14

BORROWING COSTS

RELEVANT ACCOUNTING STANDARDS

 AS -16 : Borrowing Costs
 Accounting Standard Interpretation (ASI) 1 : Substantial Period of Time
 Accounting Standard Interpretation (ASI) 10 : Interpretation of Paragraph 4(e) of
Accounting Standard-16 ‘Borrowing costs’
 IAS -23 : Borrowing Costs
 US GAAP : APB Opinions 12, 21, FAS 34, 42, 58, 62, 87, 109, 121.

Introduction
14.1 Accounting Standard-16 ‘Borrowing Costs’ became applicable for the accounting
periods commencing on or after 1-4-2000. On the application of this standard paragraphs
9.2 and 20 of AS-10 ‘Accounting for Fixed Assets’ stood withdrawn.
Borrowing costs are interest and other costs incurred by an enterprise in connection with
the borrowing of funds. Other costs in connection with borrowings may include (i)
commitment charges, (ii) amortization of discount or premium relating to borrowing (see
Example 14.5), and (iii) amortization of ancillary costs relating to borrowings (examples
are fees for the merchant banker, documentation expenses, etc.). Borrowing costs include
(i) finance charges in respect of assets acquired under finance lease or similar
arrangements (see Example 14.8) and (ii) exchange differences arising from foreign
currency borrowings to the extent they are regarded as an adjustment to interest costs (see
Example 14.7). [Paras 3 and 4, AS-16].
Borrowing costs should generally be expensed in the accounting period in which they are
incurred. An exception to this principle is borrowing costs incurred in respect of
qualifying assets in which case borrowing costs should be capitalized. This has been
discussed in Para 14.2 of this chapter.
The basic feature of AS-16 has been reflected in the significant accounting policy of BPL
Ltd., CEAT Ltd. and Indo Gulf Fertilisers Ltd.
BPL Ltd. 2002-03
Borrowing cost that are directly attributable to the acquisition, construction or production
of a qualifying asset are capitalised as part of the asset. Other borrowing costs are
recognized as expense in the period in which they are incurred.
CEAT Ltd. 2002-03
Borrowing costs include interest, fees and other charges incurred in connection with the
borrowing of funds and is considered as revenue expenditure for the year in which it is
incurred except for borrowing costs attributed to the acquisition/improvement of
qualifying capital assets and incurred till the commencement of commercial use of the
asset and which is capitalised as cost of that asset.
Indo Gulf Fertilisers Limited 2002-03
Borrowing Costs incurred in relation to the acquisition, construction of assets are
capitalised as the part of the cost of such assets upto the date when such assets are ready
for intended use. Other borrowing costs are charged as an expense in the year in which
these are incurred.
Qualifying Assets and Capitalization of Borrowing Costs
14.2 Qualifying asset is an asset which necessarily takes substantial period of time to get
ready for its intended use or sale. Thus stock of finished goods cannot be treated as
qualifying asset if the production cycle is not substantially longer. So it is necessary to
take an objective view about “substantial period of time”. The term substantial period of
time is considered to be a period of twelve months vide Accounting Standards
Interpretation No. 1. If the production cycle is longer than the normal accounting period
of the company it can be assumed as “substantially long period of time”.
Examples of qualifying assets are —
 Any type of tangible fixed assets which is in the construction process or acquired
tangible fixed assets which are not yet ready for use or resale like plant and
machinery;
 Intangibles which are in the development phase or which have been acquired but not
yet ready for use or sale like patent;
 Investment properties;
 Inventories which require substantially longer production time.
Investments other than investment properties are not considered as qualifying assets.
14.2-1 Capitalisation of Borrowing Costs - All borrowing costs are not eligible for
capitalisation. Borrowing costs that are directly attributable to the acquisition,
construction or production of the qualifying assets are allowed for capitalisation.
Commencement and cessation of capitalisation are discussed in paras 14.2-3 and 14.2-4.
Another condition of capitalisation of borrowing cost is that the qualifying asset will
result in future economic benefits to the enterprise and the costs can be measured
reliably.
An important point what is missing here is the sufficiency of economic benefit to be
derived by use or sale of the qualifying asset. AS -16 does not require that present value
of future economic benefit to be derived by using the asset or net realisable value of the
asset is more than its cost including capitalised cost. For this purpose it is also essential to
understand the costs to be incurred to complete the qualifying asset. Thus capitalisation
condition of AS -16 is fraught with economic irrationality.
