Borrowing cost calculation

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Punit Agrawal (Querist)

22 April 2014 In case of a builder we have to calculate borrowing cost.
In this case a project is completed in mid of the year and all other projects are running projects.
Then we have to calculate the borrowing cost for all projects, but the question is about completed projected, borrowing cost will be calculated for which period for whole period or only uptill the date of completion of project.
note:
1. sale booked for all projects at the end of the fin. year.
2. expenses also debited after completion of the project as bills came late.

please guide me immediately.

Punit Agrawal

Punit Agrawal (Querist)

23 April 2014 Any Reply Please..............................

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

18 July 2024 When it comes to calculating borrowing costs for completed projects in the context of a builder or developer, the treatment typically follows the principles outlined in Accounting Standard (AS) 16 - "Borrowing Costs." Here’s how you should approach the calculation:

### Borrowing Costs Calculation for Completed Projects

1. **Identifying Completed Projects:**
- For projects that are completed during the financial year, borrowing costs should be calculated up until the date of completion of each individual project.

2. **Commencement of Capitalization:**
- Borrowing costs should be capitalized from the time when:
- Expenditures are being incurred for the projects that qualify as assets,
- Borrowing costs are being incurred, and
- Activities necessary to prepare the assets (projects) for their intended use or sale are in progress.

3. **Ceasing Capitalization:**
- Capitalization of borrowing costs for a specific project ceases when substantially all the activities necessary to prepare the project for its intended use or sale are complete.
- If there are significant delays or interruptions that are necessary to complete the project, capitalization may be temporarily suspended during such periods.

4. **Allocation of Borrowing Costs:**
- Allocate borrowing costs to completed projects based on the actual expenditures incurred up to the date of completion.
- Do not capitalize borrowing costs incurred after the date of completion of each project.

### Practical Application:

- **Project Completion Date:** Determine the exact date when each project is completed and ready for its intended use or sale.
- **Borrowing Costs:** Calculate the borrowing costs attributable to each completed project up until its completion date.
- **Accounting Entries:** Debit the cost of each completed project (capital asset) with the capitalized borrowing costs and credit the interest expense in the profit and loss account with the same amount.

### Example Scenario:
Let’s say you have three projects:
- Project A completed on June 30, 2023
- Project B completed on September 15, 2023
- Project C ongoing (not completed by March 31, 2024, the end of the financial year)

For Project A, capitalize borrowing costs from the start of expenditures until June 30, 2023. For Project B, capitalize borrowing costs until September 15, 2023. Project C would continue to accrue borrowing costs as it is still ongoing.

### Conclusion:
By adhering to these principles, you ensure that borrowing costs are appropriately capitalized for each project based on the period during which the funds were actively used to finance their acquisition or construction. This method provides a more accurate reflection of the project costs and aligns with accounting standards, enhancing transparency in financial reporting. Always consult with a professional accountant or financial advisor to ensure compliance with applicable standards and regulations specific to your business and projects.

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