Interest on borrowed capital
This query is : Resolved
29 January 2010
A public Ltd co take loan to purchase plant and machinery to enhance the production. The plant and machinery purchased is ready to use. Pls suggest me whether upfront fee of loan and interest on loan can be treated as Borrowed costs or not. Give me ur suggestion with ref to AS10, AS16
Aditya Maheshwari
(Expert)
29 January 2010
As per AS - 16 borrowing costs spent to purchase an asset which has long gestation period or takes time to being put to use can be capitalised.
If the asset purchased is ready to use at the time of purchase then no borrowing cost can be capitalised.
So upfront fee of loan and interest on loan cannot be treated as Borrowed costs for purchase of machine ready to use
If the asset purchased is ready to use at the time of purchase then no borrowing cost can be capitalised.
So upfront fee of loan and interest on loan cannot be treated as Borrowed costs for purchase of machine ready to use
Aditya Maheshwari
(Expert)
29 January 2010
Incidental expenses are expenses which are incurred to bring the asset to its present location and use.
Fees paid for loan facility or interest cannot be treated as incidental expenses to put the machinery for use
Fees paid for loan facility or interest cannot be treated as incidental expenses to put the machinery for use
30 January 2010
That means we have to charge off the interest if the interest relates to the period Date of Purchase of Machinery and Date of put to use. Is it Right?
Aditya Maheshwari
(Expert)
30 January 2010
Borrowing cost as per AS - 16 can be capitalised only on qualifying asset
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
Explanation:
What constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale is considered.
If the above condition is satasfied then the same can be capitalised, otherwise not.
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
Explanation:
What constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale is considered.
If the above condition is satasfied then the same can be capitalised, otherwise not.
Aditya Maheshwari
(Expert)
30 January 2010
And Borrowing costs may include:
1. interest and commitment charges on bank borrowings and other short-term and long-term borrowings;
2. amortisation of discounts or premiums relating to borrowings;
3. amortisation of ancillary costs incurred in connection with the arrangement of borrowings;
4. finance charges in respect of assets acquired under finance leases or under other similar arrangements; and
5. exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
1. interest and commitment charges on bank borrowings and other short-term and long-term borrowings;
2. amortisation of discounts or premiums relating to borrowings;
3. amortisation of ancillary costs incurred in connection with the arrangement of borrowings;
4. finance charges in respect of assets acquired under finance leases or under other similar arrangements; and
5. exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
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