Para 19 of IAS -23 explains one critical point which has been avoided in AS -16 is that
when the carrying amount of the qualifying assets is higher than the recoverable amount,
the carrying amount should be written down. Although this becomes automatically
applicable for stock in trade as it should be valued at lower of cost and net realisable
value, this is not so in case of fixed assets as in India till such time AS-28 becomes
applicable. Let us study the following example:
 Example 14.1 A fixed asset is in the construction period. Actual costs incurred till
date and expected costs to complete along with borrowings and planned borrowings
are given below:
  Costs (Rs. in lacs) (Rs. in lacs)  
Year Actual Estimated Money specifically Planned borrowing
borrowed
1. 100   60  
2. 100   60  
3.   80   40
4.   60   40
5.   50   30
Borrowed fund costs @ 12% p.a. So the estimated cost of the asset at the end of 5th year
would be as follows:
(Rs. in lacs)
Year Costs Actual & Interest Total PV factor(Using Discounted
estimated Cost of Cost
capital 15% p.a.)
1. 100 7.2 107.2 0.8696 93.22
2. 100 14.4 114.4 0.7561 86.50
3. 80 19.2 99.2 0.6575 65.23
4. 60 24 84 0.5718 48.03
5. 50 27.6 77.6 0.4972 38.58
      482.4   331.55
Expected undiscounted cost of the asset at the state of ready for use is Rs. 482.40 lacs and
discounted cost using cost of the capital (15%) as discount factor is Rs. 331.55 lacs.
Preferably the discounted cost should be lower than or equal to present value of future
benefits to be derived from the concerned asset.
Assume that expected future cash flow to be resulted from the asset is @ Rs. 130 lacs p.a.
for a period of 10 years commencing from Year 6. Value in Use of the asset cannot
recover the cost. So the asset should not include interest cost.
(Rs. in lacs)
Year PV Factor at 15% Cash Flow Discounted Cash Flow
6 0.4323 130 56.20
7 0.3759 130 48.87
8 0.3269 130 42.50
9 0.2843 130 36.95
10 0.2472 130 32.13
 11 0.2149 130 27.94
12 0.1869 130 24.30
13 0.1625 130 21.13
14 0.1413 130 18.37
15 0.1229 130 15.98
      324.38
If interest cost was not capitalized expected value of the assets Rs. 274.3362 lacs on
completion would have been less than its expected value in use Rs. 324.38 lac.
Appropriate accounting safeguard is required to disallow capitalization of borrowing
costs under such circumstances to avoid overvaluing the asset under construction and
then writing the value off through impairment charge.
Year Cash outflow PV Factor at 15% Discounted cash outflow
1 100 0.8696 86.9565
2 100 0.7561 75.6144
3 80 0.6575 52.6013
4 60 0.5718 34.3052
5 50 0.4972 24.8588
      274.3362
Loading of the borrowing cost may cause impairment of the value of the asset under
construction. This may happen because of changed cash inflow estimation. To safeguard
this situation, the standard setter should restrict the capitalization of borrowing cost
putting impairment analysis as stated above within the framework of AS-16. Para 13 of
AS-16 explains that “When the carrying amount or the expected ultimate cost of the
qualifying asset exceeds its recoverable amount or net realisable value, the carrying
amount is written down or written off in accordance with the requirements of other
standards”. This procedure has a circular impact of value adding by AS-16 and writing
down by AS-28. This complication should be avoided by putting a restrictive clause on
capitalization. Interest capitalization should be preceded by impairment test. If the asset
under construction can withstand impairment test, then only capitalization of borrowing
cost should be allowed.
14.2-2 Commencement of Capitalisation —
To commence capitalisation of borrowing costs three conditions need to be satisfied : (i)
Expenditure for the acquisition, construction or production has been incurred. This means
money borrowed has been actually spent. Expenditure includes payment of cash, transfer
of other assets, or assumption of interest-bearing liabilities. If a company takes an
interest-bearing loan and met cost of the qualifying assets using that amount, and then
takes a second loan to repay the first one, the borrowing cost relating to the second loan is
eligible for capitalisation. Advance/progress payment received or grant received towards
the cost incurred should be deducted from the amount of expenditure. Average carrying
amount of the asset including previously capitalised borrowing cost is normally
considered as reasonable approximation of the expenditure on which capitalisation rate is
applied. See Example 14.2.
