Accounting Standard (AS) 16
(issued 2000)
Borrowing Costs
Contents
OBJECTIVE
SCOPE Paragraphs 1-2
DEFINITIONS 3-5
RECOGNITION 6-22
Borrowing Costs Eligible for Capitalisation 8-12
Excess of the Carrying Amount of the Qualifying Asset over
Recoverable Amount 13
Commencement of Capitalisation 14-16
Suspension of Capitalisation 17-18
Cessation of Capitalisation 19-22
DISCLOSURE 23
The following Accounting Standards Interpretations (ASIs) relate to AS 16:
ASI 1- Substantial Period of Time
ASI 10- Interpretation of paragraph 4(e) of AS 16
The above Interpretations are published elsewhere in this Compendium.
Borrowing Costs 303
Accounting Standard (AS) 16
(issued 2000)
BorrowingCosts
(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 Standards1.)
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.2 Paragraph
9.2 and paragraph 20 (except the first sentence) of Accounting Standard
(AS) 10, ‘Accounting for Fixed Assets’, stand withdrawn from this date.
Objective
The objective of this Statement is to prescribe the accounting treatment for
borrowing costs.
Scope
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.
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which
Accounting Standards are intended to apply only to items which are material.
2 Reference may be made to the section titled ‘Announcements of the Council
regarding status of various documents issued by the Institute of Chartered
Accountants of India’ appearing at the beginning of this Compendium for a detailed
discussion on the implications of the mandatory status of an accounting standard.
304 AS 16 (issued 2000)
Definitions
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
costs4 .
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.
3 See also Accounting Standards Interpretation (ASI) 1 published elsewhere in this
Compendium.
4 See also Accounting Standards Interpretation (ASI) 10 published elsewhere in
this Compendium.
Recognition
Borrowing Costs 305
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.
Borrowing Costs Eligible for Capitalisation
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 adifficultyoccurs, 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
306 AS 16 (issued 2000)
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.
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.
Commencement of Capitalisation
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.
Borrowing Costs 307
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.
Suspension of Capitalisation
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.
308 AS 16 (issued 2000)
Cessation of Capitalisation
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.
Disclosure
23. The financial statements should disclose:
(a) the accounting policy adopted for borrowing costs; and
(b) the amount of borrowing costs capitalised during the period.
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