Accounting Standard (AS) - 16 Borrowing Costs: Vinod Jain

Accounting Standard (AS) -16 Borrowing Costs
VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA

CHAIRMAN INMACS MANAGEMENT SERVICES LTD. Mobile: 98110 40004 E-mail: vinodjain@inmacsindia.com vinodjainca@gmail.com
Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com
INMACS
Borrowing Costs
Applicability : Effective from accounting periods commencing on or after 1st April, 2000.
Nature Objective of AS 16
: Mandatory for all enterprises
: To prescribe the accounting treatment for borrowing costs.
INMACS
Borrowing Costs
Borrowing Costs
Interest & commitment charges on Borrowings Amortisation of Discount / Premium on Borrowings
Amortisation of ancillary costs relating to Borrowings Finance charges for assets acquired on Finance Lease
Exchange Differences*
*To the extent they are regarded as an adjustment to interest cost

INMACS
Q:
Exchange Differences When to as Borrowing Costs?
be treated
Ans: To the extent regarded as adjustment to interest cost. Adjustment = Interest on local currency borrowing Interest on foreign currency borrowing The adjustment is restricted to amount of exchange loss on principal due to devaluation of currency
INMACS
Treatment of Exchange Differences

Loan Amount : USD 10,000
Rate of Interest (in U.S.A.)

Exchange rate as at 01.04.2005
: 8% p.a.
: Rs. 40 per USD
Exchange rate as at 31.03.2006

Rate of Interest (in India)
: Rs. 45 per USD

: 12%
Contd..
INMACS

Computations to be made: 1. Interest for the Period = USD 10,000 x 8% x Rs. 45 = Rs. 36,0002. Increase in liability towards the principal amount = USD 10,000 x (45-40)
= Rs. 50,000/3. Interest if loan was raised in India = USD 10,000 x 48 x 12% = Rs. 57,600/4. Difference (2-1) = Rs. 57,600 Rs. 36,000 = Rs. 21,600/Contd..
INMACS

Treatment of Exchange Differences of Rs. 50,000/-
Rs. 21,600/To be treated as borrowing cost as per AS -16
Rs. 28,400/To be capitalised to loan obligation as per SCH VI
Note: The amount of borrowing costs capitalised during a period should not exceed the amount of borrowing costs incurred during the period
INMACS
Qualifying Assets
Definition: an asset that takes substantial period of time to get ready for intended sale or usage
According to ASI 1, a rebuttable presumption of a period of 12 months is considered as a substantial period of time.
Qualifying asset may be: - Fixed assets - Inventories

INMACS
Treatment of Borrowing Costs

Borrowing Costs Directly attributable* for: acquisition construction production of Assets other than Qualifying assets
Qualifying Assets
Capitalised as part of asset

Treated as revenue expenditure
*or that could have been avoided if the expenditure on qualifying assets had not been made
INMACS
Criteria for Capitalisation

Criteria Future Economic Benefits
Reliable Measurement Note : Expenses not fulfilling the criteria to be treated as revenue expenditure
INMACS
Borrowings Cost (Interest)

Borrowings Cost
Specifically for Qualifying Assets
Generally but part used for Qualifying Assets
Apply actual rate of Interest
Apply weighted average rate of interest
Capitalise the Borrowing Costs less interest income, if any
INMACS
Calculation of Weighted Average Rate of Interest

Illustration
ABC Co. Ltd. undertakes significant expansion program and incurs following capital expenditure:
Facility Capex (in Rs.) Remarks Date of Start Date of Completion
Plant I
Plant II
30 Lacs
20 Lacs
Specific Borrowing to the extent of Rs. 22 Lacs

Specific Borrowing to the extent of Rs. 8 Lacs
June 1, 2005
June 1, 2005
December 31, 2005

November 30, 2005
Additional Information: 1. Rs. 20 Lacs , 11% p.a. secured debentures raised on July2004 redeemable in four equal installments commencing July 1, 2005
2.
3.
Loan from financial institutions amounting to Rs. 30 Lacs bearing interest at 14% p.a. obtained for construction of Plant I & II on May 1,2005
Rs. 5 Lacs, 14% working capital loan obtained on April 1, 2005 and repaid Rs. 1 Lac on December 31, 2005. Contd..
INMACS

