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Quick Reference on Accounting Standard (AS) 16

Download Quick Reference on Accounting Standard (AS) 16 Borrowing Costs

This Standard should be applied in accounting for borrowing costs. This Standard does not deal with the actual or imputed cost of owners’ equity, including preference share capital not classified as a liability.

Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds.

Inclusions: 

  • Interest and commitment charges on borrowings
  • Amortisation of discounts and premiums related to borrowings
  • Amortisation of ancillary costs incurred in connection with arrangement of borrowings
  • Finance charges in respect of assets acquired under finance lease
  • Exchange differences arising from foreign currency borrowings to the extent they are regarded as adjustment to interest costs

Exchange differences on foreign currency borrowings to the extent of the difference between the interest on local currency borrowings and the interest on foreign currency borrowings are considered to be borrowing costs under this Standard.

Accounting of Borrowing Costs: Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. Other borrowing costs should be recognised as an expense in the period in which they are incurred.

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

Ordinarily, a period of 12 months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of  facts and circumstances of the case.

Computation of Amount to be capitalised in case funds are borrowed

  • Generally
    • Capitalisation rate (weighted average of the borrowing costs outstanding during the period, other than specific borrowings) should be applied to the expenditure on qualifying assets.
    • Amount capitalised should not exceed borrowing costs incurred during that period.
  • Specifically
    • Actual Borrowing Costs less Income on temporary investment of these borrowings.

Commencement of Capitalisation of Borrowing costs: All the following conditions to be satisfied:

  • expenditure for the acquisition, construction or production of a qualifying asset is being incurred;
  • borrowing costs are being incurred; and
  • activities that are necessary to prepare the asset for its intended use or sale are in progress.

Suspension of Capitalisation of Borrowing costs: During extended periods in which active development is interrupted.

Cessation of Capitalisation of Borrowing costs :

  • 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 a completed part is capable of being used while construction continues for the other parts, capitalisation of borrowing costs in relation to a part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are complete.

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