INDIAN ACCOUNTING STANDARD (IND AS 23) – BORROWING COSTS
DEFINITIONS:
BORROWING COST– Borrowing Cost is the “Interest and other cost” which is directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset.
QUALIFYING ASSET – A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
Borrowing Costs may include :
- Interest Cost as per Effective Rate of Interest Method
- Finance Charges under Finance Lease
- Exchange Differences as per Para 6E
The following Assets may take time for their Production, Construction and Acquisition:
- Inventories
- Manufacturing plants
- Power generation facilities
- Intangible under Development Phase
- Investment properties
- Buildings
Financial assets, and inventories that are manufactured, or otherwise produced, over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.
It can be said that Inventory can be considered as a Qualifying Asset only if the following two conditions are satisfied:
- It should take substantial period of time.
- It should not be produced in larger quantity on regular basis.
RECOGNITION RULES:
As per the provisions of Ind AS 23, 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. An entity shall recognise other borrowing costs as an expense in the period in which it incurs them. But , borrowing cost which is not incurred for acquisition, construction or production of Qualifying Assets should be expensed in Profit and Loss Statement in same year.
STAGES OF CAPITALISATION:
Commencement of Capitalisation:
The following conditions should be satisfied to commence the Capitalisation of Borrowing Cost :
(a) Expenditures should be incurred out of borrowed funds;
(b) Interest Cost should be Actual Cost and (c) Necessary Activities should be undertaken for completion of Qualifying Asset.
Following expenditures include capitalization i.e. payments of cash, transfers of other assets or the assumption of interest-bearing liabilities.
In case of Progress Payments : Expenditures are reduced by any progress payments received and grants received in connection with the asset .
In case of Income on Investments made out of Borrowed Funds:
An entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of 5 borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.
Suspension of Capitalisation:
Capitalisation of Borrowing Cost will be suspended if activities remain discontinued. It can be due to shortage of man, material and any other unexpected reasons.
Suspension is of two types:-
- Temporary Suspension: If Suspension is of temporary in nature then it should be ignored and such suspension will not affect Capitalisation in any way.
- Permanent Suspension: If Suspension is permanent then it will be expensed in Profit and Loss Statement.
Cessation of Capitalisation:
Cessation means completion of work. As per this Ind AS , Borrowing Costs can not be capitalised after the date of cessation of activities. It shall be capitalised upto the date at which Qualifying Asset becomes ready for use or sale.
Cessation in Parts:
- Dependent: If Qualifying Asset which is completed and dependent in nature then it will be considered that this part is still a Qualifying Asset and Borrowing Cost should be Capitalised.
- Independent: If Qualifying Asset which is completed and independent in nature then it will be considered that this part is not a Qualifying Asset and Borrowing Cost should be written off in Profit and Loss Statement.
TYPES OF BORROWINGS:
- Specific Borrowings:- Specific Borrowings are those borrowings where there is direct relationship between Qualifying Assets and Borrowed funds. In this case Capitalisation is directly charged with the related asset.
- General Borrowings:- General Borrowings are those borrowings where there is no direct relationship between Qualifying Assets and Borrowed funds. In this case, there may be multiple Qualifying Assets and multiple Borrowings. Hence, Borrowings are not undertaken specifically for an Asset, but these are undertaken for a Project as a whole by using a Rate called Weighted Average Capital Rate (WACR).
DISCLOSURES:
The Accounting Policy should also be reported.
The Entity should report “WACR” which has been used in books for Capitalisation of Borrowing Costs.
