IND AS 23- Borrowing Costs:

Table of Contents

·      Definitions

·      Accounting Treatment:

Eligibility for Capitalization

Commencement of Capitalization

Suspension of Capitalization

Cessation of Capitalization

·      Conclusion

Definition:

Borrowing cost: The one-time or over period of time cost incurred to procure any funds, which are further to be utilized for new asset acquisition, business expansion or for routine operations, be identified as borrowing costs. Of this cost the one specifically attributable to setting-up of a qualifying asset shall be capitalized alongside its cost of acquisition or production as case be, and rest all be expensed off. This definition also would cover the interest expense relating to Ind AS 109-Financial Instruments, Ind AS 116-Leases and exchange differences as identified under Ind AS 21.

Qualifying asset: Asset that occupies a hefty time-frame to be brought to ready-to-use condition is up-front identified as a qualifying asset. However, this identification has few exceptions as noted below:

-        Asset measured at fair value;

-        Bulk quantities of inventory manufactured on repetitive basis.

Accounting treatment:

Eligibility for capitalization:

The borrowing cost could be prima facie bifurcated into two i.e. the cost pertaining to:

1.     Amount raised/borrowed for acquisition/production of specific qualifying asset; or

2.     Amount raised/borrowed in general for various business purpose and of this a certain portion being used for qualifying asset.

 Specific Borrowing: In case any amount is specifically borrowed to acquire or construct qualifying asset, the actual borrowing cost of such financing arrangement shall be entirely capitalized alongside the cost of such asset.

 General borrowings: At time, it is observed that the companies/organizations have certain limit of financing arrangements sanctioned. Of this they use the funds for varied purposes as per their requirement such as working capital needs, business expansion plans, asset acquisition/construction etc. In such circumstances, only such portion of borrowing costs as it pertains to amount used to acquire/construct qualifying asset shall be capitalized.

The amount to be capitalized shall be assessed based on capitalization rate. Capitalization rate is nothing but the weighted average of interest rates of active/outstanding financing facilities. Further, while assessing the capitalization rate, we shall not consider the funds that are borrowed for specific qualifying assets until, it is confirmed that all the costs pertaining to concerned qualifying asset has been fulfilled.

Note: In no circumstances, the assessed amount of borrowing cost to be capitalized can exceed the actual amount of borrowing costs.

Commencement of capitalization:

The borrowing costs being incurred shall begin to be capitalized only when all below 3-conditions are fulfilled simultaneously:

1.     Entity incurs expenditures for the asset;

2.     Entity incurs relevant borrowing costs;

3.     Begins to undertake activities necessary to prepare asset of intended use or sale.

 Say for example company acquired a land to set up the factory premises thereon, then interest expense thereon shall be capitalized only when the company begins to undertake the construction work for factory.

Suspension of capitalization:

At times we observe that, the asset acquisition/construction is being kept on hold for certain time frame due to various circumstances such as legal matters, funding needs, etc. In such circumstances, till the active development of asset remains on hold, the borrowing costs for the stay period shall not be capitalized but rather expensed off. Once the active development i.e. acquisition/construction proceedings is back on track, we shall again start to capitalize the borrowing costs.

Cessation of capitalization:

Effectively, when all the stages of qualifying asset development are fulfilled, in its entirety such that it is now possible to put it to planned/intended use, then we shall cease to capitalize the borrowing cost concerned with the outstanding financing facilities.

 Conclusion:

This Ind AS holds specific importance from viewpoint of assessing rightful cost/capitalizable value of any asset being put-to use. So, we need to be very much cautious while assessing the eligible amount of borrowing cost that needs to be capitalized in books and the rest that needs to be expensed off as and when incurred.