(ii) Borrowing cost is incurred - if the borrowing cost is accrued that implies incurrence
of the cost, and
(iii) Activities necessary to prepare the asset for its intended use should be in progress. If
there is any temporary stoppage of activities which is normally acceptable as a
unavoidable in the flow of activities, capitalisation is not suspended. However, activities
relevant for the intended use of the assets should be in progress.
Example 14.2 : Given below are some relevant data as regards a construction contract :
  (Rs. in lacs)
Expenditure incurred till 31.3.2000 450
Interest cost capitalised for the year 1999-2000 @ 12% p.a. 24
Amount specifically borrowed till 31.3.2000 200
Assets transferred to construction during 2000-01 100
Cash payments during 2000-01 78
Progress payment received 300
New borrowings during 2000-01@ 12% 200
The company intends to capitalise total borrowing cost of Rs. 48 lacs. Is it possible to do
that as per AS -16?
  (Rs. in lacs)
Expenditure incurred  
Balance including capitalised interest cost 474
Assets transferred to construction during 2000-01 100
Cash payments during 2000-01 78
Less Progress payments received 300
Net expenditure 352
Eligible borrowing 352
Money borrowed including previously capitalised interest cost 424
Borrowing cost intended to be capitalised 48
In this case eligible expenditure is Rs. 352 lacs only as against specific borrowing of Rs.
400 lacs. This means money borrowed has not been utilised for the purpose of assets.
This reduces the capitalisation rate. The capitalisation rate in this case is - 352/424 i.e.
83%.
The company can therefore capitalize 83% of interest cost of Rs. 50.88 lacs (12% of Rs.
424), i.e., Rs. 42.23 lacs.
14.2-3 Cessation of Capitalisation - Capitalisation of borrowing cost should cease when
substantially all the activities necessary to prepare the qualifying assets for its intended
use or sale are complete [Para 17 of AS-16]. This means all relevant activities which are
necessary for making the asset in use should be substantially complete. Once
capitalisation ceases, borrowing cost should be expensed.
When the construction of the qualifying asset is carried out in phases or parts like power
projects, and it is possible that each phase or part can be used independently, then
capitalisation ceases for each such phase or part separately. Once all necessary activities
are substantially complete for a phase or part, capitalisation of borrowing cost will cease
for that part. Therefore, it is necessary to keep separate expenditure record for
expenditure for each phase. If borrowings are not specifically linked to a phase then it
should be linked proportionately or by the choice of the management. In this point AS -
16 is not clear.
Example 14.3 Given below are expenses incurred in three phases of a project relating to
construction of a captive power plant :
(Rs.)
  Phase 1 Phase 2 Phase 3 Total
Cash payments 500000 700000 500000  
Transfer of asset 500000 200000 300000  
Total 1000000 900000 800000 2700000
Money borrowed @12% p.a. 2200000
The phase 1 is complete. How should the company capitalise borrowing costs?
(Rs.)
  Phase 1 Phase Phase Total
2 3
Cash payments 500000 700000 500000  
Transfer of asset 500000 200000 300000  
Total 100000 900000 800000 270000
0 0
Money borrowed @12% p.a.       220000
0
I Alternative        
Allocation of borrowed fund in the ratio 814815 733333 651852 220000
expenditure 0
Interest 97778 88000 78222 264000
Capitalised borrowing cost   88000 78222 166222
II Alternative        
Total expenditure of the qualifying assets   900000 800000 170000
0
Allocation of borrowed fund by choice of 500000 900000 800000 220000
qualifying assets 0
Interest 60000 108000 96000 264000
Capitalised borrowing cost   108000 96000 204000
Since AS -16 does not specify the technique of allocation of borrowed funds, Para 12 of
AS -16 is not applicable in this case as that relates to general borrowing. Here it is
specific borrowing for a project but not for specific to a phase. So the management may
maximise capitalisation by choice of application of borrowings as explained in the II
alternative.
14.2-4 Suspension of capitalisation - Capitalisation of interest should be suspended
during extended periods in which active development is interrupted. Borrowing cost
relating to partially completed asset on which work is interrupted is not qualified for
capitalisation. Such borrowing cost should then be expensed. It can be written back and
added to the cost of the asset when the work is resumed.
Accounting policy for borrowing cost suggested in the International Accounting
Standard 23
14.3 IAS-23 suggests two alternative accounting policies for the treatment of borrowing
cost, namely, immediate expensing and deferral.
