(As) - 16 Borrowing Costs

Accounting Standard (AS) -16
Borrowing Costs
VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA

CHAIRMAN
INMACS MANAGEMENT SERVICES LTD.
Mobile: 98110 40004
E-mail: vinodjain@inmacsindia.com
vinodjainca@gmail.com
Vinod Jain, FCA, FCS, FCWA
Vinodjain@inmacsindia.com INMACS
Borrowing Costs
Applicability : Effective from accounting

periods commencing on or after
1st April, 2000.
Nature : Mandatory for all enterprises
Objective of AS – 16 : To prescribe the accounting

treatment for borrowing costs.

Borrowing Costs
Borrowing Costs
Interest & Amortisation

Exchange
commitment of ancillary costs
charges relating to
Differences*
on Borrowings Borrowings
Amortisation Finance charges

of Discount for assets
/ Premium acquired on
on Borrowings Finance Lease
*To the extent they are regarded as an adjustment to interest cost

Q: Exchange Differences – When to be treated
as Borrowing Costs?
Ans: To the extent regarded as ‘adjustment to

interest cost’.
Adjustment =
Interest on local currency borrowing
– Interest on foreign currency borrowing
The adjustment is restricted to amount of

exchange loss on principal due to
devaluation of currency
Treatment of Exchange Differences
Loan Amount : USD 10,000
Rate of Interest (in U.S.A.) : 8% p.a.
Exchange rate as at 01.04.2005 : Rs. 40 per USD
Exchange rate as at 31.03.2006 : Rs. 45 per USD
Rate of Interest (in India) : 12%

Contd..

Computations to be made:
1. Interest for the Period = USD 10,000 x 8% x Rs. 45
= Rs. 36,000-
2. Increase in liability towards the principal amount
= USD 10,000 x (45-40)
= Rs. 50,000/-
3. Interest if loan was raised in India
= USD 10,000 x 48 x 12%
= Rs. 57,600/-
4. Difference (2-1) = Rs. 57,600 – Rs. 36,000
= Rs. 21,600/- Contd..
Treatment of Exchange Differences of Rs. 50,000/-
Rs. 21,600/- Rs. 28,400/-
To be treated To be capitalised
as borrowing cost to loan obligation
as per AS -16 as per SCH VI
Note: The amount of borrowing costs capitalised during a period should

not exceed the amount of borrowing costs incurred during the period

Qualifying Assets
Definition:
• an asset
• that takes substantial period of time
• to get ready for intended sale or usage
According to ASI – 1, a rebuttable presumption of a
period of 12 months is considered as a substantial period
of time.
Qualifying asset may be:

- Fixed assets
- Inventories

Treatment of Borrowing Costs
Borrowing Costs
Directly attributable* for:

• acquisition
• construction
• production of
Assets other than

Qualifying Assets
Qualifying assets
Capitalised as part Treated as

of asset revenue expenditure
*or that could have been avoided if the expenditure on qualifying assets had not been made

Criteria for Capitalisation
Criteria
 Future Economic Benefits
 Reliable Measurement
Note : Expenses not fulfilling the criteria to be

treated as revenue expenditure

Borrowings Cost (Interest)
Borrowings Cost
Specifically for Generally but part used

Qualifying Assets for Qualifying Assets
Apply actual Apply weighted

rate of Interest average rate of interest
Capitalise the Borrowing Costs

less interest income, if any

Calculation of Weighted Average Rate of Interest
Illustration
ABC Co. Ltd. undertakes significant expansion program and incurs following capital
expenditure:
Facility Capex Remarks Date Date of
(in Rs.) of Start Completion
Plant I 30 Lacs Specific Borrowing to the June 1, December 31,

extent of Rs. 22 Lacs 2005 2005
Plant II 20 Lacs Specific Borrowing to the June 1, November 30,

extent of Rs. 8 Lacs 2005 2005
Additional Information:
1. Rs. 20 Lacs , 11% p.a. secured debentures raised on July2004
redeemable in four equal installments commencing July 1, 2005
2. Loan from financial institutions amounting to Rs. 30 Lacs bearing interest
at 14% p.a. obtained for construction of Plant I & II on May 1,2005
3. Rs. 5 Lacs, 14% working capital loan obtained on April 1, 2005 and
repaid Rs. 1 Lac on December 31, 2005. Contd..

