11 May 2013
Para 12 of AS-2 is as under. Interest and other borrowing costs are usually considered as not relating to bringing the inventories to their present location and condition and are, therefore, usually not included in the cost of inventories.
As per AS-16 "Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds." and "A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale."
Para 15 of AS-16 is as under. Expenditure on a qualifying asset includes only such expenditure that has resulted in payments of cash, transfers of other assets or the assumption of interest-bearing liabilities. Expenditure is reduced by any progress payments received and grants received in connection with the asset (see Accounting Standard 12, Accounting for Government Grants). The average carrying amount of the asset during a period, including borrowing costs previously capitalized, is normally a reasonable approximation of the expenditure to which the capitalization rate is applied in that period.
Now, the question is as under. Interest cost should not form part of inventory as per AS-2 as said above. But, relevant provisions of AS-16 provides for the capitalisation of borrowing cost related with even inventories by using the words "for its intended use or sale", "progress payment received".
So, why such controversies are there between these two Accounting Standards? And How to resolve it?
12 May 2013
Thanks Mr. Sunil. Your answer is also correct, but meanwhile I got the answer from one of my friends which is more clear and you will also find it useful. Refer to para 8 of ASI-1 from link given below and matter will be more clear. http://220.227.161.86/313asi_accstand1.pdf
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