Accounting Standard AS 16

1

• Accounting Standard (AS) -16
• Borrowing Costs
• VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA
• CHAIRMAN
• INMACS MANAGEMENT SERVICES LTD.
• Mobile [phone]
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2
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 accounting treatment for borrowing
costs.
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3
Borrowing Costs
Borrowing Costs
Interest commitment charges on Borrowings
Amortisation of ancillary costs relating to
Borrowings
Exchange Differences
Amortisation of Discount / Premium on Borrowings
Finance charges for assets acquired on Finance
Lease
To the extent they are regarded as an adjustment
to interest cost
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Q Exchange Differences When to be treated as
Borrowing Costs?
Ans To the extent regarded as adjustment
to interest cost. The adjustment is
restricted to amount of exchange loss on
principal due to devaluation of currency
Adjustment Interest on local currency
borrowing Interest on foreign currency
borrowing
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Treatment of Exchange Differences
Loan Amount 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..
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Treatment of Exchange Differences

• Computations to be made
• Interest for the Period USD 10,000 x 8 x Rs.
  45
• Rs. 36,000-
• Increase in liability towards the principal
  amount
• USD 10,000 x (45-40)
• Rs. 50,000/-
• Interest if loan was raised in India
• USD 10,000 x 48 x 12
• Rs. 57,600/-
• Difference (2-1) Rs. 57,600 Rs. 36,000
• Rs. 21,600/- Contd..

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Treatment of Exchange Differences

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

Rs. 21,600/-
Rs. 28,400/-
To be treated as borrowing cost as per AS -16
To be capitalised to loan obligation as per SCH VI
Note The amount of borrowing costs capitalised
during a period should not exceed the amount of
borrowing costs incurred during the period
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Qualifying Assets

• Definition
• an asset
• that takes substantial period of time
• to get ready for intended sale or usage
• According to ASI 1, a rebuttable presumption
  of a period of 12 months is considered as a
  substantial period of time.
• Qualifying asset may be
• - Fixed assets
• - Inventories

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Treatment of Borrowing Costs
Borrowing Costs

• Directly attributable for
• acquisition
• construction
• production of

Qualifying Assets
Assets other than Qualifying assets
Capitalised as part of asset
Treated as revenue expenditure
or that could have been avoided if the
expenditure on qualifying assets had not been made
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Criteria for Capitalisation

• Criteria
• Future Economic Benefits
• Reliable Measurement
• Note Expenses not fulfilling the criteria to be
  treated as revenue expenditure

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Borrowings Cost (Interest)

Borrowings Cost

Specifically for Qualifying Assets
Generally but part used for Qualifying Assets
Apply weighted average rate of interest
Apply actual rate of Interest
Capitalise the Borrowing Costs less interest
income, if any
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Calculation of Weighted Average Rate of Interest
Illustration ABC Co. Ltd. undertakes significant
expansion program and incurs following capital
expenditure

• Additional Information
• Rs. 20 Lacs , 11 p.a. secured debentures raised
  on July2004 redeemable in four equal installments
  commencing July 1, 2005
• 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
• Rs. 5 Lacs, 14 working capital loan obtained on
  April 1, 2005 and repaid Rs. 1 Lac on December
  31, 2005. Contd..

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Calculation of Weighted Average Rate of Interest

• Solution
• Calculation of borrowing costs for the year ended
  on March 31, 2006
• Secured debentures
• 20,00,000 x 11 x 3 / 12 55,000/-
• 15,00,000 x 11 x 9 /12 1,23,750/-
• Loan from financial Institutions
• 30,00,000 x 14 x 11 / 12 3,85,000/-
• Working Capital Loan
• 5,00,000 x 14 x 9 / 12 52,500/-
• 4,00,000 x 14 x 3 / 12 14,000/-
• Calculation of average unspecified borrowings
  outstanding during the year
• Secured debentures
• 20,00,000 x 3 / 12 5,00,00/-
• 15,00,000 x 9/12 11,25,000/-
• Secured working capital loan
• 5,00,000 x 9 / 12 3,75,000/-
• 4,00,000 x 3 / 12 1,00,000/-
• Total (12) 21,00,000/- Contd..

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Calculation of Weighted Average Rate of Interest

• Solution
• Calculation of average interest on unspecified
  borrowings for the year
• Secured debentures
• 20,00,000 x 11 x 3 / 12 55,000/-
• 15,00,000 x 11 x 9 /12 1,23,750/-
• Working Capital Loan
• 5,00,000 x 14 x 9 / 12 52,500/-
• 4,00,000 x 14 x 3 / 12 14,000/-
• TOTAL (12) 2,45,250/-
• Average interest rate for the year ( C / B )
• (2,45,250 / 21,00,000) 100 11.67
• Contd..