14.3-1 Benchmark treatment - Para 5 of IAS 23 (Revised) states that borrowing cost may
include (a) interest on bank overdrafts and short- term and long-term borrowings, (b)
amortisation of discounts or premiums relating to borrowings, (c) amortisation of
ancillary costs incurred in connection with the arrangements of borrowings, (d) finance
charge in respect of finance lease and (e) exchange difference arising from foreign
currency borrowings to the extent they are regarded as an adjustment to interest cost.
Para 7 of IAS -23 requires that “Borrowing costs should be recognised as an expense in
the period in which they are incurred.” Disclosure of accounting policy adopted for
borrowing cost is also required (Para 9 of IAS-23).
14.3-2 Alternative treatment - Paras 10-11 of IAS-23 suggest an alternative treatment.
Borrowing costs which 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 as defined in
Para 5.
Para 15 of IAS-23 requires that to the extent that funds are borrowed specifically for
acquiring an asset, amount of borrowing cost eligible for capitalisation should be
determined as the actual borrowing costs incurred during the period less any investment
income on temporary investment of such borrowed funds.
Sometimes it may be difficult to identify direct relationship between particular borrowing
and asset in which such borrowed funds have been invested. Such difficulties arise when
financing activities are centrally co-ordinated. It is possible that various debts have been
raised at various interest rates and the investment of borrowed funds cannot be directly
linked to any specific asset. Para 17 of IAS-23 suggests to use a capitalisa-tion rate based
on weighted average borrowing costs. However, total capitalised borrowing cost should
not exceed the borrowing costs incurred during the period.
Example 14.4 : Total borrowings and interest costs of A Ltd. for 2003 are given in the
Table 14.1. All borrowings are general in nature for financing three fixed assets shown in
the Table. Weighted average borrowing cost is 10.18%. The qualified assets for which
funds were borrowed are now charged at the weighted average rate.
 TABLE 14.1
ALLOCATION OF BORROWING COSTS OF GENERAL PURPOSE FUNDS
Borrowings Date of Amount Interest (Rs. in Weighted average
borrowing (Rs. in lacs) borrowing cost(%)
lacs)
14.8% Term 1.1.1999 1000 148  
Loan
14.6% 1.4.1999 2000 219  
Debentures
14.2% 1.7.1999 2000 142  
Debentures
    5000 509 10.18
Fixed Assets     Allocation of Interest (Rs. in lacs)
Factory Shed   1000 101.8  
Plant 1   2500 254.5  
Plant 2   1500 152.7  
    5000 509  
However, the idea of capitalisation of borrowing costs may distort the value of fixed
assets particularly when the project completion is delayed. That apart, financing cost is
the result of specific financing decision and it has no direct linkage with the investment
decision. Accordingly, costs of two exactly identical projects would be different simply
because of different financing options.Thus comparability of return on investments data
is lost.
14.3-3 Suspension of capitalisation - IAS-23 (Revised) also suggests suspension of
capitalisation for the period when active development of the fixed assets is interrupted.
But suspension is not suggested when substantial technical and administrative works are
done. Also capitalisation is not suspended for temporary delay which forms part of the
process to make the asset ready.
14.3-4 Writing down excess carrying cost of fixed assets - Para 19 of IAS- 23 suggests to
write down fixed assets if its carrying amount exceeds recoverable amount or net
realisable value. Approach of IAS-23 is confusing on this count, because in a going
concern fixed assets are valued at their fair values which are represented by their current
costs. In case capitalisation of borrowing costs causes the carrying cost of the concerned
fixed assets to exceed their fair values, capitalisation should not be allowed.
14.3-5 Disclosures - Para 29 of IAS-23 requires disclosure of (i) accounting policy
adopted for borrowing costs, (ii) amount of borrowing costs capitalised, and (iii)
capitalisation rate used to determine the amount of borrowing costs eligible for
capitalisation.
Eligibility test in case of general borrowing
14.4 In case of general borrowing of funds, the amount of borrowing costs eligible for
capitalisation against a particular fixed asset is determined applying a capitalisation rate
to the expenditure on that asset. The capitalisation rate should be the weighted average of
the borrowing costs applicable to the borrowings of the enterprise that are outstanding
during the period. This should exclude specific borrowing costs. The amount of
borrowing cost capitalised cannot exceed the amount of borrowing costs incurred during
the period.
