NAS 23 Borrowing cost

Revision Note
Reference for CAP-II Students

1. Key Terms Used

Borrowing cost Interest and other costs that an entity incurs in connection
with borrowing of Fund.
Qualifying asset An asset that takes substantial period of time to get ready
for its intended use or sale.
Example:
i. Inventories
ii. Manufacturing Plant
iii. Power Generation facilities
iv. Intangible asset

2. What is the core principle of this standard?

 Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are included in the cost of that asset.
 Other borrowing costs are recognised as an expense in Statement of profit or loss.

3. Types of Borrowing:

a. Specific Borrowing:
Where a loan is taken out specifically to finance the construction of an asset,
the amount to be capitalised (I.e. included in cost of the respective asset) :

= Interest payable on that loan - any investment income on the temporary

investment of the borrowings.

b. General Borrowing:
If construction of a qualifying asset is financed from an entity's general borrowings,
the borrowing costs eligible to be capitalised are determined by applying a
capitalisation rate to the expenditure incurred on the asset.

What is capitalisation rate?

Capitalisation rate= Total general borrowing cost for the period (excluding
specific borrowings) / weighted average total general
borrowings (excluding specific borrowings)

Now this capitalisation rate is applied to the average carrying amount of the
asset during the period.

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 NAS 23 Borrowing cost
Revision Note
Reference for CAP-II Students

Example 1:
Beta Ltd had the following loans in place at the end of 31st March, 20X2: (In thousand)
Loan 1st April, 20X1 31st March,
20X2
18% Bank Loan 1,000 1,000
16% Term loan 3,000 3,000
14% Debentures 2000
14% debenture was issued to fund the construction of Office building on 1st July, 20X1
but the development activities has yet to be started.
On 1st April, 20X1, Beta ltd began the construction of a Plant being qualifying asset
using the existing borrowings. Expenditure drawn down f or the construction was: Rs
500(000 )on 1st April, 20X1 and Rs 2,500 (000) on 1st January, 20X2.
Required
Calculate the borrowing cost that can be capitalised for the plant.
Answer:

Calculation of Borrowing cost to be capitalised

Condition:
 Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are included in the cost of that asset.

Type of loan 31s t March, 20X2 Remarks

18% Bank Loan
1000 General borrowing for
qualifying asset
(Construction of plant)
16% Term loan
3000 General Borrowing for
qualifying asset
(construction of plant)
14% Debentures
2000 Specific Borrowing for
qualifying asset
(construction of building)
Now, Capitalisation Rate for General borrowing:

Type of loan Loan Amount as Interest cost (In

on 31s t March, thousand)
20X2
18% Bank Loan =1000*12/12 =1000*18%*12/12
(Used for whole =180
year)
16% Term Loan =3000*12/12 =3000*16%*12/12
(Used for whole =480
year)
Total 4000 660
Capitalisation =660/4000
Rate

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 NAS 23 Borrowing cost
Revision Note
Reference for CAP-II Students
=16.5% per
annum
Borrowing cost to be capitalized for Plant = 500*16.5%+ 2500*16.5%*3/12=
185.625 (in thousand).

Note: 14% debenture is specific borrowings (hence ignore in capitalization of

general borrowing)

Exam Question
M/s Biotic Company Limited obtained a loan for Rs. 14 crores on Shrawan 15, 2069
from Nepal Bank Limited, to be utilized as under:

Construction of Factory building Rs. 2.5 crores

Purchase of Plant and Equipment Rs. 2.0 crores
Working Capital Rs'. 1.5 crores
Advance for purchase of trucks Rs. 1.0 crore

In Ashadh 2070, construction of the factory building was completed and Plant and
Equipments, which was ready for its intended use, was installed. Delivery of trucks was
received in the next FY. Total interest of Rs. 9,100,000 was charged by the bank for the
financial year ending 31.3.2070.
Show the treatment of interest under NAS 23 “Borrowing Cost” and also explain the
nature of assets. (June 2014- 5marks)
Answer:
Condition: (As per NAS 23)
 Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are included in the cost of that asset.
 Other borrowing cost charged as expenses.
Here,

Effective interest rate= Interest cost/ Fund borrowed*100%

=0.91/14*100
= 6.5%

Treatment of Borrowing cost under NAS 23 Borrowing cost:

Particulars Nature Interest to Interest to Total

be be charge as
capitalised expenses
Construction of Qualifying =2.5 *6.5%
Factory asset =0.1625
Building
Purchase of =2*6.5%
plant and Non- =0.13
equipment Qualifying
Working asset =1.5*6.5%
capital =0.0975

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 NAS 23 Borrowing cost
Revision Note
Reference for CAP-II Students
Advance for =1*6.5%
purchase of =0.065
trucks
Remaining 0.455
Total 0.1625 0.7475 0.91

Notes:
 Assumed that construction of a factory building was completed on 31st Ashadh,
2070.
 Assumed that the Plant and Equipment was ready for its intended use at the time
of its acquisition.

Exam Question:
A company obtained term loan during the year ended 31st March, 2012 to an extent of
Rs. 650 lakhs for modernization and development of its factory. Building worth Rs. 120
lakhs were completed and plant and machinery worth Rs. 350 lakhs were installed by 31st
March, 2012. A sum of Rs. 70 lakhs has been advanced for assets the installation of which
is expected in the following year. Rs. 110 lakhs has been utilized for working capital
requirements. Interest paid on the loan of Rs. 650 lakhs during the fiscal year 2011-012
amounted to Rs. 58.50 lakhs. How should the interest amount be treated in the account
of the company? Give your comments for the financial year ending on 31-03-2012 in the
context of relevant NAS.
Answer:

As per NAS 23:

 Borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset are included in the cost of that asset.
 Other borrowing costs are recognised as an expense in Statement of profit or
loss.
Interest rate= Interest expenses/Loan borrowed= 58.5/650 = 9%

Nature Fund used (in Interest cost To be Interest cost to

lakh) capitalised be charged as
expenses
Building Qualifying 120 =9%*120 -
asset =10.8
(This cost added to
Building)
Plant and Qualifying 350 =9%* 350
Machinery asset =31.5 (This cost
added to Plant and
Machinery)
Advance Non 70 =9%*70
for assets Qualifying =6.3
Working Non 110 =110*9%
Capital Qualifying =9.9

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 NAS 23 Borrowing cost
Revision Note
Reference for CAP-II Students
Total 650
(equivalent to
Borrowed
loan)

4. Period of Capitalisation: (Important for Theory Question)

a. Commencement of Capitalisation (When borrowing cost is Capitalised?)

The COMMENCEMENT date for capitalisation is the date when the entity first meets
ALL of the following conditions cumulatively on a particular date:

i. It incurs expenditures for the asset.

ii. It incurs borrowing cost.
iii. It undertakes activities that are necessary to prepare the asset for its intended use
or sale.

b. Suspension of capitalisation:
Capitalisation of borrowing costs should be SUSPENDED during extended periods in
which active development is interrupted. Such costs are costs of holding partially
completed assets and do not qualify for capitalisation.

c. Cessation of capitalisation:

An entity should CEASE capitalising borrowing costs when substantially all the
activities necessary to prepare the qualifying asset for its intended use or sale are
complete.

When construction of a qualifying asset is completed in parts and each part is capable
of being used while construction continues on other parts, capitalisation of
borrowing costs relating to a part should cease when substantially all the
activities that are necessary to get that part ready for use are completed.

Discuss the treatment of capitalization of borrowing cost as per NAS 23.

(Dec 2014, June 2015)

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