IndAS 23 Borrowing Costs: Definition, Scope, Treatment, Disclosure: It is quite common where an entity borrow funds for meeting its various business needs like acquisition of building, day to day operations etc. On such borrowed funds an entity incurs the cost known as borrowing cost. Now, the query arises how such borrowing cost should be treated while preparing the financial statements?
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IndAS 23 Borrowing Costs
The treatment of such borrowing cost is prescribed under Ind AS 23, AS 16 under IGAAP and IAS 23 under IFRS. The objective of this article is to prescribe the treatment of borrowing cost as prescribed under Ind AS 23 along with highlighting the differences between AS 16 and IAS 23.
Core Principle
- Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are included in the cost of that asset.
- Other borrowing costs are recognised as an expense
⇑ Borrowing costs’ that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset.
⇓ Other borrowing costs are recognised as an expense.
Qualifying Asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
Borrowing Costs – definition
Borrowing costs are defined as interest and other costs that an entity incurs in connection with the borrowing of funds.
Borrowing costs may include:
- (a) Interest expense calculated using the effective interest method as described in Ind AS 39 Financial Instruments.
- (b) Finance charges in respect of finance leases recognised in accordance with Ind AS 17 Leases; and
- (c) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
Under IGAAP (AS 16) – there is no reference to effective interest rate.
Scope
- This standard is applied in accounting for borrowing cost.
- It does not deal with the actual or imputed cost of equity, including preferred capital not classified as a liability. For example: Dividend paid on equity shares, cost of issuance of equity, cost on Irredeemable preference share capital will not be included as borrowing cost within the purview of this standard.
- This standard is not required to apply on borrowing cost directly attributable to the acquisition, construction or production of:
- Qualifying asset measured at fair value {For example: A biological asset Ind AS 41}
- Inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis
Under IGAAP (AS 16) –Borrowing costs does not include any scope exemptions similar to Ind AS or IAS.
Exchange differences to be included in borrowing costs
With regard to exchange difference required to be treated as borrowing costs in accordance with paragraph 6(e), the manner of arriving at the adjustments stated therein shall be as follows:
- (i) the adjustment should be of an amount which is equivalent to the extent to which the exchange loss does not exceed the difference between the cost of borrowing in functional currency when compared to the cost of borrowing in a foreign currency.
- (ii) where there is an unrealised exchange loss which is treated as an adjustment to interest and subsequently there is a realised or unrealised gain in respect of the settlement or translation of the same borrowing, the gain to the extent of the loss previously recognised as an adjustment should also be recognised as an adjustment to interest.
Under IAS 23 – Above guidance on how the adjustment prescribed in para 6(e) is to be determined is not found in IAS 23.
Treatment of Borrowing Cost
- 1) If the borrowing cost incurred is directly attributable to the acquisition, construction or production of qualifying asset, then it should be capitalised as part of the cost of the asset.
- 2) Otherwise it should be expensed in the profit or loss.
- 3) Note: In case of hyperinflationary economy, part of borrowing cost which compensates for the inflation during the same period should be expensed in profit of loss.
Borrowing cost eligible for capitalisation
Borrowing cost which is directly attributable to the acquisition, construction or production of a qualifying asset is capitalised. A borrowing cost is said to be directly attributable if it can be avoided when the expenditure on qualifying asset is not made.
Specific borrowing
When an entity borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified.
Amount of borrowing costs eligible for capitalisation is the actual borrowing costs incurred on those funds during the period reduced by any investment income earned on temporary investment of idle funds.
General borrowing
In case of general borrowings it may be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings that could otherwise have been avoided.
Rate of Capitalisation
Total general borrowing cost for the period / Weighted average total general borrowings
Expenditure to which the capitalisation rate is applied:-
| Particular | Amount |
| Opening balance of Qualifying Asset (Including borrowing cost previously capitalised) |
XXX |
| Add: Cash expenditure incurred | XXX |
| Add: Transfer or consumption of other assets and material | XXX |
| Add: Assumption of Interest bearing liabilities | XXX |
| Less: Progress payments received | XXX |
| Less: Pre-Sale Deposit | XXX |
Note: Amount of borrowing cost eligible to capitalise should not exceed the actual borrowing cost in case of general borrowing.
Period of capitalisation (Commencement of capitalisation)
Suspension of capitalisation
- Capitalisation should be suspended in the extended periods during which active development of qualifying asset is interrupted.
- Active development interruption means development not taking place due to the abnormal reasons
Cessation of capitalisation
Capitalisation should cease when
- Substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
- Borrowing cost is not being incurred.
Other Key Points: – Recognition of an Impairment Loss: when the carrying amount or expected cost of a qualifying asset exceeds its recoverable amount or N.R.V, the carrying amount is written down or written off in accordance with requirement of relevant standards IND AS 36 or 2.
Disclosure
- a) Amount of borrowing cost capitalised during the period.
- b) Capitalisation rate used.
Author – CA. Pankaj Sharma
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- Ind AS 40 Investment Property
- Indian Accounting Standard (IndAS 2)
- IND AS 36 Impairment of Assets – Complete Details
- IndAS 1: Presentation of Financial Statement
- IndAS 106: Exploration & Evaluation of Mineral Resources
- IndAS 7 Statement of Cash Flows – Applicability, Scope, Objective
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