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Accounting Standard (AS)Accounting Standard (AS) --1616Borrowing CostsBorrowing Costs
VINOD JAIN,VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISAFCA, FCS, FCWA , LL.B.,DISA
CHAIRMANCHAIRMAN
INMACS MANAGEMENT SERVICES LTD.INMACS MANAGEMENT SERVICES LTD.Mobile: 98110 40004Mobile: 98110 40004
EE--mail:mail: [email protected]@[email protected]@gmail.com
Vinod Jain, FCA, FCS, FCWAVinod Jain, FCA, FCS, [email protected]@inmacsindia.com INMACSINMACS
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Borrowing Costs
Vinod Jain, FCA, FCS, FCWAVinod Jain, FCA, FCS, [email protected]@inmacsindia.com INMACSINMACS
Applicability : Effective from accounting
periods commencing on or after
1st April, 2000.
Nature : Mandatory for all enterprises
Objective of AS ± 16 : To prescribe the accountingtreatment for borrowing costs.
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Borrowing Costs
Vinod Jain, FCA, FCS, FCWAVinod Jain, FCA, FCS, [email protected]@inmacsindia.com INMACSINMACS
Borrowing Costs
Interest &
commitment
charges
on Borrowings
Amortisation
of Discount/ Premium
on Borrowings
Amortisationof ancillary costs
relating to
Borrowings
Finance charges
for assetsacquired on
Finance Lease
Exchange
Differences*
*To the extent they are regarded as an adjustment to interest cost
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A ns: To the extent regarded as adjustment tointerest cost.
The adjustment is restricted to amount of exchange loss on principal due todevaluation of currency
Q: Exchange Differences When to be treatedas Borrowing Costs?
A djustment =Interest on local currency borrowing
Interest on foreign currency borrowing
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Vinod Jain, FCA, FCS, FCWAVinod Jain, FCA, FCS, [email protected]@inmacsindia.com INMACSINMACS
Treatment of Exchange Differences
Loan A mount : USD 10,000
Rate of Interest (in U.S. A .) : 8% p.a.
Exchange rate as at 01.04.2005 : Rs. 40 per USD
Exchange rate as at 31.03.2006 : Rs. 45 per USD
Rate of Interest (in India) : 12%
Contd..
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Treatment of Exchange Differences
Computations to be made:
1. Interest for the Period = USD 10,000 x 8% x Rs. 45
= Rs. 36,000-
2. 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..
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Treatment of Exchange Differences
Treatment of Exchange Differences of Rs. 50,000/-
Rs. 21,600/- Rs. 28,400/-
To be treatedas borrowing cost
as per A S -16
To be capitalisedto loan obligation
as per SCH VI
Note: The amount of borrowing costs capitalised during a period shouldnot exceed the amount of borrowing costs incurred during the period
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Qualifying A ssets
Definition:
an asset
that takes substantial period of time
to get ready for intended sale or usage
A ccording to A SI 1, a rebuttable presumption of aperiod of 12 months is considered as a substantial periodof time.
Qualifying asset may be:
- Fixed assets
- Inventories
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Treatment of Borrowing Costs
Borrowing Costs
Directly attributable* for: acquisition construction
production of
Qualifying A ssetsA ssets other thanQualifying assets
Capitalised as part of asset
Treated asrevenue expenditure
*or that could have been avoided if the expenditure on qualifying assets had not been made
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Criteria for Capitalisation
Criteria
Future Economic Benefits
Reliable Measurement
Note : Expenses not fulfilling the criteria to betreated as revenue expenditure
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Borrowings Cost (Interest)
Borrowings Cost
Specifically for
Qualifying A ssetsGenerally but part used
for Qualifying A ssets
Capitalise the Borrowing Costsless interest income, if any
A pply actualrate of Interest
A pply weightedaverage rate of interest
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Calculation of Weighted A verage Rate of Interest Illustration
A BC Co. Ltd. undertakes significant expansion program and incurs following capital
expenditure:
Facility Capex
(in Rs.)
Remarks Date
of Start
Date ofCompletion
Plant I 30 Lacs Specific Borrowing to theextent of Rs. 22 Lacs
June 1,2005
December 31,2005
Plant II 20 Lacs Specific Borrowing to theextent of Rs. 8 Lacs
June 1,2005
November 30,2005
A dditional Information:
1. Rs. 20 Lacs , 11% p.a. secured debentures raised on July2004
redeemable in four equal installments commencing July 1, 20052. 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
3. Rs. 5 Lacs, 14% working capital loan obtained on A pril 1, 2005 andrepaid Rs. 1 Lac on December 31, 2005. Contd..
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Calculation of Weighted A verage Rate of Interest Solution A . Calculation of borrowing costs for the year ended on March 31, 2006
1. Secured debentures= 20,00,000 x 11% x 3 / 12 = 55,000/-
= 15,00,000 x 11% x 9 /12 = 1,23,750/-
2. Loan from financial Institutions
= 30,00,000 x 14% x 11 / 12 = 3,85,000/-
3. Working Capital Loan= 5,00,000 x 14% x 9 / 12 = 52,500/-
= 4,00,000 x 14% x 3 / 12 = 14,000/-
B. Calculation of average unspecified borrowings outstanding during the year
1. Secured debentures
= 20,00,000 x 3 / 12 = 5,00,00/-
= 15,00,000 x 9/12 = 11,25,000/-
2. Secured working capital loan
= 5,00,000 x 9 / 12 = 3,75,000/-
= 4,00,000 x 3 / 12 =1,00,000/-
Total (1+2) 21,00,000/- Contd..
