IND AS 23BORROWING COST

BY- VIVEK MEHNDIRATTA

INDEX Scope

Definition

What does borrowing cost include?

Recognition

Eligibility for capitalization

Commencement of capitalization

Suspension of capitalization

Cessation of capitalization

Disclosures

Difference between Ind AS 23 and IAS23

Difference between AS-16 and Ind AS 23

SCOPEThis standard shall be applied in accounting for

borrowing costs;This standard does not deal with actual or

imputed cost of equity.An entity is not required to apply the standard

to borrowing cost directly attributable to acquisition, construction, or production of: Qualifying asset measured on fair value viz Biological

Asset. Inventories that are manufactured or produced in large

quantities on repetitive basis.

DEFINITIONSBorrowing Costs :- Interest and other cost

incurred for the borrowing of funds.

Qualifying Assets :- The asset which take substantial period of time to get ready for its intended use or sale.

EXAMPLES OF QUALIFYING ASSET

Investment Properties;Inventories that need substantial time to

bring them to their saleable condition;Manufacturing Plants;Power generation facilities

EXAMPLES OF NOT A QUALIFYING ASSETInventories that are normally

manufactured or produced in large quantities on a repetitive basis and over a short period of time ;

Assets which are ready for use or sale when acquired.

WHAT DOES BORROWING COST INCLUDES?Borrowing cost may include :-Interest on bank overdraft, and short term and

long term Borrowings.Finance charges related to Finance Lease.Exchange Difference arising from Foreign

currency borrowings to the extent that they are regarded as an adjustment to interest costs.

RECOGNITION Borrowing cost that are directly attributable to the

acquisition, construction or production of a qualifying asset shall be capitalized as a part of the cost of the asset;

Such borrowing cost can be capitalized when: It is probable that they will result in future economic benefit

to the entity; and These costs can be measured reliably.

Entity shall recognize other borrowing costs as an expense in the period it incurs them.

CAN ANY ONE ANSWERA telecom company has acquired a 3G licence. The

licence could be sold or licensed to a third party. However, management intends to use it to operate a wireless network. Development of the network starts when the licence is acquired.

Should borrowing costs on the acquisition of the 3G licence be capitalized until the network is ready for its intended use?

CHECK WHETHER YOU ARE CORRECT Yes. The licence has been exclusively acquired to operate

the wireless network.

The fact that the licence can be used or licensed to a third

party is irrelevant.

The acquisition of the licence is the first step in a wider

investment project (developing the network). It is part of

the network investment, which meets the definition of a

qualifying asset.

AGAIN YOUR TURN A real estate company has incurred expenses for the

acquisition of a permit allowing the construction of a building. It has also acquired equipment that will be used for the construction of various buildings.

Can borrowing costs on the acquisition of the permit and the equipment be capitalized until the construction of the building is complete?

THE ANSWER IS HERE Yes for the permit, which is specific to one building.

It is the first step in a wider investment project. It is part of the construction cost of the building, which meets the definition of a qualifying asset.

No for the equipment, which will be used for other construction projects. It is ready for its ‘intended use’ at the acquisition date. It does not meet the definition of a qualifying asset.

FOREIGN EXCHANGE DIFFERENCE TO BE CAPITALIZEDWith regard to exchange difference required to be

treated as borrowing costs, the manner of arriving at

the adjustments stated therein shall be as follows

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.

CONT…

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.

ILLUSTRATION XYZ Ltd. has taken a loan of USD 10,000 on April 1, 2016, for

a specific project at an interest rate of 5% p.a., payable

annually.

On April 1, 2016, the exchange rate between the currencies

was Rs. 45 per USD. The exchange rate, as at March 31, 2017,

is Rs. 48 per USD.

The corresponding amount could have been borrowed by XYZ

Ltd. in local currency at an interest rate of 11% per annum as

on April 1, 2016.

