Ind AS 16 - PPE

Teaser!
• Elevator (lift) in a building – separate PPE or part of building?

• Whitewash of a building – asset or expense?

• Inspection cost (regulatory requirement – every 3 years) – asset or

expense?

• Site restoration cost (mines) (after 20 years) – asset or expense?

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Specialized software embedded in computer controlled machine tools
Flat Bed CNC Lathe

Dr. Abhishek Ranga

FCMA, CPA, MBA, PhD (Finance)
S t r u c t u re o f I n d A S 1 6
S.No. Heading Para
1 Objective 1
2 Scope 2-5
3 Definitions 6
4 Recognition 7-10
4a Initial cost 11
4b Subsequent cost 12-14
5 Measurement at Recognition 15
5a Element of cost 16-22A
5b Measurement of cost 23-28
6 Measurement after Recognition 29-30
6a Revaluation model 31-42
6b Depreciation 43-49
6c Dep. Amount and dep. Period 50-59
6d Dep. Method 60-62A
7 Derecognition 67-72
8 Disclosure 73-79
Topics -
• Component accounting

• Exchange of assets

• Deferred settlement terms

• Revised estimates

• Cost of asset

• Subsequent cost

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Objective
The objective of this Standard is to prescribe the accounting treatment for property, plant and
equipment so that users of the financial statements can discern information about an and the
changes entity’s investment in its property, plant and equipment in such investment. The
principal issues in accounting for property, plant and equipment are the recognition of the
assets, the determination of their carrying amounts and the depreciation charges and
impairment losses to be recognised in relation to them.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
…contd.

Summary

i. Prescribe the accounting treatment for PPE

ii. Recognition of the assets

iii. Determination of carrying amount

iv. Depreciation charges

v. Impairment losses

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Ind AS 16 applicable to all kinds of PPE except

• PPE classified as held for sale

Ind
AS
105
• biological assets related to agricultural activity
Ind AS
41

• the recognition and measurement of exploration

Ind AS and evaluation assets
106

• mineral rights and mineral reserves such as oil,

natural gas and similar non-regenerative resources

This Standard will be applicable to property, plant and equipment which are
used to develop or maintain the above assets.
Dr. Abhishek Ranga
PhD, FCMA, CPA, MBA
Definition of PPE
Held for use in
production or
supply of goods or
services
Tangible Expected to used
during more than
items one period

PPE

AS 10 (IGAAP)
Fixed asset is an asset held with the intention of being used for the purpose of producing or
providing goods or services and is not held for sale in the normal course of business.
?

A chemical manufacturer installed new chemical handling processes to comply with

environmental requirements for the production and storage of dangerous chemicals.

Question -

Related plant enhancements should be recognised as an asset?

Refer para 11 of Ind AS 16

Dr. Abhishek Ranga
PhD, FCMA, CPA, MBA
Recognition criteria
Probable that
future Cost can
economic be
benefits will measured
flow to entity reliably

Recognition
of cost as
an asset
(PPE)

AS 10 (IGAAP)
- No Such specific recognition criteria.
- Item which meet the definition of fixed asset will be recognised as a fixed asset
 1. Spare parts or Servicing equipment

Normally treated as inventory and expensed off as

consumed

Major spare parts and stand-by equipment expected to be used

during more than one period are treated as PPE. (if they meet
the definition of PPE as per Ind AS 16)

Depreciated over the useful life of the main assets to

which it relates.
AS 10 (IGAAP) - Spare parts are capitalised, if they can be used only in connection
with a fixed asset and whose use is expected to be irregular.
Component Accounting

Complex assets, such as airplanes, ships, buildings, large manufacturing equipment and utilities
infrastructure, often comprise multiple parts that need to be periodically replaced or
overhauled during their useful lives.

Deloitte – Accounting insights

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Component Accounting – Building

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
1. Structural Components: 5. Interior Finishes:
a. Foundations a. Flooring materials (tiles, carpet, hardwood)
b. Frame and structural elements (beams, columns, load- b. Wall finishes (paint, wallpaper, panels)
bearing walls)
c. Ceiling finishes
c. Roof structure
6. Functional Equipment:
2. Building Envelope Components:
a. Kitchen equipment
a. Exterior walls
b. Built-in cabinetry and fixtures
b. Windows and doors
7. Specialized Systems:
c. Roof covering
a. Security systems
3. Mechanical Systems:
b. Communication systems (networking, cabling)
a. HVAC (Heating, Ventilation, and Air Conditioning)
c. Audiovisual systems
systems
b. Elevators and escalators 8. Exterior Improvements:

c. Plumbing systems (pipes, fittings, fixtures) a. Landscaping and hardscaping

d. Fire protection systems b. Exterior lighting

4. Electrical Systems: 9. Common Areas:

a. Wiring and electrical panels a. Shared spaces, corridors, and lobbies

b. Lighting systems 10. Utilities Infrastructure:

c. Power distribution systems a. Water supply and drainage systems
b. Gas supply systems
Dr. Abhishek Ranga
PhD, FCMA, CPA, MBA
Component Accounting
Separation of an asset into its significant
components

