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As 16 doubt

Arjun M K (Student) (181 Points)

19 April 2016

A Limited has deployed owned funds for constructing a qualifying asset for B Limited and has charged interest of say, Rs.1 Crore on B Limited. Interest computation is based on the funds deployed everyday for the construction multiplied by a interest rate . Whether B Limited can capitalise this cost as borrowing cost? Assume qualifying asset conditions are satisfied.

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arun kumar sawlani (C.A.) (71 Points)
Replied 20 April 2016

Arjun
the interest charged by A ltd would be capitalised by B ltd being the cost of asset as per AS-10 accounting for fixed asset as A ltd is using its owned funds in it.thus it wont recover any interest neither will it due such interest in the construction period on the name of B Ltd.moreover such interest would be charged in the full comsideration of asset..hence it wont be a borrowing cost for B Ltd but it would be asset cost for Bltd..hence capitalised under AS 10 and not AS-16

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Arjun M K (Student) (181 Points)
Replied 02 May 2016

Hi Arun. For clarity, qualifying asset is not a fixed asset. It is an inventory. It is a project work in progress in the books of a Real estate company.

arun kumar sawlani (C.A.) (71 Points)
Replied 02 May 2016

Hi Arjun,
if thats the case then AS-2

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arun kumar sawlani (C.A.) (71 Points)
Replied 02 May 2016

also allows to include borrowing cost for closing stock valuation if the asset satisfies conditions required for being a qualifying asset

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arun kumar sawlani (C.A.) (71 Points)
Replied 02 May 2016

hence A LTD will add this in its product cost(Stock cost) as per AS-16 hence it will also be capitalised by B ltd as part of asset cost

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Arjun M K (Student) (181 Points)
Replied 04 May 2016

A Ltd has only depoloyed some funds in the initial stage of the real estate project, which now is undertaken by B Ltd. For which, A Ltd has charged some interest on the funds used by them for B Lts's project. This is more of a nature of notional interest. First of all, there is no borrowing in B Lts's books. Second of all, AS 16 Borrowing costs definition includes only borrowings from banks and financial institutions, not from companies / related parties.

arun kumar sawlani (C.A.) (71 Points)
Replied 04 May 2016

hii Arjun,
U have tried to clarify the situation by including notional interest in ur question. on notional interest the AS is silent..hence it wouldnt be included in the cost of product..neither would A LTD charge it from B ltd...this is as per AS..but as AS doesnt cover all possible accounting treatments, hence this notional interest is out of the purview of AS..unlike costing..hence the company can though do so. but this treatment is not as per AS

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