A company takes a major expansion program for which it raises through following routes:
Debentures
term loan
Working Capital loan
Whether interest on Working capital loan should be capitalised?
Joey Tribbiani (fdg) (2010 Points)
24 May 2010A company takes a major expansion program for which it raises through following routes:
Debentures
term loan
Working Capital loan
Whether interest on Working capital loan should be capitalised?
LAVANYA SM
(Chartered Accountant)
(113 Points)
Replied 24 May 2010
As per A S 16, interest is capitalized on qualifying asssets.Qualifying asset may be Fixed Asset, Current Asset or Investment.
Borrowing costs that are directly attributable to acquisition,construction or production is capitalized as part of the cost of the asset.
Borrowing cost not eligible for capitalization is recognized as expense in the period during which it is incurred.
Borrowings are of two types:-
Specific Borrowings and General Borrowings
Here working capital loan amounts to general borrowings.So the funds borrowed generally and used for the purpose of obtaining qualifying asset,the amount of borrowing cost to be capitalized is determined by applying an appropriate capitalization rate.
So if the working capital loan is used for obtaining a qualifying asset, the same can be capitalized.
Gopal G
(CA Final )
(44 Points)
Replied 24 May 2010
Dear,
Borrowing cost that directly attributable to acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset.
Examples of qualifying asset are manufacturing plants, power generation facilities and investment on properties etc.
On the other hand, borrowing cost may include; Interest and commitment charges on bank long term and short term borrowings as well.
From the above we conclude, Interest on working capital loan should be capitalized provided, the loan should have been taken particularly for this expansion program.
KUSHAL AGRAWAL
(CA Final Student)
(128 Points)
Replied 24 May 2010
lavanya's answer is not completely correct. but the thing is answer must be specific and notgeneral.
as per as-16 , any loan taken for expansion of current capaciy or for new project can be capitaized till the project starts ( i.e production start )
now if the project is particularly financed by debenures or term loan specifically granted for the said purpose , then the full interest cost will be capitalized
in case of working capital loan , proportionate amount used for project financing will be attributed towards the project and only that amount will be capitalized , other interst will be charged to profit and loss account .
proportionate amount to be capitalized
total interest amount x total amount used for project
total amount of working capital loan
CA Rahul Khatter
(Chartered accountant)
(97 Points)
Replied 24 May 2010
borrowing cost for wrking capital is not qualifying for capitalised ....
Aneesh
(Pursuing CA)
(101 Points)
Replied 24 May 2010
Hello,
As per AS-16 a qualifying asset is:
- an Asset
- that takes a substantial period of time
- to get ready for intended sale or usage
Here working capital loan is taken to finance such assets and so Interest on this loan cant be capitalised.
Pls correct me if I'm wrong.
Regards
Sharad Saini
(Student)
(286 Points)
Replied 24 May 2010
hi,
Borrowing costs which are directly attributable to the acquisition, construction or production of qualifying assets are eligible for capitalization. Directly attributable costs are those costs that would have been avoided if the exp on the qualifying asset had not been made.
In the given case, Working capital is specifically for expansion project and if the project is not undertaken the exp would not have been incurred. So it is eligible for capitalization
You can also check Q.2 of D S Rawat. In this q same treatment has been made on same logic. .
Arjit Singhal
(Ca Final (New) Article Assistant Student )
(107 Points)
Replied 24 May 2010
As per As- 16
Borrowing intt. can be capitalized if it is used for generating Capital asset
and actual payment has been made.
No Matters whether loan was taken for working capital or for anything
BUT IT SHOULD BE USED IN GENERATION OF CAPITAL ASSETS,
NOT FOR WORKING CAPITAL PURPOSES
IF IT IS PARTIALLY USED IN GENERATION , THEN THAT PARTIAL PART OF INTT. CAN BE
CAPITALIZED.....
CA.E.Deepan Chakravarthy
(CA and CS Executive)
(462 Points)
Replied 25 May 2010
Hello Friends
To capitalize the interest the asset should be qualifying asset, so what is meant by qualifying asset?
As per AS 16 Qualifying asset means the asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
In this, what is meant by substantial period? As per ASI 1, the substantial period means the period of 12 months or more.
The interest of the borrowings, which is specifically borrowed for particular asset or general borrowings, is to be capitalized only, when it is incurred for qualifying asset.
Borrowing cost of working capital loan is eligible for capitalization when the loan is incurred for qualifying asset which necessarily take substantial period to get ready.
Builders and wine manufacturers are eligible to capitalize their borrowing cost of working capital loan
vipin
(student)
(107 Points)
Replied 25 May 2010
borrowing cost for wrking capital is not qualifying ,therefore it can't be capitalised ....
N V Ram
(Manager)
(272 Points)
Replied 25 May 2010
WC is basically for running day to day operation, i don't know whether Banks will provide WCL for buying assets or expansion
sateesh
(B.com,cwa,ca)
(195 Points)
Replied 25 May 2010
Borrowing cost on working capital can be capitalised but, as per CARO we have to report that short term funds have been used for long term purpose because application of WC loan involes substantial period of time
Sachidanand Singh
(Service)
(235 Points)
Replied 25 May 2010
What is working capital? It is the capital blocked in day to day operations. It is seen in the form of current assets and operating cash that firms keep. It is financed, in parts, by current liabilities (sundry creditors), owners' long term sources and bank loan. (Some people define working capital as current assets minus current liabilities but I am not comfortable with that definition.)
Working capital loans are used for funding current assets. By definition current assets are ready for use and thus cannot be "qualifying assets" under AS16. Thus, the costs attributable to working capital loan cannot be capitalised.
Having said that, I must admit, there are certain grey areas. Interest on funds borrowed for raw material purchase for a new plant are often capitalised till commissioning of the plant - at least to the extent of interest attributable to the raw material consumed during trial runs (i.e. in the pre-commissioning phase).
| Interest on working capital | |||||||||
| Borrowing costs include interest paid on short term borrowings such as working capital finance | |||||||||
| that existed when the qualifying asset (QA) was being purchased,constructed or purchased. | |||||||||
| One may argue that | |||||||||
| working capital finance was not used or meant for financing the construction or acquisition of asset. | |||||||||
| However, this argument is not tenable within the framework of AS-16 | |||||||||
| Para-8 of AS-16 | |||||||||
| which establishes a key test reads as follows : | |||||||||
| The borrowing costs that are directly attributable to acquisition,construction or production of a QA | |||||||||
| are those borrowing costs that would have been avoided if the expenditure on the OA had not been made. | |||||||||
| A positive answer would indicate the fulfillment of a critical condition for capitalization. | |||||||||
| therefore | |||||||||
| it is not necessary that a loan should have been taken separately for the purpose of QA. | |||||||||
| cash may have been utilised from the existing working capital borrowings to finance | |||||||||
| the acquisition/construction of the OA. | |||||||||
| Had the cash been used to avoid to reduce the working capital loan,the borrowing costs would have been | |||||||||
| lower. | |||||||||
| In such instances too | |||||||||
| borrowing costs are required to be capitalised but only to the extent the borrowing costs | |||||||||
| would have been avoided if the investment in QA had not been made. | |||||||||
| This supports our general knowledge that money is fungible, | |||||||||
| and therefore in the above situation one should not argue that the investments in the QA | |||||||||
| were not made out of borrowings. | |||||||||
| Regards | |||||||||
| K.Ilayaraja. | |||||||||
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