AS 16 - Borrowing Costs

Purpose: The purpose of this Statement is to prescribe the accounting treatment for borrowing costs

However, this statement neither deals with the actual or imputed cost of owners' equity nor with preference share capital which is not classified as a liability

This statement is mandatory for accounting periods beginning on or after 1st April, 2000

Definitions

• Borrowing Costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds
• A Qualifying Asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale

Recognition: Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset and other borrowing cost should be charged as an expense in the period in which they are incurred. However, it should be noted that borrowing costs are capitalised as part of the cost of a qualifying asset only when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. The amount of borrowing costs eligible for capitalisation should be computed in accordance with this AS itself

Borrowing Costs Eligible for Capitalisation

Borrowing costs directly related to the acquisition, construction or production of a qualifying asset are those which could be avoided if the expenditure on the qualifying asset had not been made

While calculating the amount of borrowing costs eligible for capitalisation during a period, any income earned on the temporary investment of those borrowings is deducted from the borrowing costs incurred

If the funds are borrowed generally and later used for the purpose of obtaining a qualifying asset, the amount of borrowing cost to be capitalised should be calculated by applying a capitalisation rate to the expenditure on that asset. However, the amount of borrowing costs capitalised during a period should not exceed the amount of borrowing costs incurred during that period

The capitalisation rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset

However, it should be noted that if the carrying amount or the expected ultimate cost of the qualifying asset exceeds its recoverable amount or net realisable value, the carrying amount should be written down or written off in accordance with the requirements of other Accounting Standards

Commencement of Capitalisation: of borrowing costs as part of the cost of a qualifying asset should commence when all the following conditions are satisfied:

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

Suspension of Capitalisation: Capitalisation of Borrowing costs should be suspended during extented periods in which active developement is interrupted. However when substantial technical and administrative work is being carried out or/and if there is temporary delay which is a necessary part of the process of getting an asset ready for its intended use or sale, the capitalisation need not be suspended

Cessation of Capitalisation: Borrowing cost incurred after the qualifying asset is ready for its intended use or sale should not be capitalised. If only a part of a qualifying asset is ready to be used while the other parts are still under construction, 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

Disclosures

1. Accounting policy adopted for borrowing costs
2. Amount of borrowing costs capitalised during the period