
Capitalisation of borrowing costs on the above expenditure of Rs 2 crores should be at the rate of 12% p.a. for the said month apart from capitalisation of interest on specific borrowings

13. SUSPENSION /CESSATION OF CAPITALISATION
Suspend during extended periods in which active development is interrupted.
Capitalisation should cease when substantially all activities necessary to prepare the qualifying asset for its intended use or sale are complete.
In case of construction of a qualifying asset in parts and a completed part is capable of being used while construction continues for the other parts, capitalization 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

14. DISCLOSURE The accounting policy adopted for borrowing costs.
The amount of borrowing costs capitalised during the period.