-Significant Cost of a part in proportion to

total cost
-May have different useful life.

IGAAP
Para 8.3 of AS 10 only touch upon on this issue
and states that Accounting for FA may be
improved if total cost thereof is allocated to its
various parts.
Component Accounting
The Companies Act, 2013
Mandatory as per Schedule II of the CA 2013
from April 1, 2015. (Voluntary for 2014-15)

Bridges the gap under converged IFRS

and Existing Scenario for this
requirement.

Imapct of
moving to new
regime of Ind
AS ??
Dr. Abhishek Ranga
PhD, FCMA, CPA, MBA
Aircraft Example

Purchased on 01.04.2020

Boeing 787-9 price INR 1800 crore

Economic life – 30 years

Engine: Rolls-Royce Trent 1000 price INR 300 crore

Economic life – 5 years

How to account for the replacement cost? – a) as on 31.03 2021 b) 31.03.2025

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Subsequent Costs

• Same criteria followed as of initial recognition.

• Probable that future economic benefits will flow and cost can be measured reliably.
• Day to day servicing cost which includes labour and
consumables needs to be expensed off

• It can be in the form of followings:

- Replacement Cost
- Inspection Cost etc.

•AS 10 (IGAAP) – Subsequent expenditures relating to an item of Fixed Assets should be added
to its Book value only if they increase the future benefits from the existing asset beyond its
previously assessed standard of performance.
Dr. Abhishek Ranga
PhD, FCMA, CPA, MBA
Subsequent costs - Major inspections or overhauls

 Overhaul costs may involve three elements; Inspection,

Replacement of parts and Major Maintenance.

 Cost of major inspection is recognised as PPE if it meets the asset

recognition criteria.

 Any remaining carrying amount relating to the previous

inspection is derecognized irrespective of whether previous
inspection was separately identified and depreciated.
Q
Uddan Ltd buys an aircraft for 90 Lakhs. Under civil aviation rules, the aircraft
requires a major inspection every three years at a cost of 5 lakh. Three year after
purchase it undergoes its first major inspection. The cost in relation to this
inspection amounting to 7 Lakhs.
Explain how the same should be accounted for in accordance with the
requirements of Ind AS 16?
a) Scenario 1: Inspection cost today – 4 lakhs
b) Scenario 2: Inspection cost today – NA
Dr. Abhishek Ranga
PhD, FCMA, CPA, MBA
Major Changes from AS (6,10) -> Ind AS (16)

i. Change in method of depreciation

ii. Review of residual value
iii. Reassessment of useful life
iv. Frequency of revaluation
v. Componentization of assets
vi. Cost of major Inspections
vii. Estimated costs of dismantling, removing or restoring items of PPE
viii.Spare parts and servicing equipment

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
 Topic AS 6, AS 10 Ind AS 16
Change in Requires retrospective re- Considered as change in accounting
method of computation of depreciation estimate and applied prospectively.
depreciation and accounted for
prospectively.
Treated as a change
in accounting policy.
Review of Estimates with respect to RV are The RV should be reviewed at least at
residual value not required to be reviewed each financial year-end and, the change(s)
and updated. shall be accounted for as a change in an
accounting estimate in accordance with
Ind AS 8.
Reassessment of Reviewed periodically. Reviewed at least at each financial year- end.
useful life Prospective Prospective application.
application.

Frequency No equivalent Revaluations are required to be made

of revaluation guidance with sufficient regularity to ensure that the
CV does not differ materially from the FV
at the end of the previous reporting
period.
 Topic AS 6, AS 10 Ind AS 16
Component
ization of
assets

Cost of
major
Inspections

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
 Topic AS 6, AS 10 Ind AS 16
Component There is a slight discussion of the Componentization approach mandatory
ization of same under AS 10. for PPE. Accordingly, these are
assets Further, Schedule II to the depreciated separately.
Companies Act, 2013 specifically
mandates FA to be componentised
for depreciation purposes.

