Fundazone’s Reading Notes on Ind AS
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Ind AS 23 – Borrowing Cost
Scope
An entity shall apply this Standard in accounting for borrowing costs.
The Standard does not deal with the actual or imputed cost of equity, including
preferred capital not classified as a liability.
An entity is not required to apply the 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 within the
scope of Ind AS 41 Agriculture; or
inventories that are manufactured, or otherwise produced, in large quantities on a
repetitive basis.
Key Terms
Borrowing Cost (Para 5) –
Borrowing costs are interest and other costs that an entity incurs in connection with
the borrowing of funds.
It “MAY” include (Para 6) -
interest expense calculated using the effective interest method (as per Ind AS 109)
Finance charges in respect of finance leases recognised in accordance with Ind AS
17, Leases; and
Exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs.
Qualifying Asset (Para 5) –
A qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale.
Depending on the circumstances, any of the following may be qualifying assets:
(a) inventories
(b) manufacturing plants
(c) power generation facilities
(d) intangible assets
(e) investment properties
(f) bearer plants.
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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.
Computation of Borrowing Cost
General Borrowings vs. Specific Borrowings?
Specific Borrowing Cost
To the extent that an entity borrows funds specifically for the purpose of obtaining a
qualifying asset, the entity shall determine the amount of borrowing costs eligible for
capitalisation as the actual borrowing costs incurred on that borrowing during the
period less any investment income on the temporary investment of those borrowings.
[Para 12]
i.e. Borrowing Cost = Actual Borrowing Cost Minus Investment Income on Temporary
Investment of Those Borrowings
General Borrowing Cost / Non Specific Borrowing Cost [Para 14]
To the extent that an entity borrows funds generally and uses them for the purpose of
obtaining a qualifying asset, the entity shall determine the amount of borrowing costs
eligible for capitalisation by applying a capitalisation rate to the expenditures on that
asset.
Capitalisation Rate = Weighted Average Borrowing Cost on Non Specific Borrowings
WABC = Non Specific Borrowing Cost / Weighted Average Borrowings Outstanding
during the period
Accounting Treatment – General
Accounting Treatment (Para 1/8)
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 in the period in which they are
incurred.
Accounting Treatment – Special Cases
Exchange Rate Differences & Borrowing Cost (Para 6A)
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Exchange Rate Loss to the extent of notional savings in cost of borrowing (i.e. difference
between cost of borrowing in functional currency and cost of borrowing in foreign
currency) will be treated as adjustment to Borrowing Cost.
Exchange Rate Loss can be realized (where the Foreign Currency Loan is fully settled)
or unrealized (Forex Loan is still outstanding as at the reporting date).
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. (Effectively subsequent exchange rate gains can reduce the borrowing cost, if
previous exchange rate losses were added to borrowing cost)
Capitalisation Guidelines
What to Capitalize?
An entity shall capitalise borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset as part of the cost of that
asset. [Para 8]
Basic Conditions for Capitalisation?
Borrowing costs are capitalised as part of the cost of the asset when it is probable that
they will result in future economic benefits to the entity and the costs can be measured
reliably. Exception: 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 in accordance with paragraph
21 of that Standard. [Para 9]
When will Capitalisation of Borrowing Cost commence? [Para 17/18]
An entity shall begin capitalising borrowing costs as part of the cost of a qualifying asset
on the commencement date. The commencement date for capitalisation is the date
when the entity first meets all of the following conditions:
(a) it incurs expenditures for the asset; [Note 1]
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for its intended use
or sale. [Note 2]
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Note 1: Expenditures on a qualifying asset? Only those expenditures that have resulted
in payments of cash, transfers of other assets or the assumption of interest-bearing
liabilities.
.
Note 2: (Para 19) The activities necessary to prepare the asset 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..
Suspension of capitalisation [Para 20-21]
An entity shall suspend capitalisation of borrowing costs during extended periods
in which it suspends active development of a qualifying asset.
An entity may incur borrowing costs during an extended period in which it suspends
the activities necessary to prepare an asset for its intended use or sale. Such costs
are costs of holding partially completed assets and do not qualify for capitalisation.
However, an entity does not normally suspend capitalising borrowing costs during
a period when it carries out substantial technical and administrative work. An entity
also does not suspend capitalising borrowing costs 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 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.
Cessation of capitalisation [Para 22 to 25]
An entity shall cease capitalising borrowing costs when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.
An asset is normally ready for its intended use or sale when the physical
construction of the asset is complete even though routine administrative work
might still continue. If minor modifications, such as the decoration of a property to
the purchaser’s or user’s specification, are all that are outstanding, this indicates
that substantially all the activities are complete.
When an entity completes the construction of a qualifying asset in parts and each
part is capable of being used while construction continues on other parts, the entity
shall cease capitalising borrowing costs when it completes substantially all the
activities necessary to prepare that part for its intended use or sale.
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Example 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 usable while construction continues on other parts.
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 steel mill.
Disclosure
(a) the amount of borrowing costs capitalised during the period; and
(b) the capitalisation rate used to determine the amount of borrowing costs eligible for
capitalisation.
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