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Summary of Ind AS - 23 Borrowing Cost

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    Ind AS- 23 Borrowing Cost Ind AS- 23 Borrowing Cost Core Principle 1. Borrowing Cost which are directly attributable to acquisition, construction or production of a QUALIFYING ASSET are included in the COST OF ASSET. 2. Other borrowing costs are recognized as EXPENSE. Applicability 1. This standard does not apply to actual or imputed cost of equity, including preferred capital not classified as liability. Ex: Dividend paid on equity shares, cost of issuance of equity, cost on irredeemable preference share capital will not be included as borrowing cost. *Imputed Cost: An imputed cost is a cost that is incurred by virtue of using an asset instead of investing in it or undertaking an alternative cost of action. It is an invisible cost not incurred directly. Ex: To get a full-time four year college education, one may need to forgo the opportunity of working full time and earning Rs 20,000 per year in that period. The Rs 20,000 is the imputed cost 2. This standard does not apply to the acquisition, construction or production of a) A Qualifying Asset measured at Fair Value under Ind AS-41. b) Inventories which are manufactured or otherwise produced, in large quantities and on repetitive basis and that takes substantial period to get ready for sale. (Whisky, Wine) Definitions Borrowing Cost: Interest and other costs that an entity incurs in connection with borrowing of funds. Qualifying Asset: An asset which takes substantial amount of time to get ready for its intended use or sale. Borrowing cost includes 1. Interest expense calculated using effective interest method -Ind AS-109 Financial instruments. 2. Finance charges in respect of Finance Leases - Ind AS-17 Leases. 3. Exchange difference arising from foreign currency borrowings to the extent they are recognized as an adjustment to interest costs. Page 1
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    Ind AS- 23 Borrowing Cost Exchange difference to be included in borrowing costs Adjustment should be an amount which is Equivalent to the EXTENT to which Exchange loss does not exceed the difference between Cost of borrowing in functional currency and Cost of borrowing in foreign currency (Exchange difference capitalised cannot exceed the difference between Cost of borrowing in functional currency and Cost of borrowing in foreign currency) SL NO 1. 2. 3. CONDITION Exchange Loss > Cost of borrowing in functional currency Exchange Loss < Cost of borrowing in functional currency Exchange Gain TOTAL ELIGIBLE BORROWING COST TO BE CAPITALISED Cost of Borrowing in Functional Currenc Borrowing Cost in Foreign Currenc + Exchan e Loss Borrowing Cost in Foreign Currenc When there is an Unrealized exchange loss which is treated as an adjustment to interest and subsequently there is unrealized or realized gain in respect of settlement or translation of the same borrowing Gain to the extent of Loss previously recognized as an adjustment Should also be recognized as an adjustment to the interest (Deduct the exchange gain to the extent of exchange loss previously capitalized) KEY NOTE ON QUALIFYING ASSETS ' Financial assets and inventories that are manufactured, or otherwise produced, over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets. Page 2
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    Ind AS- 23 Borrowing Cost RECOGNTION , Borrowing costs that are DIRECTLY ATTRIBUTABLE to the acquisition, construction or production of a qualifying asset are CAPITALIZED as part of the cost of the qualifying asset. Conditions for Capitalization 1. when it is probable it will result in future economic benefits to the entity 2. Cost can be measured reliably. Other borrowing costs are recognized as an EXPENSE in the period in which they are incurred. When an entity applies Ind AS 29 Financial Reporting in Hyperinflationary Economies, it recognises as an expense the part of borrowing costs that compensates for inflation during the same period. BORROWING COST ELIGIBLE FOR CAPITALIZATION 1. 2. Specific Borrowing Cost In this case entity borrows funds specifically for the purpose of obtaining a qualifying asset. Actual borrowing costs incurred on borrowing during the period Less: Any income on temporary investment of those borrowings Amount of Borrowing Cost Eligible for capitalisation General Borrowing Cost xxx xxx xxx In this case the qualifying asset is funded from a pool of general borrowings. Hence the amount of the borrowing cost eligible for capitalization is not so obvious. Calculation of Capitalisation rate The capitalisation rate is the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. [Specific borrowings should NOT be considered for calculation of capitalisation rate]. The amount of borrowing costs that an entity capitalises during a period shall not exceed the amount of borrowing costs it incurred during that period. (Capitalisation rate is the weighted average cost of non-specific borrowings for the Period) Page 3
