As 16 borrowing cost- general borrowing

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

24 December 2013 Suppose, company has taken a loan of Rs 100 Crore @ 10%pa (General Borrowing) as on 1.4.2011 and out of this amount it has infused Rs 20 crore in its Project-I on 1.4.2012 and further infused Rs 30 crore in Project-II on 1.4.2013.

Now What will be the interest amount to be capitalized of Project-I and Project-II on 1.4.2014.
What will be the treatment of interest on Balance Loan of Rs 50 Crore.??

Querist : Anonymous

Querist : Anonymous (Querist)

01 January 2014 Please provide your guidance

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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14 July 2024 Under AS 16 - Borrowing Costs, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset should be capitalized as part of the cost of that asset. Here’s how the interest amount would be capitalized for Project-I and Project-II, and the treatment of interest on the balance loan of Rs 50 Crore as on 1st April 2014:

### Calculation of Capitalized Interest for Project-I and Project-II:

1. **Project-I (infused on 1.4.2012):**

- Capitalization period: From 1.4.2012 to 1.4.2014 (2 years)
- Loan amount used for Project-I: Rs. 20 Crore
- Weighted average borrowing cost: 10% per annum

**Capitalized interest for Project-I:**
- Rs. 20 Crore × 10% × 2 years = Rs. 4 Crore

2. **Project-II (infused on 1.4.2013):**

- Capitalization period: From 1.4.2013 to 1.4.2014 (1 year)
- Loan amount used for Project-II: Rs. 30 Crore
- Weighted average borrowing cost: 10% per annum

**Capitalized interest for Project-II:**
- Rs. 30 Crore × 10% × 1 year = Rs. 3 Crore

### Treatment of Interest on Balance Loan (Rs 50 Crore):

- The remaining Rs. 50 Crore of the loan that was not specifically infused into Project-I or Project-II is considered general borrowing.

- **Treatment:**
- Interest on the balance loan of Rs. 50 Crore (general borrowing) will not be capitalized as part of the cost of any specific qualifying asset.
- Instead, the interest expense on this portion of the loan will be recognized in the profit and loss account for the period.

### Overall Impact on Financial Statements:

- **Balance Sheet:**
- The cost of Project-I will be increased by Rs. 4 Crore (capitalized interest).
- The cost of Project-II will be increased by Rs. 3 Crore (capitalized interest).
- The remaining Rs. 50 Crore of the loan will be shown as a liability in the balance sheet.

- **Profit and Loss Account:**
- The interest expense related to the Rs. 50 Crore balance loan (general borrowing) will be recognized as an expense in the profit and loss account.

### Compliance with AS 16:

- Ensure that all calculations are based on the principles outlined in AS 16 regarding the capitalization of borrowing costs.
- Maintain documentation of the capitalization process, including the determination of the weighted average borrowing cost and the calculation of capitalized interest for each qualifying asset.
- Disclose the accounting policies related to borrowing costs in the notes to the financial statements, including the amount of borrowing costs capitalized during the period.

By following these guidelines, you can ensure compliance with AS 16 while accurately reflecting the impact of borrowing costs on the company's financial statements.

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