Solution
A.
1.
Calculation of borrowing costs for the year ended on March 31, 2006
Secured debentures = 20,00,000 x 11% x 3 / 12 = 15,00,000 x 11% x 9 /12 = 55,000/= 1,23,750/= 3,85,000/= 52,500/-
2. 3.
Loan from financial Institutions = 30,00,000 x 14% x 11 / 12 Working Capital Loan = 5,00,000 x 14% x 9 / 12
= 4,00,000 x 14% x 3 / 12
= 14,000/-
B.
1.
Calculation of average unspecified borrowings outstanding during the year

Secured debentures = 20,00,000 x 3 / 12 = 15,00,000 x 9/12 Secured working capital loan = 5,00,000 x 9 / 12 = 4,00,000 x 3 / 12 Total (1+2) = 5,00,00/= 11,25,000/= 3,75,000/=1,00,000/21,00,000/-
2.
Contd..
INMACS

Solution
C.
1.
Calculation of average interest on unspecified borrowings for the year

Secured debentures = 20,00,000 x 11% x 3 / 12 = 15,00,000 x 11% x 9 /12 = 55,000/= 1,23,750/-
2.
Working Capital Loan
= 5,00,000 x 14% x 9 / 12
= 4,00,000 x 14% x 3 / 12 TOTAL (1+2)
= 52,500/= 14,000/2,45,250/-
D.
Average interest rate for the year ( C / B )

= (2,45,250 / 21,00,000) * 100 = 11.67% Contd..
INMACS

Solution
Interest Capitalised
1. Plant I
On specific borrowings: 22,00,000 X 14% X 7 / 12 On general Borrowings: 8,00,000 x 11.67% x 7 / 12 = 1,79,667/= 54,460/-
2.
Plant II On specific borrowings: 8,00,000 X 14% X 6 / 12 On general Borrowings: 12,00,000 x 11.67% x 6 / 12 = 56,000/= 70,020/-
INMACS
Excess of the Carrying amount of the Qualifying asset over recoverable Amount
Actual Cost of the Asset + Borrowing Cost Capitalised
<=
Recoverable amount of the Asset
INMACS
Commencement of Capitalisation
Expenditure for the acquisition construction production of a qualifying asset is being incurred
Conditions
Borrowing costs are being incurred
Necessary activities for preparation of qualifying assets are in progress
INMACS
Suspension of Capitalisation
Criteria Capitalisation to be suspended during extended periods in which active development is hampered.
Suspension not to take place in case: substantial technical & administrative work is being carried on
temporary delays necessary for preparation of qualifying assets (seasonal rains etc.)
INMACS
Cessation of Capitalisation
Criteria
Capitalisation should cease when substantially all the the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
Cessation to take place even if:

routine administrative work still continues minor modifications to property as per users specifications is to be made
Cessation to take place in part if: Construction of qualifying asset is completed in parts and a part is capable of being used separately
INMACS
Disclosure Requirements
The financial statements should disclose:
1. the accounting policy adopted for borrowing costs

2. The amount of borrowing costs capitalised
INMACS
The financial statements should disclose:
1. the accounting policy adopted for borrowing costs

2. The amount of borrowing costs capitalised
INMACS
Example 1 Name of the Company : MRF Financial Year Auditors : 2004-05 : Sastri & Shah M.M. Nissim & Co. Significant Accounting Policy Borrowing costs that are attributable to the acquisition of or construction of qualifying assets are capitalized as part of the cost of such assets. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are charged to revenue. Notes to Accounts The total borrowing cost capitalized during the year is Rs. 4.13 Crores.
INMACS
Example 2 Name of the Company : NICHOLAS PIRAMAL INDIA LIMITED Financial Year Auditors Notes to Accounts Interest amounting to Rs. 2.4 Million has been capitalized during the year in compliance with AS-16. : 2004-05 : Price Waterhouse
INMACS
Example 3 Name of the Company : GHCL Financial Year Auditors : 2004-05 : Jayantilal Thakkar & Co. Rahul Gautam Divan & Associates Significant Accounting Policy
Borrowing Costs that are attributable to the acquisition , construction or production of qualifying assets are capitalized as part of cost of such assets. The capitalized rate is the weighted average of the borrowing costs applicable to the borrowings of the company that are outstanding during the period. All other borrowing costs are recognized as an expense in the period in which they are incurred.
Notes to Accounts
Borrowing Costs capitalized during the year Rs. 8.26 Million (Previous Year Rs. 5.54 Million)
INMACS
Example 4 Name of the Company : EIH LIMITED Financial Year Auditors : 2004-05 : Ray & Ray
Significant Accounting Policy Borrowing Costs that are attributable to the acquisition / construction of fixed assets are capitalized as part of the cost of the respective assets. Other borrowing costs are recognized as expenses in the year in which they arise. Notes to Accounts Interest debited to the Profit & Loss Account is net of interest capitalized amounting to Rs. Nil (2004 Rs. 233,156,467)
INMACS
COP - Capitalisation of Borrowing Costs

