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AS - 16 - Borrowing Costs - Companies (Accounting Standards) Rules, 2021

Extract

..... rd with the meanings specified: 3.1 Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. 3.2 A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Explanation: What constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale is considered. 4. Bor .....

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AS - 16 - Borrowing Costs - Companies (Accounting Standards) Rules, 2021

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..... tion is illustrated in the Illustration attached to the Standard. 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. Recognition 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 ass .....

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AS - 16 - Borrowing Costs - Companies (Accounting Standards) Rules, 2021

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..... 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 as .....

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AS - 16 - Borrowing Costs - Companies (Accounting Standards) Rules, 2021

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..... rrowing 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 for Government Grants). The average carrying amo .....

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AS - 16 - Borrowing Costs - Companies (Accounting Standards) Rules, 2021

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..... 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. 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 sale when its physical construction .....

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AS - 16 - Borrowing Costs - Companies (Accounting Standards) Rules, 2021

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..... 20X3, for a specific project at an interest rate of 5% p.a., payable annually. On April 1, 20X3, the exchange rate between the currencies was Rs. 45 per USD. The exchange rate, as at March 31, 20X4, is Rs. 48 per USD. The corresponding amount could have been borrowed by XYZ Ltd. in local currency at an interest rate of 11 per cent annum as on April 1, 20X3. The following computation would be made to determine the amount of borrowing costs for the purposes of paragraph 4(e) of AS 16: (i) Interest for the period = USD 10,000 × 5% × Rs. 48/USD = Rs. 24,000. (ii) Increase in the liability towards the principal amount = USD 10,000 × (48 45) = Rs. 30,000. (iii) Interest that would have resulted if the loan was taken in Indian c .....

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AS - 16 - Borrowing Costs - Companies (Accounting Standards) Rules, 2021

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