Cost of
major
Inspections

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
 Topic AS 6, AS 10 Ind AS 16
Component There is a slight discussion of the Componentization approach mandatory
ization of same under AS 10. for PPE. Accordingly, these are
assets Further, Schedule II to the depreciated separately.
Companies Act, 2013 specifically
mandates FA to be componentised
for depreciation purposes.

Cost of Costs of major inspections are Cost of major inspections is recognised

major generally expensed when in the carrying amount of PPE, if recognition
Inspections incurred. criteria are satisfied and any remaining
carrying amount of the cost of previous
inspection is derecognised.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
 Topic AS 6, AS 10 Ind AS 16
Estimated
costs of dismantling,
removing or
restoring items of
PPE
 Topic AS 6, AS 10 Ind AS 16
Estimated No specific guidance in AS 10. The initial estimate of the costs of with
costs of dismantling, respect to dismantling and removing an item
removing or However, as per AS 29, an of PPE restoring the site is required to be
restoring items of enterprise recognizes a included in the cost of the respective item of
PPE provision for the PPE.
decommissioning cost of an
oil installation to the extent
that there is an obligation to
rectify damage already
caused.

These provisions are not

required to be
discounted.

Further, GN on ‘Accounting For

Oil & Gas producing Activities’
provides some guidance on
the same.
 Topic AS 6, AS 10 Ind AS 16
Spare parts
and servicing
equipments

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
 Topic AS 6, AS 10
Spare parts Normally, standby equipments
and servicing and servicing equipment are
equipments capitalized.
Machinery spares are generally
charged to P&L as and when these
are consumed. However, if such
spares can be used only in
connection with an item of fixed
asset and their use is expected to be
irregular, it would be capitalized &
depreciated (not exceeding the
useful life of the principal item).
Ind AS 16
Generally carried as inventory. Once
consumed-recognized in P&L
major spare parts and stand-by equipment
qualify as PP&E only (either):
• when it is expected to be used during
more than one period.
• it can be used only in with an item of
PP&E.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numericals -

• Exchange of assets

• Deferred settlement terms

• Revised estimates

• Cost of asset

• Subsequent cost

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 1:

ABC ltd. purchased a machine (M1) on 01.04.2016 for Rs. 8,00,000. Economic life of M1 is 7 years.
Till AY 2017-18 M1 was following WDV @ 20%. From AY 2018-19 ABC shifts to SLM, calculate book
value of M1 as per IGAAP and IndAS as on March 31, 2019.

Also, if SLM->WDV@20%

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 2:

ABC ltd. purchased a machine (M1) on 01.04.2016 for Rs. 8,00,000. Economic life of M1 is 7 years.
In AY 2018-19 ABC revised M1’s economic life and increased it by 2 years, calculate book value of
M1 as per IGAAP and IndAS.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 3:

Sun Ltd. Has acquired a heavy road trailer at a cost of Rs. 1,00,000 (with no breakdown of
component parts). The estimated useful life is 10 years. At the end of the sixth year, the engine
requires replacement, as further maintenance is uneconomical due to the off-road time
required. The remainder of the vehicle is perfectly road worthy and is expected to last for the
next four years. The cost of the new engine is Rs. 45,000. The discount rate assumed is 5%.
Whether the cost of new engine can be recognized as the asset, and if so, what treatment
should be followed?

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 4:

A ship which cost Rs. 20 Mn. with a 20 years’ economic life must have major overhaul every
five years. As per the estimates current overhaul cost for such ship is Rs. 5 Mn. and after five
years it will be Rs. 6 Mn. Calculate carrying amount of ship at the end of –
• 4 years

• 6 years

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 5:

A company purchased a property with an overall cost of $100m on 1 April 2009. The property
elements are made up as follows:
$000 Estimated life
Land and buildings
(Land element 65,000 50 years
$20,000)
Fixtures and fittings 24,000 10 years
Lifts 11,000 20 years
100,000

Calculate the annual depreciation charge for the property for the year ended 31 March 2010.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 6:

A machine was purchased on 1 April 2007 for $120,000. It was estimated that the asset had a
residual value of $20,000 and a useful economic life of 10 years at this date. On 1 April 2009
(two years later) the residual value was reassessed as being only $15,000 and the useful
economic life remaining was considered to be only five years.

How should the asset be accounted for in the years ending 31 March 2008/2009/2010?