Q. Whether borrowing cost avoidable or unavoidable? A. Said to be unavoidable if expenditure on qualifying assets had been incurred and borrowing is taken ,Existing borrowing exercise of judgement required. Q. Factors to be considered as to whether and to what extent general borrowings have been so used A. Information of cash inflows and outflows, close scrutiny required. Q. General borrowings made but equity specifically infused for financing qualifying assets A. No question of capitalizing borrowing cost. Q. Calculation of weighted average borrowing rate? A. Based on borrowing during period of expenditure and not borrowings made for the whole year.
INMACS
COP - Capitalisation of completed parts of a project

Q. Capitalisation of commissioned packages when capitalization of remaining incomplete packages is pending? A. Necessary to capitalize commissioned packages . Q. Date of capitalization? A. Date on which package is ready to commence commercial production. Q. Allocation of incidental expenditure during construction? A. On appropriate basis. Q. Capitalisation of independent packages which are complete when capitalization of main packages is pending ?
A. Capitalised when ready for their intended use.

INMACS
COP - Capitalisation of completed parts of a project

Q. Capitalisation of main packages when capitalization of ancillary packages is pending or vice versa? A. Capitalisation of main packages to be done when ready to commence commercial production or ready for use. Q. Treatment of general and administrative overheads after part capitalisation? A. Segregation on appropriate basis between P/L A/C & Expenditure during construction A/C Q. Treatment of depreciation on infrastructure? A. Allocation on appropriate basis to P & L A/c and Expenditure during construction A/c
INMACS
Thank You
VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA CHAIRMAN INMACS MANAGEMENT SERVICES LTD. Mobile: 98110 40004 E-mail: vinodjain@inmacsindia.com vinodjainca@gmail.com
INMACS

Accounting Standard (AS) - 16 Borrowing Costs: Vinod Jain

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Accounting Standard (AS) -16 Borrowing Costs

VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA

: Mandatory for all enterprises

: To prescribe the accounting treatment for borrowing costs.

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Interest & commitment charges on Borrowings Amortisation of Discount / Premium on Borrowings

*To the extent they are regarded as an adjustment to interest cost

Exchange Differences When to as Borrowing Costs?

Treatment of Exchange Differences

Rate of Interest (in U.S.A.)

Exchange rate as at 31.03.2006

: Rs. 45 per USD

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Treatment of Exchange Differences

Treatment of Exchange Differences

Rs. 21,600/To be treated as borrowing cost as per AS -16

Rs. 28,400/To be capitalised to loan obligation as per SCH VI

Qualifying asset may be: - Fixed assets - Inventories

Treatment of Borrowing Costs

Capitalised as part of asset

Treated as revenue expenditure

Criteria for Capitalisation

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Borrowings Cost (Interest)

Apply actual rate of Interest

Apply weighted average rate of interest

Capitalise the Borrowing Costs less interest income, if any

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Calculation of Weighted Average Rate of Interest

Specific Borrowing to the extent of Rs. 22 Lacs

December 31, 2005

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Calculation of Weighted Average Rate of Interest

Calculation of average unspecified borrowings outstanding during the year

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Calculation of Weighted Average Rate of Interest

Calculation of average interest on unspecified borrowings for the year

Working Capital Loan

Average interest rate for the year ( C / B )

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Calculation of Weighted Average Rate of Interest

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Actual Cost of the Asset + Borrowing Cost Capitalised

Recoverable amount of the Asset

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Borrowing costs are being incurred

Necessary activities for preparation of qualifying assets are in progress

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Cessation to take place even if:

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

1. the accounting policy adopted for borrowing costs

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

1. the accounting policy adopted for borrowing costs

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com

COP - Capitalisation of Borrowing Costs

COP - Capitalisation of completed parts of a project

A. Capitalised when ready for their intended use.

COP - Capitalisation of completed parts of a project

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