See Example 14.4. Another Example is given here to further illustrate the point covered.
Example 14.5 Y Ltd. made the following borrowings :
Borrowing Date of Amount Rs. Purpose Related Date of
Borrowing in Lacs Expenses Rs. maturity
in lacs
9.5% 1-1-2003 400.00 General 1.00 31-12-2007
Debenture
s
9.6% 1-1-2003 200.00 Specific 0.50 for 31-12-2012
Term acquisition of Amortizing
Loan plant and to be repaid
machinery in 10 equal
instalments
of principal
9.8% 1-1-2003 400.00 Specific 0.20 for 31-12-2007
Term acquisition of Amortizing
Loan plant and type to be
machinery repaid in 5
equal
installments
of principal
The company desires to write off the related expense in the ratio of outstanding balance
at the end of the accounting period. So the following amortization scheme has been
designed:
Amortization Scheme
Yea Principal Outstanding Expenses Amortized
r
  9.5% 9.6% 9.8% 9.5% 9.6%Term 9.8%
Debentures Term Term Debentures Loans Term
Loans Loans Loans
1 400 200 400 0.1 0.091 0.067
2 400 180 320 0.1 0.082 0.053
3 400 160 240 0.1 0.073 0.040
4 400 140 160 0.1 0.064 0.027
5 400 120 80 0.1 0.055 0.013
6 400 100   0.1 0.045  
7 400 80   0.1 0.036  
8 400 60   0.1 0.027  
9 400 40   0.1 0.018  
 10 400 20 0.1 0.009    
  4000 1100 1200 1.0 0.500 0.200
Qualifying assets for general borrowings amount to Rs. 1100 lacs:
Plant and Machinery - I Rs. 600 lacs
Plant and Machinery - II Rs. 500 lacs
Commercial production for both specific plant and machinery as well other plant and
machinery commenced on 1-1-2004. Therefore, capitalization of borrowing cost was
possible till 31-12-2003.
How to calculate capitalization amount ?
  9.5% Debentures 9.6% 9.8% Term
Term Loans
Loans
  Rs. in lacs    
Eligible interest cost 38.00 19.20 39.20
Amortization of expenses 0.10 0.09 0.07
Eligible borrowing costs 38.10 19.29 39.27
Charge to   Specific  
Plant and
machiner
y
Charge to Plant & Machinery I Eligible Charge
and II in the ratio of Borrowin
their carrying g costs
amounts Carrying
Amount Rs. in Lacs
    Rs. in lacs  
Plant & Machinery I 600 42.20  
Plant & Machinery II 500 35.17  
  1100 77.37 77.37
Expensing Borrowing Costs
14.5 Borrowing costs other than which are eligible for capitalization is recognized as an
expense in the period in which they are incurred.
Example 14.6 A Ltd. raised floating rate loan of US$ 500 million at L+ 2%. USD 6
month Libor was 2.35% at the beginning of the first half year and 2.45% at the beginning
of the second first year. Interest is payable as on 30-6-2003 and 31-12-2003. Spot rate as
on 30-6-2003 was 45.02 and 46.25 respectively. The related asset was ready for
commercial use on 31-10-2003. How much interest should be capitalized and how should
be expensed?
  1-1-2003 to 30-6-2003 1-7-2003 to 31-10-2003 31-10-2003
  In million    
Interest US$ 10.88 5.56 5.56
 Conversion rate 45.02 46.25 46.25
Interest Rs. 489.5925 257.2656 257.2656
To be capitalized   746.8581  
To be expensed     257.2656
Question may remain whether interest during construction period during 1-7-2003 to 31-
10-2003 should be converted applying spot rate as on 31-10-2003. However, payment
obligation arose as on 31-12-2003 and therefore, interest during 1-7-2003 to 31-10-2003
should be converted applying spot rate as on 31-12-2003.
14.5-1 Exchange difference - Para 4(e) of AS-16 explains that exchange difference
arising from foreign currency borrowings to the extent that they are regarded as an
adjustment to interest costs is treated as borrowing cost. ASI-10 explains how much of
the exchange difference should be treated as adjustment to interest cost and thereby
charged to borrowing costs.
As per ASI-10, Paragraph 4(e) of AS 16 covers exchange differences on the amount of
principal of the foreign currency borrowings to the extent of difference between interest
on local currency borrowings and interest on foreign currency borrowings. Let us
illustrate the concept in Example 14.7.