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 7:
Construction of Deb and Ham’s new store began on 1 April 2009. The following costs were incurred
on the construction:
Particulars Amount in $ ‘000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
General overheads 940

The store was completed on 1 January 2010 and brought into use following its grand opening on the
1 April 2010. Deb and Ham issued a $25m unsecured loan on 1 April 2009 to aid construction of the
new store (which meets the definition of a qualifying asset per IAS 23). The loan carried an interest
rate of 8% per annum and is repayable on 1 April 2012. Calculate the amount to be included as
property, plant and equipment in respect of the new store for the year ended 31 March 2010.
Dr. Abhishek Ranga
PhD, FCMA, CPA, MBA
Numerical 8:

On 1 March 2008 Yucca acquired a machine from Plant under the following terms:
Particulars Amount
List price of machine 82,000
Import duty 1,500
Delivery fees 2,050
Electrical installation costs 9,500
Pre-production testing 4,900
Purchase of a five-year maintenance contract 7,000
with Plant

In addition to the above information Yucca was granted a trade discount of 10% on the initial list price
of the asset and a settlement discount of 5% if payment for the machine was received within one
month of purchase. Yucca paid for the plant on 25 March 2008. How should the above information be
accounted for in the financial statements?

On 1 March 2010 Yucca purchased an upgrade package from Plant at a cost of $18,000 for the machine
it originally purchased in 2008. The upgrade took a total of two days where new components were
added to the machine. Yucca agreed to purchase the package as the new components would lead to
a reduction in production time per unit of 15%. This will enable Yucca to increase production without
the need to purchase a new machine. Should the additional expenditure be capitalised or expensed?
Numerical 9:

The term of an operating lease allows a tenant, XYZ Ltd. to tailor the property to meet its
specific needs by building an additional internal wall, but on condition that the tenant returns
the property at the end of the lease in its original state. This will entail dismantling the internal
wall. XYZ Ltd. Incurs a cost of Rs. 25,00,000 on building the wall and present value of estimated
cost to dismantle the wall is Rs. 10,00,000. At what value should the leasehold improvements
be capitalized in the books of XYZ Ltd.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 10:

X Ltd. has a machine (M1) which got damaged due to fire as on January 31, 20X1. The carrying
amount of M1 was Rs. 1,00,000 on that date. X Ltd. sold the damaged asset as scrap for Rs.
10,000. X Ltd. has insured the same asset against damage. As on March 31, 20X1, the
compensation proceed was still in process but the insurance company has confirmed the claim.
Compensation of Rs. 50,000 is receivable from the insurance company. At what value M1 will
be carried in the books of X Ltd. As on March 31, 20X1.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 11: Component of Cost

Identify which cost elements to be capitalized -

1. Site preparation charges
2. Direct material
3. Direct labour
4. Testing cost of various processes in factory (before initial normal use)
5. Consultancy fees for installation of equipment
6. Relocation of staff to new factory
7. General overheads

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 12: Deferred Payment Credit

On 1st April 20X1, an item of property is offered for sale at Rs. 10 million, with
payment terms being three equal installments of Rs. 33,33,333 over a two years
period (payments are made on 1st April 20X1, 31st March 20X2 and 31st March
20X3).

The property developer is offering a discount of 5 percent (i.e. Rs. 0.5 million) if
payment is made in full at the time of completion of sale. Implicit interest rate of
5.36 percent p.a.

Show how the property will be recorded in accordance of Ind AS 16.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 13: Exchange of Assets

Pluto Ltd owns land and building which are carried in its balance sheet at an
aggregate carrying amount of Rs. 10 million. The fair value of such asset is Rs. 15
million. It exchanges the land and building for a private jet, which has a fair value of
Rs. 19 million, and pays additional Rs. 3 million in cash.

Calculate –
1. Carrying amount of private jet
2. Profit on exchange of assets
Dr. Abhishek Ranga
PhD, FCMA, CPA, MBA
Question:

Sun Ltd acquired a software from Earth Ltd. in exchange for a telecommunication license. The
telecommunication license is carried at Rs. 5,00,000 in the books of Sun Ltd. The Software is
carried at Rs. 10,000 in the books of the Earth Ltd which is not the fair value.

Advise measurement value in the following situations in the books of Sun Ltd and Earth Ltd:-

1) Fair value of software is Rs. 5,20,000 and fair value of telecommunication license is Rs.
5,00,000.

2) Fair Value of Software is not measureable. However similar Telecommunication license is

transacted by another company at Rs. 4,90,000.