Solution
A. Calculation of borrowing costs for the year ended on March 31, 2006
1. Secured debentures
= 20,00,000 x 11% x 3 / 12 = 55,000/-
= 15,00,000 x 11% x 9 /12 = 1,23,750/-
2. Loan from financial Institutions
= 30,00,000 x 14% x 11 / 12 = 3,85,000/-
3. Working Capital Loan
= 5,00,000 x 14% x 9 / 12 = 52,500/-
= 4,00,000 x 14% x 3 / 12 = 14,000/-
B. Calculation of average unspecified borrowings outstanding during the year
= 20,00,000 x 3 / 12 = 5,00,00/-
= 15,00,000 x 9/12 = 11,25,000/-
2. Secured working capital loan
= 5,00,000 x 9 / 12 = 3,75,000/-
= 4,00,000 x 3 / 12 =1,00,000/-
Total (1+2) 21,00,000/- Contd..
Solution
C. Calculation of average interest on unspecified borrowings for the year
= 20,00,000 x 11% x 3 / 12 = 55,000/-
= 15,00,000 x 11% x 9 /12 = 1,23,750/-
2. Working Capital Loan
= 5,00,000 x 14% x 9 / 12 = 52,500/-
= 4,00,000 x 14% x 3 / 12 = 14,000/-
TOTAL (1+2) 2,45,250/-
D. Average interest rate for the year ( C / B )

= (2,45,250 / 21,00,000) * 100 = 11.67%
Contd..
Solution
Interest Capitalised
1. Plant I
On specific borrowings: 22,00,000 X 14% X 7 / 12 = 1,79,667/-
On general Borrowings: 8,00,000 x 11.67% x 7 / 12 = 54,460/-
2. Plant II
On specific borrowings: 8,00,000 X 14% X 6 / 12 = 56,000/-
On general Borrowings: 12,00,000 x 11.67% x 6 / 12 = 70,020/-

Excess of the Carrying amount of the Qualifying asset
over recoverable Amount
Actual Cost of the Asset Recoverable

+ Borrowing Cost Capitalised <= amount
of the Asset

Commencement of Capitalisation
Expenditure for the
• acquisition
• construction
• production
of a qualifying asset is being incurred
Conditions Borrowing costs are being incurred
Necessary activities for preparation

of qualifying assets are in progress

Suspension of Capitalisation
Criteria
 Capitalisation to be suspended during
extended periods in which active
development is hampered.
Suspension not to take place in case:

• substantial technical & administrative
work is being carried on
• temporary delays necessary for
preparation of qualifying assets (seasonal
rains etc.)
Cessation of Capitalisation
Criteria
 Capitalisation should cease when substantially all the
the activities necessary to prepare the qualifying
asset for its intended use or sale are complete.
Cessation to take place even if:

• routine administrative work still continues
• minor modifications to property as per users’
specifications is to be made
Cessation to take place in part if:

• Construction of qualifying asset is completed in
parts and a part is capable of being used
separately
Disclosure Requirements
The financial statements should disclose:
1. the accounting policy adopted for borrowing costs
2. The amount of borrowing costs capitalised

The financial statements should disclose:
1. the accounting policy adopted for borrowing costs
2. The amount of borrowing costs capitalised

Example 1
Name of the Company : MRF
Financial Year : 2004-05
Auditors : Sastri & Shah
M.M. Nissim & Co.
Significant Accounting Policy
Borrowing costs that are attributable to the acquisition of or
construction of qualifying assets are capitalized as part of the cost of
such assets. A qualifying asset is one that necessarily takes substantial
period of time to get ready for intended use. All other borrowing costs
are charged to revenue.
Notes to Accounts
The total borrowing cost capitalized during the year is Rs. 4.13 Crores.

Example 2
Name of the Company : NICHOLAS PIRAMAL INDIA LIMITED

Auditors : Price Waterhouse

Notes to Accounts
Interest amounting to Rs. 2.4 Million has been capitalized during the
year in compliance with AS-16.

Example 3
Name of the Company : GHCL
Auditors : Jayantilal Thakkar & Co.
Rahul Gautam Divan & Associates
Borrowing Costs that are attributable to the acquisition , construction or
production of qualifying assets are capitalized as part of cost of such
assets. The capitalized rate is the weighted average of the borrowing costs
applicable to the borrowings of the company that are outstanding during
the period. All other borrowing costs are recognized as an expense in the
period in which they are incurred.
Notes to Accounts
Borrowing Costs capitalized during the year Rs. 8.26 Million (Previous Year
Rs. 5.54 Million)
Example 4
Name of the Company : EIH LIMITED
Auditors : Ray & Ray

Borrowing Costs that are attributable to the acquisition / construction
of fixed assets are capitalized as part of the cost of the respective
assets. Other borrowing costs are recognized as expenses in the year
in which they arise.
Notes to Accounts
Interest debited to the Profit & Loss Account is net of interest
capitalized amounting to Rs. Nil (2004 – Rs. 233,156,467)


COP - Capitalisation of Borrowing Costs
Q. Whether borrowing cost avoidable or unavoidable?
A. Said to be unavoidable if expenditure on qualifying assets had been
incurred and borrowing is taken ,Existing borrowing exercise of
judgement required.
Q. Factors to be considered as to whether and to what extent general

borrowings have been so used
A. Information of cash inflows and outflows, close scrutiny required.
Q. General borrowings made but equity specifically infused for financing

qualifying assets
R. No question of capitalizing borrowing cost.
Q. Calculation of weighted average borrowing rate?