Example 14.7 Y Ltd. borrowed US$ 100 million @ 4.75% p.a. Comparative domestic
borrowing rate was 7%. When the money was borrowed spot rate was US$ 1= INR 45.6.
At the year end the closing spot rate was US$ 1= 46.6.
In this case exchange fluctuation loss arising out of INR depreciation was Rs. 100 million
[ US$ 100 million × (Rs. 46.6- Rs. 45.6)]. Of this interest differential arising out of rate
difference between two countries was Rs. 97.85 million [100 million × 45.6 × 7.5%] -
[100 million × 4.5% × 46.6]. Therefore, exchange difference resulting in increased value
of loan in terms of local currency is higher than the interest differential. So to the extent
of maximum interest differential arising out of difference in interest rates between two
countries should be treated as borrowing cost. Balance of the loss of Rs. 2.15 million
should be treated as exchange fluctuation loss as per AS-11.
If a company takes any foreign currency loan without any linked assets purchased from a
country outside India, exchange fluctuation loss is not allowed to be capitalized by virtue
of Schedule VI to the Companies Act. Revised AS-11 even scrapped the idea of
capitalization of exchange fluctuation loss/gain arising out asset linked foreign currency
borrowings. It is expected that the Schedule VI to the Companies Act will also be
amended in the line of AS-11 such that capitalization of asset linked exchange fluctuation
loss/gain is not continued. ASI-10 takes care of the problem partly. Exchange fluctuation
loss on the borrowed principal during the construction period can be capitalized by
treating a major portion of loss as interest cost. Of course, continued capitalization of
exchange fluctuation loss, which is the present practice, will not be possible once the
Schedule VI is amended.
Finance Charge arising out of Finance Lease
14.6 Finance charges in respect of assets acquired under finance leases or under similar
arrangement of borrowings is treated as borrowing costs. Capitalization principle is
applicable to finance charge as well.
Example 14.8 A Ltd. had installed a plant amounting to Rs. 500 lacs on 1-1-2003. The
plant was ready for commercial production on 1-7-2003. The plant was taken on finance
lease. As per the lease agreement the finance company is entitled to load @10% p.a. from
the date of investment till the date the plant is installed. Thereafter lease rental is charged
in Equated Half-yearly instalments @ 10% implicit interest rate. The finance company
invested Rs. 200 million on 1-7-2002 , Rs. 200 million on 1-10-2002 and Rs. 100 million
on 1-11-2002. Find out the borrowing cost to be capitalized and the carrying amount of
the plant for the purpose of depreciation charge. For the year ended 31-12-2003, how
much finance charge should be expensed. Life of the leased asset is 10 years.
Solution :
The Finance company will treat principal including interest for the period ended on 31-
12-2003 as initial investment in finance lease. This initial investment in lease is Rs.
516.67 million :
Rs. in million Principal Interest
1-7-2002 200 10.00
1-10-2002 200 5.00
1-11-2002 100 1.67
  500 16.67
Given below is the lease Table :
Lease Table (Rs. in Million)
Half Discount Lease Principal Finance Principal
Years Factor Rental Outstanding Charge repayment
1 0.952381 41.46 516.67 25.83 15.63
2 0.907029 41.46 501.04 25.05 16.41
3 0.863838 41.46 484.63 24.23 17.23
4 0.822702 41.46 467.41 23.37 8.09
5 0.783526 41.46 449.32 22.47 18.99
6 0.746215 41.46 430.33 21.52 19.94
7 0.710681 41.46 410.38 20.52 20.94
8 0.676839 41.46 389.45 19.47 21.99
9 0.644609 41.46 367.46 18.37 23.09
10 0.613913 41.46 344.37 17.22 24.24
11 0.584679 41.46 320.13 16.01 25.45
12 0.556837 41.46 294.68 14.73 26.72
13 0.530321 41.46 267.96 13.40 28.06
14 0.505068 41.46 239.90 11.99 29.46
15 0.481017 41.46 210.43 10.52 30.94
16 0.458112 41.46 179.49 8.97 32.48
17 0.436297 41.46 147.01 7.35 34.11
18 0.415521 41.46 112.90 5.65 35.81
 19 0.395734 41.46 77.09 3.85 37.60
20 0.376889 41.46 39.48 1.97 39.48
  12.46221        
*Equated half yearly instalment is : Rs. 516.67 million/12.46221 .
