IND AS 23

BORROWING COST

PRESENTATION BY:-GARIMA MAHESHWARI

INDEX Scope

Definition

What does borrowing cost include?

Recognition

Eligibility for capitalization

Commencement of capitalization

Suspension of capitalization

Cessation of capitalization

Disclosures

Difference between Ind AS 23 and IAS23

Difference between AS-16 and Ind AS 23

SCOPE This standard shall be applied in accounting for

borrowing costs;

This standard does not deal with actual or imputed

cost of equity.

An entity is not required to apply the standard to

borrowing cost directly attributable to acquisition,

construction, or production of:

Qualifying asset measured on fair value viz Biological

Asset.

Inventories that are manufactured or produced in large

quantities on repetitive basis.

BORROWING COSTS

Qualifying Assets

Other Borrowing

Costs

DEFINITIONS

Borrowing Costs :- Interest and other

cost incurred for the borrowing of funds.

Qualifying Assets :- The asset which

take substantial period of time to get

ready for its intended use or sale.

EXAMPLES OF QUALIFYING ASSET

Constructions to be used for operations;

Inventories that need substantial time to

bring them to their saleable condition;

Manufacturing Plants;

Power generation facilities

EXAMPLES OF NOT A QUALIFYING ASSET

Inventories that are normally

manufactured or produced in large

quantities on a repetitive basis and over

a short period of time ;

Assets which are ready for use or sale

when acquired.

WHAT DOES BORROWING COST INCLUDES?Borrowing cost may include :-

Interest on bank overdraft, and short term

and long term Borrowings.

Finance charges related to Finance Lease.

Exchange Difference arising from Foreign

currency borrowings to the extent that

they are regarded as an adjustment to

interest costs.

RECOGNITION Borrowing cost that are directly attributable to the

acquisition, construction or production of a

qualifying asset shall be capitalized as a part of the

cost of the asset;

Such borrowing cost can be capitalized when:

It is probable that they will result in future economic

benefit to the entity; and

These costs can be measured reliably.

Entity shall recognize other borrowing costs as an

expense in the period it incurs them.

CAN ANY ONE ANSWER A telecom company has acquired a 3G licence.

The licence could be sold or licensed to a third

party. However, management intends to use it

to operate a wireless network. Development of

the network starts when the licence is acquired.

Should borrowing costs on the acquisition

of the 3G licence be capitalized until the

network is ready for its intended use?

CHECK WHETHER YOU ARE CORRECT

Yes. The licence has been exclusively acquired

to operate the wireless network.

The fact that the licence can be used or

licensed to a third party is irrelevant.

The acquisition of the licence is the first step in

a wider investment project (developing the

network). It is part of the network investment,

which meets the definition of a qualifying asset.

AGAIN YOUR TURN

A real estate company has incurred expenses

for the acquisition of a permit allowing the

construction of a building. It has also

acquired equipment that will be used for the

construction of various buildings.

Can borrowing costs on the acquisition of the

permit and the equipment be capitalized until

the construction of the building is complete?

THE ANSWER IS HERE

Yes for the permit, which is specific to one

building. It is the first step in a wider

investment project. It is part of the

construction cost of the building, which meets

the definition of a qualifying asset.

No for the equipment, which will be used for

other construction projects. It is ready for its

‘intended use’ at the acquisition date. It does

not meet the definition of a qualifying asset.

FOREIGN EXCHANGE DIFFERENCE TO BE CAPITALIZED

With regard to exchange difference required to

be treated as borrowing costs, the manner of

arriving at the adjustments stated therein shall

be as follows [Paragraph 6(e)]:

An amount which is equivalent to the extent to

which the exchange loss does not exceed the

difference between the cost of borrowing in

functional currency when compared to the cost of

borrowing in a foreign currency.

CONT…

where there is an unrealised exchange loss

which is treated as an adjustment to

interest and subsequently there is a

realised or unrealised gain in respect of the

settlement or translation of the same

borrowing, the gain to the extent of the loss

previously recognised as an adjustment

should also be recognised as an adjustment

to interest.

ILLUSTRATION XYZ Ltd. has taken a loan of USD 10,000 on April 1,

2011, for a specific project at an interest rate of 5%

p.a., payable annually.

On April 1, 2011, the exchange rate between the

currencies was Rs. 45 per USD. The exchange rate,

as at March 31, 2012, is Rs. 48 per USD.

The corresponding amount could have been

borrowed by XYZ Ltd. in local currency at an

interest rate of 11% per annum as on April 1, 2011.

SOLUTION The following computation would be made to determine the

amount of borrowing costs for the purposes of paragraph 6(e)

of Ind AS 23:

i. Interest for the period = USD 10,000 × 5%x Rs. 48/USD = Rs.