3) Neither Fair Value of Software nor Telecommunication license could be reliably measured.

Dr. Abhishek Ranga

FCMA, CPA, MBA, PhD (Finance)
Numerical 14:

An asset which cost Rs. 10,000 was estimated to have a useful life of 8 years and
residual value Rs. 2,000.

After two years, useful life was revised to 4 remaining years.

Calculate the carrying value of the asset at the end of third year.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 15:

An asset which cost Rs. 10,000 was estimated to have a useful life of 8 years and
residual value Rs. 2,000.

After two years, useful life was revised to 4 remaining years and residual value to
Rs. 1,000.

Calculate the carrying value of the asset at the end of third year.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 16:

On April 1, 20X1, XYZ Ltd. acquired a machine under the following terms:
Particulars Amount (in Rs.)
List price of machine 80,00,000
Import duty 5,00,000
Delivery fees 1,00,000
Electrical installation costs 10,00,000
Pre-production testing 4,00,000
Purchase of a five-year maintenance contract with vendor 7,00,000

In addition to the above information XYZ Ltd. was granted a trade discount of 10%
on the initial list price of the asset and a settlement discount of 5%, if payment for
the machine was received within one month of purchase. XYZ Ltd. paid for the
plant on April 20, 20X1. At what cost the asset will be recognised?

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Ind AS 23 - Borrowing Cost
Session agenda

• Define borrowing cost, qualifying asset and other related terms

• Recognise various conditions and pre-conditions for capitalisation of borrowing

costs

• Evaluate suspension and cessation of capitalization of such borrowing cost

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Core Principle

This standard requires 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.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Qualifying Asset

A qualifying asset is an asset that necessarily takes a substantial period of time to

get ready for its intended use or sale.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Borrowing Costs

Borrowing costs are interest and other costs that an entity incurs in connection with the
borrowing of funds.

Borrowing costs may include

a. interest expense calculated using the effective interest method as
described in Ind AS 109 Financial Instruments;
b. finance charges in respect of finance leases recognised in accordance with Ind AS 17
Leases; and
c. exchange differences arising from foreign currency borrowings to the extent that they
are regarded as an adjustment to interest costs.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Issues

• Exchange Differences ( 3 numerical)

• Income on investment (2 numerical)

• Specific and General borrowing costs (2 numerical)

• Period of capitalisation (2 numerical)

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Exchange Differences

Q1. An entity can borrow funds in its functional currency (Rs.) @ 12%. It borrows $ 1,000 @ 4%
on April 1, 20X1 when $ 1 = Rs. 40. Interest is payable on March 31, 20X2. On March 31, 20X2,
exchange rate is $ 1 = Rs. 50. The loan is not due for repayment.

Calculate the amount of borrowing cost that can be capitalized.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Exchange Differences

Q2. An entity can borrow funds in its functional currency (Rs.) @ 12%. It borrows $ 1,000 @ 4%
on April 1, 20X1 when $ 1 = Rs. 40. Interest is payable on March 31, 20X2. On March 31, 20X2,
exchange rate is $ 1 = Rs. 150. The loan is not due for repayment.

Calculate the amount of borrowing cost that can be capitalized.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Exchange Differences

Q3. An entity can borrow funds in its functional currency (Rs.) @ 12%. It borrows $ 1,000 @ 4%
on April 1, 20X1 when $ 1 = Rs. 140. Interest is payable on March 31, 20X2. On March 31, 20X2,
exchange rate is $ 1 = Rs. 50. The loan is not due for repayment.

Calculate the amount of borrowing cost that can be capitalized.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Income on investment

When an entity borrows funds specifically for the purpose of obtaining a qualifying
asset, the entity should determine the amount of borrowing costs eligible for
capitalisation as ‘the actual borrowing costs incurred on that borrowing during the
period less any investment income on the temporary investment of those
borrowings.’

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Income on investment
Q4. Alpha Ltd. on 1St April 20X1 borrowed 9% Rs. 30,00,000 to finance the construction of two
qualifying assets. Construction started on 1st April 20X1. The loan facility was availed on 1st
April 20X1 and was utilized as follows with remaining funds invested temporarily at 7%.
Calculate the cost of the asset and the borrowing cost to be capitalized.

