AS-16 BORROWING COSTS

Borrowing Costs include:
1. Interest and commitment charges on borrowings
2. Amortization of discounts or premiums relating to borrowings
3. Amortization of ancillary costs incurred in connection with the arrangement
of borrowings
4. Exchange difference arising from borrowings to the extent it amounts to
interest costs.

Borrowing costs should be recognized as an expense in the period in which they are incurred.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of that asset.

Qualifying Asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. e.g. Heavy Plant & Machinery.

BORROWING COST ELIGIBLE FOR CAPITALIZATION

Specific Borrowing for acquisition of qualifying asset: Borrowing cost to be
capitalized.

Amount of borrowing cost
= Specific Borrowing Cost – Income from temporary
investment

General Borrowing and used for acquisition of qualifying asset: Borrowing cost should be capitalised with the following amount;

Amount of Borrowing Cost
= Expenditure cost on asset or Asset cost * Capitalisation rate

Capitalisation Rate
= Weighted Average Borrowing costs on general borrowing
(i.e. Excluding cost of specific borrowing)


Note: When with the capitalization of borrowing cost, the cost exceeds the net recoverable amount, the carrying amount is written down to net recoverable amount as per the recommendation of other accounting standards.

COMMENCEMENT OF CAPITALISATION


Capitalisation of Borrowing should commence when all the following conditions are satisfied

1. Expenditure for the acquisition of a qualifying asset is being incurred
2. Borrowing costs are being incurred; and
3. Activities that are necessary to prepare the asset for its intended use or
sale are in progress

SUSPENSION OF CAPITALISATION


Capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted.

However capitalization should not be suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale.

Example:
 Borrowing costs incurred while land is under development are capitalized during the period in which activities related to the development are being undertaken. However, it should not be capitalized when land acquired for building purposes is held without use.

CESSATION OF CAPITALISATION


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.


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,
capitalization of borrowing costs in relation to that part should cease
when substantially all the activities necessary to prepare that part for its intended use or sale are complete.
Example:
Housing complex comprising several buildings: If individual building can be used separately, its capitalisation should cease.
Disclosure:
1. The Accounting Policies adopted for borrowing costs.
2. The amount of borrowing costs capitalized during the period.
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