CORPORATE ACCOUNTS SECTION

1sl Floor, Bharat Sanchar Bhawan,

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H. C. Mathur Lane, Janpath
New Delhi - 110 001.
BHARAT SANCHAR NIGAM LIMITED
(A Govt. of India Enterprise)
TEL: 23734110, 23732263, 23734109 (fax)

Circular N0.365
No.500-31/2015-16/CA-I/BSNL/AI/302 Dated: 19/01/2017

To,
The Chief General Manager
All BSNL Circles

Sub: Accounting for capitalization of Borrowing Costs - reg.

Due to financial crunch, Company's own sources are not sufficient to finance the capital
expenditure and therefore, funds for capital expenditure are being issued to Circles after availing
loan facility from banks. Further, the Borrowing costs i.e. interest and other costs that an entity
incurs in connection with the borrowing of funds are required to be capitalized to the assets
according to the Ind AS - 23. Therefore, Circles are required to capitalize the borrowing costs to
the assets as per the methodology explained below:

1. Intimation of source of funds being issued to circles: The BFCI cell of Corporate Office will
intimate the source of funds while issuing funds to circles i.e. whether the funds issued out of
loan funds or the own sources. Further, if the funds issued out of loan funds, whether it is from
the general borrowings or specific borrowings meant for a particular project or asset, shall also
be intimated.

2. Intimation of capitalization rate for capitalization of borrowing cost: The BFCI cell of
Corporate Office will intimate the effective rate of capitalization of borrowing costs, which is
to be applied by circles to compute and capitalize the borrowing costs. The capitalization rate
intimated by the BFCI cell shall be computed for specific borrowings and general borrowings
separately. The relevant provisions ofInd AS - 23 in this respect are enumerated below:

As per Para 8 of Ind AS - 23 'An entity shall capitalize borrowing costs that are directly
attributable to the acquisition, construction or production ofa qualifying asset as part of the
cost ofthat asset. An entity shall recognize other borrowing costs as an expense in the period in
which it incurs them. '

As per Para 10 of Ind AS - 23 '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 entity 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. '

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Registered & Corporate Office: Bharat San char Bhawan, H. C. Mathur Lane, Janpath, New Delhi-l 10001
Corporate Identity Number (CIN): U74899DL2000GOIl07739, Website: www.bsnI.co.in
 Specific Borrowing Costs: As per Para 12 ofInd AS - 23 'To the extent that an entity borrows
fUnds specifically for the purpose of obtaining a quali&ing asset, the entity shall determine the
amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on
that borrowing during the period less. any investment income on the temporary investment of
those borrowings.

As per Para 13 ofInd AS - 23 'The financing arrangements for a quali&ing asset may result in
an entity obtaining borrowed funds and incurring associated borrowing costs befOre some or
all of the funds are used for expenditures on the quali&ing asset. In such circumstances, the
funds are often temporarily invested pending their expenditure on the quali&ing asset. In
determining the amount of borrowing costs eligible for capitalization during a period, any
investment income earned on such funds is deducted from the borrowing costs incurred.

General Borrowing Costs: As per Para 14 ofInd AS - 23 'To the extent that an entity borrows
.funds generally and uses them fOr the purpose of obtaining a quali&ing asset, the entity shall
determine the amount of borrowing costs eligible for capitalization by applying a capitalization
rate to the expenditures on that asset. The capitalization rate shall be the weighted average of
the borrowing costs applicable to the borrowings of the entity that are outstanding during the
period. other than borrowings made specifically for the purpose of obtaining a quali&ing asset.
The amount of borrowing costs that an entity capitalizes during a period shall not exceed the
amount of borrowing costs it incurred during that period. '

From the above provisions it can be inferred that the rate of capitalization of borrowing cost
shall be computed after considering the debt issue cost incurred for processing of the loan and
any investment income earned on the temporary investment of the borrowings shall be
deducted while determining rate of capitalization. Further, in case of general borrowings,
capitalization rate shall be the weighted average of the borrowing costs that are outstanding
during the period.

The change in the capitalization rate, if any, will also be intimated by the BFCI section from
time to time depending on the change in the composition of different loans, terms and
conditions of loans and associated costs.

3. Transfer of borrowing costs from BSNL Corporate Office to respective Circles: The BFCI
section will transfer the borrowing costs on the loan funds given to circles through ATs on
monthly basis clearly stating the period for which the borrowing costs relate.

4. Accounting of Borrowing Costs to be done by Circles is as follows:

a. Borrowing Costs incurred in respect of the loan funds used for the construction or
production of a qualifying asset should be capitalized as part of cost of that asset.
Borrowing cost will be charged as overhead expense to CWIP which will in turn be
transferred to fixed assets.

