Ind AS-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 form part of 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.

Borrowing Cost

Borrowing costs are defined as interest and other costs that an entity incurs in connection with the borrowing of funds.

Borrowing costs may include:

• Finance charges in respect of finance leases recognised in accordance with Ind AS 17 Leases.
• Interest expense calculated using the effective interest method as described in Ind AS 39 Financial Instruments.
• Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Need and Objective

Entities has to borrow funds in order to acquire, build and install PPE and these assets take time to make them usable or saleable, therefore the entity incur the interest (cost on borrowings) to acquire and build these assets .The objective of this standard is to prescribe the treatment of borrowing cost (interest +other cost) in accounting, whether the cost of borrowing should be included in the cost of assets or not. 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 recognized as an expense.

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.

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. It may include:

• Interest expense calculated using the effective interest method as described in Ind AS 109, Financial Instruments.
• Interest in respect of lease liabilities recognised in accordance with Ind AS 116, Leases.
• Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Borrowing costs

Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds

Qualifying asset

It is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale, Examples:

• Manufacturing plants
• Inventories
• Power generation facilities
• Investment properties
• Intangible assets

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.

Substantial Period of Time

It is based on facts and circumstances of each case. Ordinarily Substantial period =A Period of 12 months.

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.

The amount of borrowing costs eligible for capitalization is the actual borrowing costs incurred on those funds during the period reduced by any investment income earned on the 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:

Cessation of capitalisation

• Borrowing cost is not being incurred.
• Substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.

Measurement

It depends on the following

1. Funds Borrowed Specifically
2. Funds Borrowed Generally.

Funds Borrowed Specifically

Amount of Borrowing Cost eligible for Capitalization =Actual interest plus related expenses Incurred less Investment Income from Excess idle Borrowings.

Funds Borrowed Generally

• Amount of Borrowing cost eligible for Capitalization =Amount of Qualifying Asset × Weighted Average Capitalization Rate
• Weighted Average Capitalization Rate=Total borrowing Cost/Total average outstanding ×100.
• Amount of Borrowing cost capitalized cannot exceed the amount of borrowing cost incurred during that period.