Factory Building Office Building

1st April 20X1 5,00,000 10,00,000

1st October 20X1 5,00,000 10,00,000

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA

Exchange Differences and Income on investment

Q5. An entity can borrow funds in its functional currency (Rs.) @ 12%. It borrows $ 1,000 @ 4%
on April 1, 20X1 when $ 1 = Rs. 40. Interest is payable on March 31, 20X2. On March 31, 20X2,
exchange rate is $ 1 = Rs. 50. The loan is not due for repayment. Out of the loan amount Rs.
15,000 was invested @ 9% for six months.

Calculate the amount of borrowing cost that can be capitalized.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
General borrowing costs
• When a qualifying asset is funded from a pool of general borrowings, the amount of the
borrowing costs eligible for capitalisation is not so obvious. It may be difficult to identify a
direct relationship between particular borrowings and a qualifying asset and to determine
the borrowings that could otherwise have been avoided.

• Such a difficulty occurs, for example, when the financing activity of an entity is coordinated
centrally. Difficulties also arise when a group uses a range of debt instruments to borrow
funds at varying rates of interest, and lends those funds on various bases to other entities
in the group.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
General borrowing costs
Q6. Beta Ltd had the following loans in place at the end of 31st March 20X2:

Loan 1st April 20X1 31st March 20X2

18% Bank Loan 1,000,000 1,000,000
16% Term Loan 3,000,000 3,000,000
14% Debentures - 2,000,000

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 for the construction was: Rs. 500,000 on 1st April 20X1
and Rs. 2,500,000 on 1st January 20X2.

Calculate the borrowing cost that can be capitalised for the plant.
Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA

General borrowing costs, Exchange difference and Interest on
Investment
Q7. Beta Ltd had the following loans in place at the end of 31st March 20X2:
Loan 1st April 20X1 31st March 20X2
18% Bank Loan 1,000,000 1,000,000
16% Term Loan 3,000,000 3,000,000
4% ECB - USD 1,000

On 1st April 20X1, Beta ltd began the construction of a Plant being qualifying asset using the existing
borrowings. Expenditure drawn down for the construction was: Rs. 500,000 on 1st April 20X1
and Rs. 2,500,000 on 1st January 20X2.

4% ECB was raised to fund the construction of Office building on 1st July 20X1, the development
activities started on 1st January 20X2. July-December funds were invested (Indian market) @ 3%. Based
on credit profile firms were eligible to borrow from Indian market @ 16%. Exchange rates 70 and 75 as
on July 1, 20X1 and March 31, 20X2, respectively.

Calculate the borrowing cost that can be capitalised for the plant.
Period of Capitalisation - Commencement, Suspension, Cessation

Capitalization should commence when all the following conditions are met:

1. Expenditure for the assets are being incurred

2. Borrowing costs are being incurred
3. Activities necessary to prepare the asset for its intended use or sale are in progress

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Commencement

Case I: Borrowing costs incurred while land is under development are capitalized during the
period in which activities related to the development are being undertaken

Case II: Borrowing costs incurred while land acquired for building purposes is held without any
associated development activity having commenced do not qualify for capitalization

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Commencement and Cessation

Q8. Apex issued an unsecured loan on April 1, 2015.

The loan was specifically issued to finance the building of the new store which meets the
definition of a qualifying asset. Construction of the store commenced on 1 May 2015 and it was
completed and ready for use on 28 February 2016, but did not open for trading until 1 April
2016.

Calculate the borrowing cost that may be capitalized.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Commencement, Suspension and Cessation

Q9. Apex issued an unsecured loan on April 1, 2015.

The loan was specifically issued to finance the building of the new store which meets the
definition of a qualifying asset. Construction of the store commenced on 1 May 2015 and it was
completed and ready for use on 28 February 2016, but did not open for trading until 1 April
2016.

During the year Apex suspended the construction of the new store for a two-month period
during July and August 2015.

Calculate the borrowing cost that may be capitalized.

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA
Numerical 10:
Construction of Deb and Ham’s new store began on 1 April 2009. The following costs were incurred
on the construction:
Particulars Amount in $ ‘000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
General overheads 940

The store was completed on 1 January 2010 and brought into use following its grand opening on the
1 April 2010. Deb and Ham issued a $25m unsecured loan on 1 April 2009 to aid construction of the
new store (which meets the definition of a qualifying asset per IAS 23). The loan carried an interest
rate of 8% per annum and is repayable on 1 April 2012. Calculate the amount to be included as
property, plant and equipment in respect of the new store for the year ended 31 March 2010.
Dr. Abhishek Ranga
PhD, FCMA, CPA, MBA
Thank You!

Dr. Abhishek Ranga

PhD, FCMA, CPA, MBA