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Ind AS 23- Borrowing Costs

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Ind AS 23 prescribes accounting treatment for borrowing costs. The objective of this standard is to understand the cost attributed to acquisition, construction and  production of a qualifying asset. The costs other than specified above are recognized as expense every year.

Considering the time constraint and for ease of understanding it is important to address only those issues which are imperative for the one’s understanding. To summarize the same following are the important points are to be taken into consideration while applying Ind AS 23.

This Standard shall be applied by entities for the accounting of borrowing costs.

This Standard shall not be applied:-

  • In the calculation of cost of equity share capital or preference share capital.
  • In determining the borrowing costs of acquiring, constructing and producing those qualifying assets which are measured at Fair Value, i.e. a Biological asset.
  • On the production of those goods which are manufactured in a bulk quantity on repetitive basis.

The meaning of the following terms used repetitively in the Standard are:-

  • Borrowing Cost means ‘Interest and other cost’ which is incurred by an enterprise for the arrangement and then allocation of funds.
    The following amounts should be considered while computing Borrowing Cost-

    • Interest on Long term and short term Borrowed funds
    • Amortized portion of Discount on issue, Premium payable on Redemption and other related expenses i.e. Commissions, stamp duties, etc.
    • Finance Charges incurred under Finance Lease
    • Exchange differences with regard to foreign exchange borrowings.
  • Qualifying Asset is an asset that takes Substantial period of time to get ready for its intended use or further sale.
    Qualifying assets may be of any of the following type depending on the condition-

    • Intangible assets under development
    • Inventories other than routine stock /common stock
    • Power facilitation machines
    • Generating plants
    • Investment properties (other than shares and debentures)50
    • 70

The following are not qualifying assets-

  • Inventories which are produced or manufactured within a short period of time, and
  • Assets which are not ready for use or sale at the time of acquisition.

An entity shall capitalize those borrowing costs that are in regard to the acquisition, production and construction of the qualifying asset included as a part of the cost of that asset. Any expenses of borrowing cost incurred other than above shall be written off as an expense in the year in which they occur. The capitalized part of the qualifying asset as a cost of asset is recognized when the cost of such an asset can be measured and it will result in the future economic benefits to the entity.

Closing amount of the qualifying asset more than net realizable value
When the closing amount of the qualifying asset is in excess of the recoverable amount, the carrying off shall be written off in such a manner prescribed by other standards. 

First Stage: Commencement of Capitalization
As per the provisions of Ind AS 23, Borrowing Cost can be capitalized to the cost of Qualifying Asset only if the following three conditions are satisfied:

  • Expenditure should be incurred out of borrowed funds on qualifying assets. It means that capitalization will not be allowed on unutilized funds, but borrowing cost on unutilized funds shall be written off in profit and loss account.
  • The interest cost should be the actual cost. According to the provisions, national interest cannot be capitalized if expenditure on qualifying assets becomes more than borrowed funds.
  • All the necessary activities should remain in continuation, which are required for completion of assets. These activities may be physical or administrative.

Second Stage: Suspension of Capitalization
In case necessary activities are discontinued during the period, the capitalization of borrowing cost will also be discontinued during the respective period. This period is known as Suspension of capitalization. The provision states that we will write off borrowing cost in profit and loss account which will be incurred during the period of suspension.

Exception: In case suspension of activities is temporary in nature then it will not affect capitalization. It can also be said that we will capitalize the borrowing cost even if work remains discontinued during this period.

Third Stage: Cessation of Capitalization
Capitalization of borrowing cost will be permanently ceased from the date at which qualifying asset becomes ready for use or sale. It means the borrowing cost will not be capitalized after the completion of work.
Cessation in parts

  • If a part of qualifying asset is completed first without completing others and it can be used individually, we will assume it to be an independent asset. And the cost shall not be capitalized to such completed portion.
  • If any part of qualifying asset is completed first without completing others but it cannot be used individually, we will assume it to be dependent asset and continue its capitalization until completion.

The following disclosures made by the entity shall be-

  • The capitalized amount of the part of borrowings every year
  • The amount of capitalized borrowings are determined by a capitalization rate is to be disclosed.

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