24,000/-

ii. Increase in the liability towards the principal amount = USD

10,000 × (48-45) = Rs. 30,000/-

iii. Interest that would have resulted if the loan was taken in Indian

currency = USD 10000 x 45 x 11% = Rs. 49,500

iv. Difference between interest on local currency borrowing and

foreign currency borrowing = Rs. 49,500 – Rs. 24,000 = Rs. 25,500

COND…

Therefore, out of Rs. 30,000 increase in the liability towards

principal amount, only Rs. 25,500 will be considered as the

borrowing cost.

Thus, total borrowing cost would be Rs. 49,500 being the

aggregate of interest of Rs. 24,000 on foreign currency

borrowings plus the exchange difference to the extent of

difference between interest on local currency borrowing

and interest on foreign currency borrowing of Rs. 25,500.

CONT…

Thus, Rs.49,500 would be considered as the

borrowing cost to be accounted for as per

Ind AS 23 and the remaining Rs.4,500

would be considered as the exchange

difference to be accounted for as per Ind AS

21 - The Effects of Changes in Foreign

Exchange Rates.

ELIGIBILITY FOR CAPITALIZATION Borrowing cost that would have been avoided

if the expenditure on qualifying asset had not

been made should be capitalized.

The amount OF cost eligible for capitalization

shall be of borrowing determined as:

Borrowing Cost Eligible for Capitalization = Actual

Borrowing Cost Incurred – Investment income on the

temporary investment of those borrowings

CONT….

It may be difficult to identify direct

relationship between particular

borrowing & qualifying asset and to

determine the borrowing that could

have been avoided. In this case exercise

of judgment is required.

QUALIFYING ASSET

Specific Borrowing cost to be Capitalised

Borrowing Cost Less

Income from Investment

General Borrowing cost to be Capitalised

Capitalisation Rate x

Expenditure Incurred

CAPITALIZATION RATE In some instance, amount of borrowing cost

eligible for capitalization shall be determined

by applying a capitalization rate to the

expenditure on that asset.

Capitalization Rate = Weighted Average of the

borrowing Cost

The amount of borrowing cost capitalized

during the period shall not exceed the amount

of borrowing cost it incurred during the period.

EXCESS OF CARRYING OVER RECOVERABLE AMOUNT

When the carrying amount or expected

ultimate cost of the qualifying asset exceeds

its recoverable amount or net realizable

value, the carrying amount is written off in

accordance with the requirements of other

Standards. In certain circumstances, the

amount of the write down or write-off is

written back in accordance with those other

standards.

COMMENCEMENT OF CAPITALIZATION

The capitalization process shall begin

when:

Expenditure for asset are being incurred;

Borrowing costs are being incurred;

Activities that are necessary to prepare

the asset for its intended use or sale are

in progress.

SUSPENSION OF CAPITALIZATION An entity shall suspend capitalization of

borrowing costs during extended periods in

which it suspends active development of a

qualifying asset.

Exceptions:

If extension is due to substantial technical and

administrative work.

If it is a part of the process of getting an asset

ready for its intended use or sale.

CESSATION OF CAPITALIZATION 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.

When the construction of a qualifying asset is completed

in parts and each part is capable of being used while

construction continues on other parts, capitalization of

borrowing costs shall cease when substantially all the

activities necessary to prepare that part for its intended

use or sale are completed.

DISCLOSURE

Following shall be disclosed:-

The amount of borrowing cost

capitalized during the period;

The capitalization rate used to

determine the amount of borrowing cost

eligible for capitalization.

DIFFERENCE BETWEEN IND-AS 23 AND IAS 23 Ind-AS 23 provides specific guidelines on

computation of exchange difference arising

from foreign currency borrowings to the

extent they are regarded as adjustment to

the Borrowing Cost. HOWEVER this

guideline is not there in IAS 23.

DIFFERENCE BETWEEN IND-AS 23 AND AS 16

Ind AS 23 AS 16

Not required to disclose accounting policy adopted for capitalization

Accounting policy adopted for borrowing cost should be disclosed

Capitalzation rate used to determine the borrowing cost should be disclosed

It is not required to disclose the capitalization rate

Does not require an entity to apply this standard to borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset 1.measured at fair value 2. inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis

AS -16 Does not provide for such relaxation

QUESTION AND ANSWERS SESSION

CAPITALIZATION OF BORROWING COST

Q.1 Whether borrowing cost avoidable or unavoidable?

Said to be unavoidable if expenditure on qualifying assets had

been incurred and borrowing is taken but for Existing borrowing

exercise of judgment required.

Q.2 Borrowing cost shall be capitalized for borrowing

made during the period of expenditure OR borrowing

made for the whole year?

Borrowing made during period of expenditure are to be

capitalized.

CAPITALIZATION OF COMPLETED PARTS OF A PROJECT

Q.1 Is it necessary to capitalize commissioned

package when capitalization of remaining

pending package is pending?

It is necessary to capitalize commissioned

packages.

Q.2 On which date borrowing cost should be

capitalized?

Date on which package is ready to commence

commercial production.