SOLUTION The following computation would be made to determine the

amount of borrowing costs for the purposes of Ind AS 23:

i. Interest for the period = USD 10,000 × 5%x Rs. 48/USD = Rs. 24,000/-

ii. Increase in the liability towards the principal amount = USD 10,000 ×

(48-45) = Rs. 30,000/-

iii. Interest that would have resulted if the loan was taken in Indian

currency = USD 10000 x 45 x 11% = Rs. 49,500

iv. Difference between interest on local currency borrowing and foreign

currency borrowing = Rs. 49,500 – Rs. 24,000 = Rs. 25,500

COND… Therefore, out of Rs. 30,000 increase in the liability

towards principal amount, only Rs. 25,500 will be

considered as the borrowing cost.

Thus, total borrowing cost would be Rs. 49,500 being the

aggregate of interest of Rs. 24,000 on foreign currency

borrowings plus the exchange difference to the extent of

difference between interest on local currency borrowing

and interest on foreign currency borrowing of Rs. 25,500.

CONT…Thus, Rs.49,500 would be considered as the

borrowing cost to be accounted for as per Ind AS 23 and the remaining Rs.4,500 would be considered as the exchange difference to be accounted for as per Ind AS 21 - The Effects of Changes in Foreign Exchange Rates.

ELIGIBILITY FOR CAPITALIZATION

Borrowing cost that would have been avoided if the expenditure on qualifying asset had not been made should be capitalized.

The amount OF cost eligible for capitalization shall be of borrowing determined as:Borrowing Cost Eligible for Capitalization = Actual Borrowing Cost Incurred – Investment income on the temporary investment of those borrowings

CONT….It may be difficult to identify direct

relationship between particular borrowing & qualifying asset and to determine the borrowing that could have been avoided. In this case exercise of judgment is required.

QUALIFYING ASSET

Specific Borrowing cost to be Capitalised

Borrowing Cost Less

Income from Investment

General Borrowing cost to be Capitalised

Capitalisation Rate x

Expenditure Incurred

CAPITALIZATION RATE In some instance, amount of borrowing cost eligible

for capitalization shall be determined by applying a capitalization rate to the expenditure on that asset.Capitalization Rate = Weighted Average of the borrowing Cost

The amount of borrowing cost capitalized during the period shall not exceed the amount of borrowing cost it incurred during the period.

EXCESS OF CARRYING OVER RECOVERABLE AMOUNT When the carrying amount or expected ultimate

cost of the qualifying asset exceeds its recoverable amount or net realizable value, the carrying amount is written off in accordance with the requirements of other Standards. In certain circumstances, the amount of the write down or write-off is written back in accordance with those other standards.

COMMENCEMENT OF CAPITALIZATIONThe capitalization process shall begin when:Expenditure for asset are being incurred;Borrowing costs are being incurred;

Activities that are necessary to prepare the asset for its intended use or sale are in progress.

SUSPENSION OF CAPITALIZATION

An entity shall suspend capitalization of borrowing costs during extended periods in which it suspends active development of a qualifying asset.

Exceptions: If extension is due to substantial technical and

administrative work. If it is a part of the process of getting an asset ready

for its intended use or sale.

CESSATION OF CAPITALIZATION Capitalization of borrowing costs shall cease when substantially

all the activities necessary to prepare the qualifying asset for its

intended use or sale are complete.

When the construction of a qualifying asset is completed in

parts and each part is capable of being used while construction

continues on other parts, capitalization of borrowing costs shall

cease when substantially all the activities necessary to prepare

that part for its intended use or sale are completed.

DISCLOSURE

Following shall be disclosed:-

The amount of borrowing cost capitalized

during the period;

The capitalization rate used to determine

the amount of borrowing cost eligible for

capitalization.

DIFFERENCE BETWEEN IND-AS 23 AND IAS 23Ind-AS 23 provides specific guidelines on

computation of exchange difference arising from foreign currency borrowings to the extent they are regarded as adjustment to the Borrowing Cost. HOWEVER this guideline is not there in IAS 23.

Ind AS 23 AS 16

This explanation is not included in the Ind AS 23

Existing AS 16 gives explanation for meaning of ‘substantial period of time’ appearing in the definition of the term ‘qualifying asset

Capitalzation rate used to determine the borrowing cost should be disclosed

It is not required to disclose the capitalization rate

Does not require an entity to apply this standard to borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset 1.measured at fair value 2. inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis

AS -16 Does not provide for such relaxation