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Calculation of Weighted A verage Rate of Interest
Solution
C. Calculation of average interest on unspecified borrowings for the year
1. Secured debentures
= 20,00,000 x 11% x 3 / 12 = 55,000/-
= 15,00,000 x 11% x 9 /12 = 1,23,750/-
2. Working Capital Loan
= 5,00,000 x 14% x 9 / 12 = 52,500/-
= 4,00,000 x 14% x 3 / 12 = 14,000/-
TOTAL (1+2) 2,45,250/-
D. A verage interest rate for the year ( C / B )
= (2,45,250 / 21,00,000) * 100 = 11.67%
Contd..
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Vinod Jain, FCA, FCS, FCWAVinod Jain, FCA, FCS, [email protected]@inmacsindia.com INMACSINMACS
Calculation of Weighted A verage Rate of Interest
Solution
Interest Capitalised
1. Plant I
On specific borrowings: 22,00,000 X 14% X 7 / 12 = 1,79,667/-
On general Borrowings: 8,00,000 x 11.67% x 7 / 12 = 54,460/-
2. Plant II
On specific borrowings: 8,00,000 X 14% X 6 / 12 = 56,000/-
On general Borrowings: 12,00,000 x 11.67% x 6 / 12 = 70,020/-
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Excess of the Carrying amount of the Qualifying asset over recoverable A mount
A ctual Cost of the A sset Recoverable+ Borrowing Cost Capitalised amount
of the A sset <=
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Commencement of Capitalisation
Conditions Borrowing costs are being incurred
Expenditure for the
acquisition construction production
of a qualifying asset is being incurred
Necessary activities for preparation
of qualifying assets are in progress
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Suspension of Capitalisation
Criteria
Capitalisation to be suspended duringextended periods in which activedevelopment 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 (seasonalrains etc.)
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Cessation of CapitalisationCriteria
Capitalisation should cease when substantially all thethe 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
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Disclosure Requirements
The financial statements should disclose:
1. the accounting policy adopted for borrowing costs
2. The amount of borrowing costs capitalised
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Disclosure Requirements
The financial statements should disclose:
1. the accounting policy adopted for borrowing costs
2. The amount of borrowing costs capitalised
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Disclosure RequirementsExample 1
Name of the Company : MRFFinancial Year : 2004-05
A uditors : Sastri & Shah
M.M. Nissim & Co.
Significant A ccounting PolicyBorrowing costs that are attributable to the acquisition of orconstruction of qualifying assets are capitalized as part of the cost of such assets. A qualifying asset is one that necessarily takes substantialperiod of time to get ready for intended use. A ll other borrowing costsare charged to revenue.
Notes to A ccounts
The total borrowing cost capitalized during the year is Rs. 4.13 Crores.
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Disclosure Requirements
Example 4
Name of the Company : EIH LIMITED
Financial Year : 2004-05
A uditors : Ray & Ray
Significant A ccounting PolicyBorrowing Costs that are attributable to the acquisition / constructionof fixed assets are capitalized as part of the cost of the respectiveassets. Other borrowing costs are recognized as expenses in the yearin which they arise.
Notes to A ccounts
Interest debited to the Profit & Loss A ccount is net of interest capitalized amounting to Rs. Nil (2004 Rs. 233,156,467)
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COP - Capitalisation of Borrowing Costs
Q. Whether borrowing cost avoidable or unavoidable?
A . Said to be unavoidable if expenditure on qualifying assets had beenincurred and borrowing is taken ,Existing borrowing exercise of
judgement required.
Q. Factors to be considered as to whether and to what extent generalborrowings have been so used
A . Information of cash inflows and outflows, close scrutiny required.
Q. General borrowings made but equity specifically infused for financingqualifying 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 borrowingsmade for the whole year.
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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. A llocation of incidental expenditure during construction?
A . On appropriate basis.
Q. Capitalisation of independent packages which are complete whencapitalization of main packages is pending ?
A . Capitalised when ready for their intended use.
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COP - Capitalisation of completed parts of a project
Q. Capitalisation of main packages when capitalization of ancillarypackages 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 . A llocation on appropriate basis to P & L A /c and Expenditure during
construction A /c
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Thank YouThank You
VINOD JAIN,VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISAFCA, FCS, FCWA , LL.B.,DISA
CHAIRMANCHAIRMAN
INMACS MANAGEMENT SERVICES LTD.INMACS MANAGEMENT SERVICES LTD.Mobile: 98110 40004Mobile: 98110 40004
EE--mail:mail: [email protected]@inmacsindia.com
[email protected]@gmail.com
Vinod Jain, FCA, FCS, FCWAVinod Jain, FCA, FCS, FCWA
[email protected]@inmacsindia.com INMACSINMACS