A. Jain,
Vinod Based
FCA,on
FCS,borrowing
FCWA during period of expenditure and not borrowings
made for the whole year.
COP - Capitalisation of completed parts of a project
Q. Capitalisation of commissioned packages when capitalization of

remaining incomplete packages is pending?
A. Necessary to capitalize commissioned packages .

Q. Date of capitalization?
A. Date on which package is ready to commence commercial production.

Q. Allocation of incidental expenditure during construction?
A. On appropriate basis.

Q. Capitalisation of independent packages which are complete when
capitalization of main packages is pending ?
A. Capitalised when ready for their intended use.

COP - Capitalisation of completed parts of a project
Q. Capitalisation of main packages when capitalization of ancillary
packages is pending or vice versa?
A. Capitalisation of main packages to be done when ready to commence

commercial production or ready for use.
Q. Treatment of general and administrative overheads after part

capitalisation?
A. Segregation on appropriate basis between P/L A/C & Expenditure

during construction A/C
Q. Treatment of depreciation on infrastructure?
A. Allocation on appropriate basis to P & L A/c and Expenditure during

construction A/c

Thank You
VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA

CHAIRMAN
INMACS MANAGEMENT SERVICES LTD.
Mobile: 98110 40004
E-mail: vinodjain@inmacsindia.com
vinodjainca@gmail.com


(As) - 16 Borrowing Costs

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Accounting Standard (AS) -16

VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA

Applicability : Effective from accounting

Nature : Mandatory for all enterprises

Objective of AS – 16 : To prescribe the accounting

Vinod Jain, FCA, FCS, FCWA

Interest & Amortisation

Amortisation Finance charges

*To the extent they are regarded as an adjustment to interest cost

Ans: To the extent regarded as ‘adjustment to

The adjustment is restricted to amount of

Loan Amount : USD 10,000

Rate of Interest (in U.S.A.) : 8% p.a.

Exchange rate as at 01.04.2005 : Rs. 40 per USD

Exchange rate as at 31.03.2006 : Rs. 45 per USD

Rate of Interest (in India) : 12%

Vinod Jain, FCA, FCS, FCWA

Rs. 21,600/- Rs. 28,400/-

Note: The amount of borrowing costs capitalised during a period should

Vinod Jain, FCA, FCS, FCWA

Qualifying asset may be:

Vinod Jain, FCA, FCS, FCWA

Directly attributable* for:

Assets other than

Capitalised as part Treated as

Vinod Jain, FCA, FCS, FCWA

Note : Expenses not fulfilling the criteria to be

Vinod Jain, FCA, FCS, FCWA

Specifically for Generally but part used

Apply actual Apply weighted

Capitalise the Borrowing Costs

Vinod Jain, FCA, FCS, FCWA

Plant I 30 Lacs Specific Borrowing to the June 1, December 31,

Plant II 20 Lacs Specific Borrowing to the June 1, November 30,

Vinod Jain, FCA, FCS, FCWA

= 20,00,000 x 11% x 3 / 12 = 55,000/-

= 15,00,000 x 11% x 9 /12 = 1,23,750/-

2. Working Capital Loan

= 5,00,000 x 14% x 9 / 12 = 52,500/-

= 4,00,000 x 14% x 3 / 12 = 14,000/-

TOTAL (1+2) 2,45,250/-

D. Average interest rate for the year ( C / B )

Vinod Jain, FCA, FCS, FCWA

Actual Cost of the Asset Recoverable

Vinod Jain, FCA, FCS, FCWA

Conditions Borrowing costs are being incurred

Necessary activities for preparation

Vinod Jain, FCA, FCS, FCWA

Suspension not to take place in case:

Cessation to take place even if:

Cessation to take place in part if:

The financial statements should disclose:

1. the accounting policy adopted for borrowing costs

2. The amount of borrowing costs capitalised

Vinod Jain, FCA, FCS, FCWA

The financial statements should disclose:

1. the accounting policy adopted for borrowing costs

2. The amount of borrowing costs capitalised

Vinod Jain, FCA, FCS, FCWA

Name of the Company : NICHOLAS PIRAMAL INDIA LIMITED

Vinod Jain, FCA, FCS, FCWA

Significant Accounting Policy