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    Capitalisation Rate = Ind AS- 23 Borrowing Cost Total General Borrowing Cost(Excluding Specific Borrowings) *100 Total General Borrowings(Excluding Specific Borrowings) Interest to be capitalised = Total of ( ** Wei hted Expenditure incurred on the asset * capitalisation rate) Weighted Expenditure incurred = Expenditure incurred * Period for which Expense was o/s 12 COMMENCEMENT OF CAPITALISATION Commencement of borrowing cost should commence when ALL of the following conditions are satisfied 1. Expenditure on Qualifying Asset being incurred 2. Borrowing costs are incurred 3. Undertakes *activities that are necessary to prepare the asset for its intended use or sale *Note: These activities include • Physical Construction of the asset • Technical and Administrative work prior to the commencement of physical construction i.e. obtaining permits for construction from local authorities, etc. Borrowing cost incurred when necessary activities are NOT in progress, should be charged to P/L statement SUSPENSION OF CAPITALISATION Capitalisation of borrowing costs should be suspended when there is NO active development or Active development is interrupted Note: Capitalisation should not be SUSPENDED 1. When substantial technical and administrative work is being carried out. 2. When a temporary delay is necessary part of getting an asset ready for its intended use or sale.(E.g. capitalisation continues during the extended period that high water levels delay construction of a bridge, if such high water levels are common during the construction period in the geographical region involved) Page 4
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    Ind AS- 23 Borrowing Cost CESSATION OF CAPITALISATION Capitalisation of borrowing costs should be stopped when Substantially all the activities necessary to prepare the qualifying asset for its intended sale or use is COMPLETE • Even though routine administrative work might still exist it can be treated as substantially complete. •If minor works such as decoration etc are pending, it can be considered as substantially completed When a Qualifying asset is completed in parts Capitalisation of borrowing costs should be stopped when any completed part is capable of being used while construction continues for other parts DISCLOSURE 1. Amount of borrowing costs capitalised during the period 2. Capitalisation rate used to determine the amount of borrowing cost eligible for capitalisation. IND AS -23 versus AS - 16 SL NO 1. 2. Page 5 Particulars Qualifying Asset measured at Fair Value Applicability to Inventories IND AS- 23 Ind AS 23 does not require an entity to apply this standard to borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset measured at fair value, for example, a biological asset Excludes acquisition, construction or production of inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis AS-16 AS 16 does not provide for such scope relaxation AS 16 does not provide for such scope relaxation and is applicable to borrowing costs related to all inventories that require substantial period of time to bring them in saleable condition
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    Ind AS- 23 Borrowing Cost 3. 4. 5. 6. Page 6 Inclusion as Borrowing Cost Explanation of substantial period of time Reporting in Hyperinflationary Economies Disclosure of Capitalisation Rate Ind AS 23 requires to calculate the interest expense using the effective interest rate method as described in Ind AS 109. Certain items therein have been deleted, as some of those components of borrowing costs are considered as the components of interest expense calculated using the effective interest rate method. Explanation not provided in Ind AS - 23 Ind AS 23 provides that when Ind AS 29, 'Financial Reporting in Hyperinflationary Economies', is applied, part of the borrowing costs that compensates for inflation should be expensed as required by that Standard (and not capitalized in respect of qualifying assets). Ind AS -23 requires disclosure of capitalization rate used to determine the amount of borrowing costs eligible for capitalization. AS 16, Borrowing Costs, inter alia, include the following: • interest and commitment charges on bank borrowings and other short-term and long-term borrowings; • amortisation of discounts or premiums relating to borrowings; • amortisation of ancillary costs incurred in connection with the arrangement of borrowings AS 16 gives explanation for meaning of 'substantial period of time' appearing in the definition of the term qualifying asset'. AS 16 does not contain a similar clarification because at present, in India, there is no Standard on ' Financial Reporting in Hyperinflationary Economies'. AS 16 does not have this disclosure requirement.
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    Ind AS- 23 Borrowing Cost Page 7

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