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Calculation of Weighted Average Rate of Interest

• Solution
• Interest Capitalised
• 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/-
• 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/-

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Excess of the Carrying amount of the Qualifying
asset over recoverable Amount
Actual Cost of the Asset Recoverable
Borrowing Cost Capitalised amount
of the Asset
lt
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Commencement of Capitalisation

• Expenditure for the
• acquisition
• construction
• production
• of a qualifying asset is being incurred

Borrowing costs are being incurred
Conditions
Necessary activities for preparation of
qualifying assets are in progress
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Suspension of Capitalisation

• Criteria
• Capitalisation to be suspended during extended
  periods in which active development 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 (seasonal rains etc.)

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Cessation of Capitalisation

• Criteria
• Capitalisation should cease when substantially
  all the the 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

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Disclosure Requirements

• The financial statements should disclose
• the accounting policy adopted for borrowing costs
• The amount of borrowing costs capitalised

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Disclosure Requirements

• The financial statements should disclose
• the accounting policy adopted for borrowing costs
• The amount of borrowing costs capitalised

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Disclosure Requirements
Example 1 Name of the Company MRF Financial
Year 2004-05 Auditors Sastri Shah
M.M. Nissim Co. Significant Accounting
Policy Borrowing costs that are attributable to
the acquisition of or construction of qualifying
assets are capitalized as part of the cost of
such assets. A qualifying asset is one that
necessarily takes substantial period of time to
get ready for intended use. All other borrowing
costs are charged to revenue. Notes to
Accounts The total borrowing cost capitalized
during the year is Rs. 4.13 Crores.  
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Disclosure Requirements
Example 2 Name of the Company NICHOLAS PIRAMAL
INDIA LIMITED Financial Year
2004-05 Auditors Price Waterhouse     Notes to
Accounts Interest amounting to Rs. 2.4 Million
has been capitalized during the year in
compliance with AS-16.
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Disclosure Requirements
Example 3 Name of the Company GHCL Financial
Year 2004-05 Auditors Jayantilal Thakkar
Co. Rahul Gautam Divan Associates Signific
ant Accounting Policy   Borrowing Costs that are
attributable to the acquisition , construction or
production of qualifying assets are capitalized
as part of cost of such assets. The capitalized
rate is the weighted average of the borrowing
costs applicable to the borrowings of the company
that are outstanding during the period. All other
borrowing costs are recognized as an expense in
the period in which they are incurred.  Notes to
Accounts Borrowing Costs capitalized during the
year Rs. 8.26 Million (Previous Year Rs. 5.54
Million) 
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Disclosure Requirements
Example 4 Name of the Company EIH LIMITED
Financial Year 2004-05 Auditors Ray Ray
Significant Accounting Policy   Borrowing Costs
that are attributable to the acquisition /
construction of fixed assets are capitalized as
part of the cost of the respective assets. Other
borrowing costs are recognized as expenses in the
year in which they arise.    Notes to
Accounts Interest debited to the Profit Loss
Account is net of interest capitalized amounting
to Rs. Nil (2004 Rs. 233,156,467)      
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COP - Capitalisation of Borrowing Costs

• Q. Whether borrowing cost avoidable or
  unavoidable?
• Said to be unavoidable if expenditure on
  qualifying assets had been incurred and borrowing
  is taken ,Existing borrowing exercise of
  judgement required.
• Factors to be considered as to whether and to
  what extent general borrowings have been so used
• A. Information of cash inflows and outflows,
  close scrutiny required.
• General borrowings made but equity specifically
  infused for financing qualifying assets
• No question of capitalizing borrowing cost.
• Calculation of weighted average borrowing rate?
• A. Based on borrowing during period of
  expenditure and not borrowings made for the whole
  year.
•  
•  

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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. Allocation
of incidental expenditure during
construction? A. On appropriate
basis.   Q. Capitalisation of independent
packages which are complete when capitalization
of main packages is pending ? A. Capitalised when
ready for their intended use.  
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COP - Capitalisation of completed parts of a
project
Q. Capitalisation of main packages when
capitalization of ancillary packages 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. Segregatio
n on appropriate basis between P/L A/C
Expenditure during construction A/C Q. Treatment
of depreciation on infrastructure? A. Allocation
on appropriate basis to P L A/c and Expenditure
during construction A/c
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• Thank You
• VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA
• CHAIRMAN
• INMACS MANAGEMENT SERVICES LTD.
• Mobile [phone]
• E-mail vinodjain_at_inmacsindia.com
• vinodjainca_at_gmail.com

Vinod Jain, FCA, FCS, FCWA Vinodjain_at_inmacsindia.
com
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