So first half yearly finance charge is Rs. 25.83 million, which should be further
capitalized in addition to Rs. 16.67 million interest capitalization at the end of 2002.
Therefore, carrying amount of the plant at the time it is put to use is Rs. 542.50 million,
which should be treated as depreciable amount. Rs. 25.05 million finance charge should
be expensed for the year ended 2003.
How to Account For Additional Interest Payable After Repayment of Loan
Amount ?
14.7 Often the lending institutions offer loan restructuring package when the borrowing
company is in financial trouble. The lender may refix payment Schedule, waive
compound interest and liquidated damages, reduce interest. Even the lender may
reschedule the loan interest in declining interest rate regime.
In case the lender reduces interest rate but charge some additional interest after the
repayment of loan amount, should that additional interest be charged as and when paid?
Let us take an example.
Example 14.9 A Ltd. borrowed Rs. 100 million on 1-1-1999 @ 12% p.a. Because of
decline in the interest rate, the company agreed to charge 10% p.a. with effect from the
accounting year 2002. The loan is repayable on bullet basis on 31-12-2005. The
restructuring package includes a clause that states a payment of 3 million on 31-12-2006
as a partial compensation of loss of interest. Should this additional interest be treated as
accrued during 2006 ?
This additional interest is compensation to loss of interest on an existing loan payable to
the lender. Point of payment should not be considered here as point of accrual. This is
additional interest accrued during the balance tenure of the loan. [Reference : Expert
Advisory Committee Opinion, Chartered Accountant March 2003]. The committee did
not discuss method recognizing such additional interest over the remaining period of
loan. Given below is a method:
 Additional interest Rs. 3 million is to be allocated over 2002-05.
 Find saving in interest during each period. See Column 3 of the Table below.
 Find present value of interest saving applying current interest rate. This makes the
saving of different period comparable at the beginning of 2002. See Column 6.
 Then find out additional interest to be charged in different years taking the
proportion of saving of the year to total saving :
 
For 2002 : Rs. 3 million X 1.82/6.34
 
(Rs. in million)
1 2 3 4 5 6 7
 Year Loan Interest Interest Present Value Present Value of Allocation of
Amoun Saving Factor @ interest Saving@ additional
t 10% 10% interest
199 100 12        
9
200   12        
0
200   12        
1
200   10 2 0.9091 1.82 0.86
2
200   10 2 0.8264 1.65 0.78
3
200   10 2 0.7513 1.50 0.71
4
200   10 2 0.6830 1.37 0.65
5
    40     6.34 3.00
Disclosures
14.8 Para 23 of AS-16 requires disclosures of (a) the accounting policy adopted for
borrowing costs and (b) amount of borrowing costs capitalized during the period.
14.8-1 Corporate Borrowing Cost Recognition Policy—
Indraprastha Gas Ltd. 2002-03
Borrowing Costs
Borrowing costs that are directly attributable to the acquisition or construction of a
capital asset is capitalised as a part of the cost of that asset. Other borrowing costs are
recognised as an expense in the period in which they are incurred.
Gujarat Ambuja Exports Ltd. 2002-03
Borrowing Costs:
Borrowing Costs that are directly attributable to the acquisition/construction of qualifying
assets are capitalised. A qualifying asset is an asset that necessarily takes substantial
period of time to get ready for its intended use. Other borrowing costs are recognised as
an expenses in the period in which they are incurred.
National Aluminium Co. Ltd. 2002-03
Borrowing costs
Borrowing costs are accounted for as an expense in the period in which they are incurred,
except to the extent where borrowing costs, that are attributable to the acquisition and
construction of qualifying assets, are allocated to the cost of relevant fixed assets.
Bharti Cellular Ltd. 2002-03
Borrowing Cost :
Borrowing costs attributable to the acquisition or construction of a qualifying asset is
capitalised as part of the cost of that asset. Other borrowing costs are recognised as an
expense in the period in which they are incurred.
Capitalization of borrowing cost is allowed for qualifying assets, which is an asset that
takes a substantial period of time to get ready for its intended use. As per Accounting
Standard Interpretation No. 1 (ICAI), this period should be considered as a period of
twelve months unless a shorter or longer period can be justified.
This is ordinarily applicable for—
(i) Self constructed assets for own use;
(ii) Assets constructed for sale or lease like ship, real estate, etc.;
(iii) Inventories like liquor which requires long seasoning.