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b. Borrowing costs incurred in respect of:-

i. the assets that are ready for their intended use or sale when acquired or
purchased; or

ii. inventories that are manufactured, or otherwise produced, in large quantities

on a repetitive basis; or

iii. the assets which llre not qualifying assets;

are not to be capitalized and therefore interest costs incurred in financing these assets
are to be booked as interest expense in the period in which they are incurred.

c. Qualifying Asset: As per para 5 of Ind AS - 23 'A qualifying asset is an asset that
necessarily takes a substantial period of time to get ready for its intended use or
sale. '

d. Substantial period: Ordinarily, a period of twelve months is considered as

substantial period of time unless a shorter or longer period can be justified on the
basis of facts and circumstances of the case.

e. Commencement of capitalization: As per Para 17 and 19 of Ind AS - 23, the

capitalization of borrowing costs as part of the cost of a qualifying asset shall begin
from the date when the entity first meets all of the following conditions:

i. It incurs expenditure for the asset;

ii. It incurs borrowing costs; and
iii. It undertakes activities that are necessary to prepare the asset for its
intended use or sale: The activities necessary to prepare the asset for its
intended use or sale encompasses more than the physical construction of the
asset. They include technical and administrative work prior to the
commencement of physical construction, such as the activities associated with
obtaining permits prior to the commencement of the physical construction.

f. Suspension of Capitalization: As per Para 20 and 21 ofInd AS - 23, Capitalization

of borrowing costs shall be suspended during extended periods in which active
development of a qualifying asset is suspended. However temporary delays which
are part of process of getting an asset ready for its intended use or sale will not be
considered for suspension of capitalization of borrowing costs.

g. Cessation of Capitalization: As per Para 22 and 24 ofInd AS - 23,

i. Capitalization of borrowing costs shall cease when substantially all the

activities necessary to prepare the qualifying asset for its intended use or sale
are complete even though routine administrative work might still continue.
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 ii. When construction of a qualifying asset is completed in parts and each part is
capable of being used while construction continues on other parts, the
capitalization of borrowing costs shall be ceased in respect of the part for
which substantially all the activities necessary to prepare that part for its
intended use or sale has been completed.

h. The amount of borrowing costs capitalized during a period shall not exceed the
amount of borrowing costs incurred during that period.

1. Where the Circles are being issued loan funds as well as the funds from own sources
for CAPEX and it is not clearly identifiable by Circles whether the funds used for
CAPEX are from loan funds or own sources then priority should be given to loan
funds and corresponding borrowing costs should be capitalized accordingly as per
the methodology given above.

5. Example: An example of capitalization of borrowing costs has been provided in Annexure

for better understanding.

GM(CA)
Copy for information and necessary action to:
1. PGM / Sr. GM I GM (Finance) I IFA, All Circles, BSNL.
2. GM (BFCI), Corporate Office, BSNL
3. GM (ERP-FICO), Corporate Office, BSNL.
4. DGM (CA-II/III) I DGM (R&P), Corporate Office BSNL.
5. OL Section for Hindi Version and Circulation.

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 Annexure
Facts:
1. Loan of Rs. 15,00,000/- availed from Bank on 01.01.2016 which was repaid on
31.12.2017
11. Rate of Interest payable on the outstanding amount is 9.5% p.a. w.e.f. 01.01.2016
and 12% w.e.f. 01.01.2017.
111. Activities to prepare the asset for intended use started on 01.06.2016
IV. Work suspended by statutory authorities for non compliance of requirements from
01.10.2016 to 30.11.2016
v. Completion of Asset for intended use on 31.10.2017
VI. Amount of loan used in construction of this asset is Rs. 12,00,000/-
V11. Capitalization rate of borrowing cost is 10% w.e.f. 01.01.2016 and 12% w.e.f.
01.01.2017

Reasoning:
1. Commencement of capitalization of Borrowing Cost will be from the date later of
the following:
a. when the expenditure for the asset has been incurred i.e. 01.06.2016 (taken the
same as activities start date)
b. borrowing costs has been incurred i.e. 01.01.2016
c. activities for development or construction of asset has started i.e. 01.06.2016
Therefore, capitalization of the borrowing cost will be started w.e.f. 01.06.2016
(Being the later of the above three dates)

11. Suspension of capitalization of interest cost will be done from 01.10.2016 to

30.11.2016 due to suspension of active development of asset for reasons which are
not part of construction or preparation of asset for its intended use or sale.

111. Capitalization of borrowing cost will be stopped on 31.10.2017 as the construction

of the asset has been completed.

IV. The borrowing cost which will be capitalized in the cost of asset is calculated as
follows:

From 01.06.2016 to 30.09.2016 = 1200000 X 10% X 4/12 = Rs. 40,000/-

From 01.12.2016 to 31.12.2016 = 1200000 X 10% X 1/12 = Rs. 10,000/-
From 01.01.2017 to 31.10.2017 = 1200000 X 12% X 10/12 = Rs. 1,20,000/-
Total interest to be capitalized in the cost of asset is = Rs. 1,70,000/-

v. Remaining interest will be booked as interest expense in the respective accounting

years.

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