The relevant Accounting Standards relating to Borrowing Costs are the following:-
a. INDAS 23
There is no major difference between INDAS 23 and IAS 23.Therefore, the following descriptions relate to both INDAS 23 and IAS 23.
Statements of Profit and loss and other Comprehensive income, Statement of changes in Equity and Statement of Financial position are the new names of Financial Statements as per IND AS and IAS.
Borrowing Costs should be capitalized. That means, Borrowing Costs should be included in the Cost of Property, Plant and Equipment (PPE is the new word for Assets).Please include Borrowing Cost in the cost of PPE as follows.
Cost of PPE (IndAS-16and IAS-16) means the following:-
Less: (i) Trade discounts.
Add: (i). Import duties
(ii) Non-refundable purchase taxes
(iii) Legal fees for purchase contract and recording ownership
(iv) Tittle guarantee insurance
(v).Directly attributable costs of bringing the assets to working condition such as :-
a. Employee benefit costs
b. Site preparation costs
c. Initial delivery costs
d. Installation Charges
e. Initial handling costs
f. Cost of testing
Less: Sale Proceeds of goods produced in the testing process.
g. Professional fees (Architects, engineers)
h. Transportation costs.
i. Cost of Technical Staff to start operation of the plant.
(vi) Initial estimate of unavoidable cost of dismantling and removing Asset and restoring the site of installation (Using technique of Present Value)
(vii) Borrowing costs.
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognized as an expense.
A. Qualifying asset
It is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale,
- Manufacturing plants
- Power generation facilities
- Intangible assets
- Investment properties.
B. Borrowing cost may include
(a) Interest expense calculated using the effective interest method as described in IFRS 9 or Ind AS 109 as the case may be
(b) Interest in respect of lease liabilities recognized in accordance with IFRS 16 Leases or IndAS 116 Leases
(e) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs
C. Substantial Period of Time
It is based on facts and circumstances of each case.
Ordinarily Substantial period =A Period of 12 months.
II. Recognition and measurement, Capitalization of Borrowing Costs, and Disclosures are the most important Concepts relating to those standards.
A .Borrowing costs directly attributable
i. To the acquisition,
ii. Construction or
iii. Production of qualifying assets must be capitalized.
B. Other Borrowing costs are expenses in the statement of profit and loss
C. When an entity applies IAS 29 Financial Reporting in Hyperinflationary Economies, the following concept is important in those conditions
It recognizes as an expense the part of borrowing costs that compensates for inflation during the same period in accordance with paragraph 21 of that Standard.
A. It depends on the following
i. Funds Borrowed Specifically
ii. Funds Borrowed Generally
Funds Borrowed Specifically.
Amount of Borrowing Cost eligible for Capitalization =Actual interest plus related expenses Incurred less Investment Income from Excess idle Borrowings.
Funds Borrowed Generally.
Amount of Borrowing cost eligible for Capitalization =Amount of Qualifying Asset × Weighted Average Capitalization Rate
Weighted Average Capitalization Rate=Total borrowing Cost/Total average outstanding ×100.
B. Amount of Borrowing cost capitalized cannot exceed the amount of borrowing cost incurred during that period.
V. Capitalization of Borrowing Cost.
It includes the following:-
a. Borrowing cost capitalization would be started when the entity first meets all the following conditions
- Expenditure on qualifying asset is being incurred
- Borrowing costs are being incurred –
- Activities essential to prepare asset for its intended use are in progress.
b. Borrowing cost capitalization should be suspended
If active development is interrupted for any extended period (excluding temporary delays or for period when substantial administrative or technical work is being done)
c. Borrowing cost capitalization should be stopped
When substantially all activities necessary to prepare the qualifying asset for its use or sale are complete – It may be completed in parts, if each part can be used or sold separately.
VI. Disclosures .
An entity shall disclose:
(a) The amount of borrowing costs capitalized during the period;
(b) The Weighted Capitalization rate used to determine the amount of Borrowing Costs eligible for capitalization.
VIII. Difference between AS 26 and INDAS 38
Currently AS 16
Ind AS 23
Provides no relaxation
Provides a relaxation from applying this standard to qualifying assets measured at fair value.
Provides explanation for 'substantial period of time' as 12 months period
Does not provide any such explanation
Does not require disclosure of capitalization rate calculations
Requires disclosure of capitalization rate