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Accountingg Standard (AS) -16

Borrowing Costs

By: Mehul Shah


(M) 09723459572
E-mail: info@raseshca.com

Rasesh Shah & Associates


Borrowing Costs

Rasesh Shah & Associates


Borrowing Costs
Borrowing Costs

Interest & Amortization


A ti ti
commitment Exchange
of ancillary costs
charges relating to
Differences*
on Borrowings Borrowings g

Amortisation Finance charges


of Discount for assets
/ Premium acquired on
on Borrowings Finance Lease

*To the extent they are regarded as an adjustment to interest cost


Rasesh Shah & Associates
Q: Exchange Differences When to be treated
as Borrowing Costs?

Ans: To the extent regarded as adjustment to


interest cost.

Adjustment =
Interest on local currency borrowing
Interest on foreign currency borrowing

The adjustment is restricted to amount of


exchange loss on principal due to
devaluation of currency

Rasesh Shah & Associates


Treatment of Exchange Differences

Loan Amount : 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..

Rasesh Shah & Associates


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
10,000
000 x (45-40)
(45 40)
= Rs. 50,000/-
3 Interest if loan was raised in India
3.
= USD 10,000 x 48 x 12%
= Rs.
s 48,000/-
8,000/
4. Difference (2-1) = Rs. 48,000 Rs. 36,000
= Rs. 12,000/- Contd..

Rasesh Shah & Associates


Treatment of Exchange Differences
Treatment of Exchange Differences of Rs. 50,000/-

Rs. 12,000/- Rs. 38,000/-

To be treated To be capitalised
as borrowing cost to loan obligation
as per AS -16 as per SCH VI

Note: The amount of borrowing costs capitalised during a period should


not exceed the amount of borrowing costs incurred during the period

Rasesh Shah & Associates


Qualifying Assets
D fi iti
Definition:
an asset
that takes substantial period of time
to get ready for intended sale or usage
According to ASI 1, a rebuttable presumption of a
period of 12 months is considered as a substantial period
of time
time.

Qualifying asset may be:


- Fixed assets
- Inventories
Rasesh Shah & Associates
Treatment of Borrowing Costs
Borrowing Costs

Directly attributable
attributable* for:
acquisition
construction
production
p od ction of

Assets
A t other
th th
than
Qualifying Assets
Qualifying assets

Capitalised as part Treated as


of asset revenue expenditure
*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

N t :E
Note Expenses nott ffulfilling
lfilli the
th criteria
it i tot be
b
treated as revenue expenditure

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Borrowings Cost (Interest)

Borrowings Cost

Specifically for Generally but part used


Qualifying Assets for Qualifying Assets

Apply actual Apply weighted


rate of Interest* average rate
t off iinterest*
t t*

Capitalise the Borrowing Costs less interest


income from temporary investments, if any

Rasesh Shah & Associates Rate of interest should be applied on Expenditure


Calculation of Weighted Average Rate of Interest
Illustration

ABC Co. Ltd. undertakes significant expansion program and incurs following capital
expenditure:
Facility Capex Remarks Date Date of
(in Rs.) of Start Completion

Plant I 30 Lacs Specific Borrowing to the June 1, December 31,


extent of Rs.
Rs 22 Lacs 2005 2005

Plant II 20 Lacs Specific Borrowing to the June 1, November 30,


extent of Rs. 8 Lacs 2005 2005

Additional Information:
1. Rs. 20 Lacs , 11% p.a. secured debentures raised on July2004
redeemable in four equal installments commencing July 1, 2005
2. 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 April 1, 2005 and
repaid Rs. 1 Lac on December 31, 2005. Contd..

Rasesh Shah & Associates


Calculation of Weighted Average 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
B. Cal lation of a
Calculation average
e age unspecified
nspe ified borrowings
bo o ings outstanding
o tstanding during
d ing the year
ea
1. Secured debentures
= 20,00,000 x 3 / 12 = 5,00,00/-
= 15
15,00,000
00 000 x 9/12 = 11,25,000/-
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..
Rasesh Shah & Associates
Calculation of Weighted Average Rate of Interest
Solution
C. Calculation of average interest on unspecified borrowings for the year
1
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. Average interest rate for the year ( C / B )


= (2,45,250 / 21,00,000) * 100 = 11.67%

Contd..

Rasesh Shah & Associates


Interest to be capitalised

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
8 00 000 x 11.67%
11 67% x 7 / 12 = 54,460/
54 460/-

2
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/-

Rasesh Shah & Associates


Commencement of Capitalisation
Expenditure for the
acquisition
construction
production
of a qualifying asset is being incurred

Conditions Borrowing costs are being incurred

Necessary activities for preparation


of qualifying assets are in progress

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Expenditure on Qualifying Asset

includes
Payment of cash
Transfer of other assets
Assumption of interest bearing liabilities

Expenditure

Progress Payment receivedd


Grant received towards the cost
Should be deducted from expenditure.

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Suspension of Capitalisation
Criteria
Capitalisation to be suspended during
extended periods in which active
development 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 (seasonal
rains etc.)
etc )
Rasesh Shah & Associates
Cessation of Capitalisation
Criteria
Capitalisation should cease when substantially all the
the 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
C i off qualifying
lif i asset is
i completed
l d in
i
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
Example 2

Name of the Company : NICHOLAS PIRAMAL INDIA LIMITED


Financial Year : 2004-05
Auditors : Price Waterhouse

Notes to Accounts
Interest amounting to Rs. 2.4 Million has been capitalized during the
year in compliance with AS-16.

Rasesh Shah & Associates


Disclosure Requirements
Example 3
Name of the Company : GHCL
Financial Year : 2004-05
Auditors : Jayantilal Thakkar & Co.
Rahul Gautam Divan & Associates
Significant Accounting Policy
Borrowing Costs that are attributable to the acquisition , construction or
production of q
p qualifying
y g assets are capitalized
p as p
part of cost of such
assets. The capitalized rate is the weighted average of the borrowing
costs applicable to the borrowings of the company that are outstanding
during the period. All other borrowing costs are recognized as an expense
in the period in which they are incurred.
Notes to Accounts
Borrowing Costs capitalized during the year Rs. 8.26 Million (Previous Year
R 5.54
Rs. 5 54 Million)
Milli )
Rasesh Shah & Associates
Disclosure Requirements
Example 4
Name of the Company : EIH LIMITED
Fi
Financial
i l Year
Y : 2004-05
2004 05
Auditors : Ray & Ray

Significant Accounting Policy


Borrowing Costs that are attributable to the acquisition / construction
p
of fixed assets are capitalized as part
p of the cost of the respective
p
assets. Other borrowing costs are recognized as expenses in the year
in which they arise.

Notes to Accounts
Interest debited to the Profit & Loss Account is net of interest
capitalized amounting to Rs. Nil (2004 Rs. 233,156,467)

Rasesh Shah & Associates


Thank
You

Rasesh Shah & Associates