Snapshot of AS16 (Accounting Standard 16) pertaining to Borrowing Cost
Scope of AS16
- Applied for accounting for borrowing cost
- Does not applies on actual or imputed cost of owner’s equity (including preference share capital)
Borrowing cost under AS16 includes:
- Interest and commitment charges
- Discount and premium on borrowings
- Other ancillary cost such as finance charges
- Exchange rate difference relatable to foreign currency
Qualifying Assets under AS16
- Assets that take substantial period of time to get ready (12 months, longer or shorter period may also be justified)
- Intended use (for fixed asset or investment property)
- Sale (inventory that requires substantial period of time to bring them in saleable condition
Recognition under AS16
- Borrowing costs are capitalised when
- It is probable that qualifying asset will result in future economic benefits.
- The cost can be measured reliably.
- Specific Borrowings
- Money borrowed specifically for the purpose of obtaining a specific qualifying asset.
- Borrowing cost on qualifying asset can be readily identified.
- Actual borrowing cost less income from temporary investment should be capitalised as the part of the cost of that asset.
- General Borrowings
- A range of debt instruments are used to borrow funds at varying rate of interest and such borrowing are not readily identifiable with specific asset.
- Steps for calculation of Borrowing cost
a. Calculate weighted average borrowing rate
b. Calculate amount to capitalised
c. Amount of borrowing cost capitalised during the period should not be more than actual borrowing cost.
- Other Borrowing costs should be recognised as expense in the period in which they are incurred
Capitalisation under AS16
Capitalisation should commence on satisfaction of the following conditions:
- Expenditure for qualifying asset has been incurred
- Borrowing costs are being incurred
- Activities that are necessary to prepare the asset for intended use or sale are in progress
Capitalisation should be suspended if:
- Extended period in which activity development is interrupted
- No suspension of capitalisation is an exception
- Period during which substantial technical or administrative work is being carried out
- When temporary delay is a part of progress
Capitalisation should be ceased:
- When substantial or all activities necessary to prepare the asset for intended use or sale is completed.
- When construction of qualifying asset is completed in parts and completed part can be used while construction of other parts going on then capitalisation of borrowing cost of that part should be ceased.
- When construction of qualifying asset consists of number of parts that can only be used in total then capitalisation should be ceased when necessary activities to complete the whole of the asset is complete.
- Accounting policy adopted
- Amount of borrowing cost capitalized