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Thread: 16 Accounting Standard 16 - Borrowing Costs - AS 16

  1. #1
    Accounting Standards
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    Default 16 Accounting Standard 16 - Borrowing Costs - AS 16


    Accounting Standard (AS) 16
    (issued 2000)
    Borrowing Costs
    (This Accounting Standard includes paragraphs set in
    bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards.)

    The following is the text of Accounting Standard (AS) 16,
    ‘Borrowing Costs’, issued by the Council of the Institute of Chartered Accountants of India. This Standard comes into effect in respect of accounting periods commencing on or after 1-4-2000 and is mandatory in nature.Paragraph 9.2 and paragraph 20 (except the first sentence) of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, stand withdrawn from this date.

  2. #2
    Accounting Standards
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    Default Objective of Accounting Standard 16 - Borrowing Costs - AS 16

    Objective of Accounting Standard 16 - Borrowing Costs - AS 16


    The objective of this Statement is to prescribe the accounting treatment for borrowing costs.

  3. #3
    Accounting Standards
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    Default Scope of Accounting Standard 16 - Borrowing Costs - AS 16

    Scope of Accounting Standard 16 - Borrowing Costs - AS 16

    1. This Statement should be applied in accounting for borrowing costs.

    2. This Statement does not deal with the actual or imputed cost of owners’ equity, including preference share capital not classified as a liability.

  4. #4
    Accounting Standards
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    Default Definitions of Accounting Standard 16 - Borrowing Costs - AS 16

    Definitions of Accounting Standard 16 - Borrowing Costs - AS 16


    3. The following terms are used in this Statement with the meanings specified:

    Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. A qualifying asset is an asset that necessarily takes a substantial period
    of time3 to get ready for its intended use or sale.


    4. Borrowing costs may include:

    (a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings;

    (b) amortisation of discounts or premiums relating to borrowings;

    (c) amortisation of ancillary costs incurred in connection with the arrangement of borrowings;

    (d) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and

    (e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.


    5. Examples of qualifying assets are manufacturing plants, power generation facilities, inventories that require a substantial period of time to bring them to a saleable condition, and investment properties. Other investments, and those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired also are not qualifying assets.

  5. #5
    Accounting Standards
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    Default Recognition of Accounting Standard 16 - Borrowing Costs - AS 16

    Recognition of Accounting Standard 16 - Borrowing Costs - AS 16


    6. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Statement. Other borrowing costs should be recognised as an expense in the period in which they are incurred.


    7. Borrowing costs are capitalised as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. Other borrowing costs are recognised as an expense in the period in which they are incurred.

  6. #6
    Accounting Standards
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    Default Borrowing Costs Eligible for Capitalisation of Accounting Standard 16 - Borrowing Costs - AS 16

    Borrowing Costs Eligible for Capitalisation of Accounting Standard 16 - Borrowing Costs - AS 16


    8. The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made. When an enterprise 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.


    9. 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. Such adifficulty occurs, for example,when the financing activity of an enterprise is co-ordinated centrally or when a range of debt instruments are used to borrow funds at varying rates of interest and such borrowings are not readily identifiable with a specific qualifying asset. As a result, the determination of the amount of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset is often difficult and the exercise of judgement is required.

    10. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings.

    11. The financing arrangements for a qualifying asset may result in an enterprise obtaining borrowed funds and incurring associated borrowing costs before some or all of the funds are used for expenditure on the qualifying asset. In such circumstances, the funds are often temporarily
    invested pending their expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalisation during a period, any income earned on the temporary investment of those borrowings is deducted from the borrowing costs incurred.

    12. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation should be determined by applying a capitalisation rate to the expenditure on that asset. The capitalisation rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of
    obtaining a qualifying asset. The amount of borrowing costs capitalised during a period should not exceed the amount of borrowing costs incurred during that period.

  7. #7
    Accounting Standards
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    Default Excess of the Carrying Amount of the Qualifying Asset over Recoverable Amount

    Excess of the Carrying Amount of the Qualifying Asset over Recoverable Amount


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

  8. #8
    Accounting Standards
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    Default Commencement of Capitalisation of Accounting Standard 16 - Borrowing Costs - AS 16

    Commencement of Capitalisation of Accounting Standard 16 - Borrowing Costs - AS 16


    14. The capitalisation of borrowing costs as part of the cost of a qualifying asset should commence when all the following conditions are satisfied:


    (a) expenditure for the acquisition, construction or production of a qualifying asset is being incurred;

    (b) borrowing costs are being incurred; and

    (c) activities that are necessary to prepare the asset for its intended use or sale are in progress.


    15. Expenditure on a qualifying asset includes only such expenditure that has resulted in payments of cash, transfers of other assets or the assumption of interest-bearing liabilities. Expenditure is reduced by any progress payments received and grants received in connection with the asset (see
    Accounting Standard 12,Accounting forGovernmentGrants). The average carrying amount of the asset during a period, including borrowing costs previously capitalised, is normally a reasonable approximation of the expenditure to which the capitalisation rate is applied in that period.


    16. The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the asset’s condition is taking place. For example, borrowing costs incurredwhile land is under development are capitalised during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualifyfor capitalisation.

  9. #9
    Accounting Standards
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    Default Suspension of Capitalisation Accounting Standard 16 - Borrowing Costs - AS 16

    Suspension of Capitalisation Accounting Standard 16 - Borrowing Costs - AS 16


    17. Capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted.

    18. Borrowing costs may be incurred during an extended period in which the activities necessary to prepare an asset for its intended use or sale are interrupted. Such costs are costs of holding partially completed assets and do not qualify for capitalisation. However, capitalisation of borrowing costs is not normally suspended during a period when substantial technical and administrativework is being carried out. Capitalisation of borrowing costs is also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. For example,
    capitalisation continues during the extended period needed for inventories to mature or the extended period during which high water levels delay construction of a bridge, if such high water levels are common during the construction period in the geographic region involved.

  10. #10
    Accounting Standards
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    Default Cessation of Capitalisation of Accounting Standard 16 - Borrowing Costs - AS 16

    Cessation of Capitalisation of Accounting Standard 16 - Borrowing Costs - AS 16


    19. Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.


    20. An asset is normally ready for its intended use or salewhen its physical construction or production is complete even though routine administrative workmight still continue. Ifminormodifications, such as the decoration of a property to the user’s specification, are all that are outstanding, this indicates that substantially all the activities are complete.


    21. When the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalisation of borrowing costs in relation to a part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are complete.

    22. A business park comprising several buildings, each of which can be used individually, is an example of a qualifying asset for which each part is capable of being used while construction continues for the other parts. An example of a qualifying asset that needs to be complete before any part can be used is an industrial plant involving several processes which are carried out in sequence at different parts of the plant within the same site, such as a steelmill.

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