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 a
liability

3. OVERVIEW Yes AS-16 not applicable Ascertain whether
there is a borrowing No
Yes
Is it a specific
borrowing for acquisition
of a qualifying asset
Is it a general
borrowing No No
Yes
Whether borrowing
costs have been
incurred
Yes
Yes
Are borrowing costs directly attributable to the construction / acquisition / production of a qualifying asset
Are funds, that are generally borrowed, used for obtaining a qualifying asset
Capitalise &
disclose
Expense off the
borrowing cost No
Yes

4. DEFINITIONS enterprise in connection with the borrowing of funds
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

5. BORROWING COSTS borrowings
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

6. 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

7. 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

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

9. 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

10. 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

11. COMMENCEMENT OF CAPITALISATION
Commence capitalisation 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

12. CRITICAL ISSUES
Expenditure on a qualifying asset includes only such expenditure:
that has resulted in payment of cash
transfer of other assets
assumption of interest bearing liabilities
Expenditure to be reduced by progress payments and grants
Average carrying amount of the asset during a period including
borrowing costs previously capitalised is normally a reasonable
approximation of the expenditure to which capitalisation rate is
applied in that period

13. CRITICAL ISSUES
When the carrying amount or the expected ultimate cost
of the qualifying asset exceeds its recoverable amount or
NRV, the carrying amount is written down or written off
in accordance with the requirements of other accounting
standards
In certain circumstances such write down or write off
may be written back as per those other accounting

14. 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

15. EXAMPLE
Weighted average rate %
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

16. SEQUENCE OF CAPITALISATION
SPECIFIC BORROWINGS
GENERAL BORROWINGS
OWN FUNDS

17. 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

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

19. THANK YOU