AS 16 Accounting For Borrowing Costs Summary PDF. In the previous articles, we have given AS 11 The Effects of Changes in Foreign Exchange Rates and AS 4 Contingencies & Events Occurring after the Balance Sheet Date. Today we are providing complete details of accounting standard – 16 accounting for borrowing costs I;e definitions, Recognition, Borrowing Costs Eligible for Capitalization, Commencement of Capitalization, Cessation of Capitalization, Suspension of Capitalization and Disclosure. At the end of this article, you can also download AS 16 summary notes in PDF by ICAI. This notes is also useful for CA IPCC and CA Final Students.
AS 16 Accounting For Borrowing Costs
Borrowing costs may include:
- interest and commitment charges on bank borrowings and other short-term and long-term borrowings;
- amortization of discounts or premiums relating to borrowings;
- amortisation of ancillary costs incurred in connection with the arrangement of borrowings;
- finance charges in respect of assets acquired under finance leases or under other similar arrangements; and
- exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
Now a days, many banks and financial institutions charge up front fee or processing charge for work-ing capital. When debentures are raised, the firm may incur rating fees, registration charges, stamp duty, etc. For the limited purpose of this AS 16, these expenses have to be treated as interest on borrowings.
The following terms are used in this Standard with the meanings specified:
1) Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds.
2) Qualifying asset :
Two conditions are important to make an asset as ‘qualifying asset’. They are
- It necessarily takes substantial period of time to get the asset ready for its intended use.
- The time taken for that should be substantial.
3) Substantial period:
What constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as a substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale is considered.
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. The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Standard. Other borrowing costs should be recognised as an expense in the period in which they are incurred.
Borrowing costs are capitalised as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. Other borrowing costs are recognised as an expense in the period in which they are incurred.
Borrowing Costs Eligible for Capitalization
The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made. When an enterprise borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified.
Commencement of Capitalization :
The capitalization of borrowing costs as part of the cost of a qualifying asset should commence when all the following conditions are satisfied:
(a) expenditure for the acquisition, construction or production of a qualifying asset is being incurred;
(b) borrowing costs are being incurred; and
(c) activities that are necessary to prepare the asset for its intended use or sale are in progress.
Cessation of Capitalization :
Capitalization of borrowing costs should be stopped when substantially all activities necessary to prepare the qualifying asset for its intended use are complete. Many companies capitalise interest up to the date of commercial production. Capitalization of interest should stop when substantially all activities are complete and need not wait till commercial production is commenced.
Further, the qualifying asset may be completed in parts. Capitalization of interest should stop when that part can be put to use even though construction of other part may continue. In factory expansion, the building may be completed and ready for use. The installation of machinery may be in progress. The capitalization of interest on a building will stop as soon as the building is complete, even though construction of machinery may be under progress.
Suspension of Capitalization
Capitalization of borrowing costs should be suspended during extended periods in which active development is interrupted.Borrowing costs may be incurred during an extended period in which the activities necessary to prepare an asset for its intended use or sale are interrupted. Such costs are costs of holding partially completed assets and do not qualify for capitalization.
However, capitalization of borrowing costs is not normally suspended during a period when substantial technical and administrative work is being carried out. Capitalization of borrowing costs is also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. For example, capitalization continues during the extended period needed for inventories to mature or the extended period during which high water levels delay construction of a bridge if such high water levels are common during the construction period in the geographic region involved.
The financial statements should disclose:
- the accounting policy adopted for borrowing costs; and
- the amount of borrowing costs capitalised during the period.
Click Here to download AS – 16 borrowing cost notes by ICAI.
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