borrowing cosct - as 16
Post on 03-Apr-2018
215 Views
Preview:
TRANSCRIPT
-
7/29/2019 Borrowing Cosct - As 16
1/20
Borrowing cost AS 16
Prashant M Maharishi
-
7/29/2019 Borrowing Cosct - As 16
2/20
Application
Applies to accounting period commencingon or after 1/4/2000.
Mandatory in nature
Relevant Para 9.2 of AS 10 of financing
cost treatment is withdrawn Relevant part of Para 20 related to Finance
cost is also withdrawn
Does not apply to actual or imputed cost of
owners equity including preference sharecapital not classified as liability
Other ASI 1 Substantial period of time, ASI10 interpretation of Para 4 (e),
-
7/29/2019 Borrowing Cosct - As 16
3/20
Need for standard
Huge borrowing cost are incurred by the
company in putting up Infrastructure for
which no guidance available existence of
AS 10
Some of the corporate also capitalized
interest in inventory valuation which was
not fair- existence of AS 2
-
7/29/2019 Borrowing Cosct - As 16
4/20
What is borrowing cost
It is interest and other
cost
Incurred by an enterprise
In connection with
borrowing of funds.
-
7/29/2019 Borrowing Cosct - As 16
5/20
Borrowing cost may include
a) Interest & commitment charges
b) Amortization of discounts or
premium on borrowing
c) Amortization of ancillary cost forarrangement of borrowing
d) Finance charges on assets
acquired on finance leasee) Exchange difference on FCB as an
adjustment to interest cost
-
7/29/2019 Borrowing Cosct - As 16
6/20
What is a qualifying asset?
It is an asset.
It may be tangible or intangible
It may be current assets fixed
assets
It applies to Investment properties
That necessarily takes
Substantial period of time To get ready for its intended use or sale
-
7/29/2019 Borrowing Cosct - As 16
7/20
Recognition
a) BC directly attributable to be
capitalized
if probable future economic
benefits to the enterprise
Bc can be measured reliably.
a) Other BC are to be expensedin the period of incurring
-
7/29/2019 Borrowing Cosct - As 16
8/20
Capitalization of BC
BC that would have been avoided ifexp on qualifying assets is not madeis cost directly attributable to QA
In complex situation, exercise your
judgment in recognizing fordetermine BC
Temporary income of fundsborrowed specifically should be
adjusted from BC General borrowing apply weighted
average cost of borrowing
-
7/29/2019 Borrowing Cosct - As 16
9/20
Capitalization of BC
IF carrying amount of
QA
-
7/29/2019 Borrowing Cosct - As 16
10/20
Commencement &
Suspension of capitalization
Capitalization on satisfaction of :- Exp on QA for acquisition/ construction /
production incurred.
Borrowing cost is incurred
Activities for preparing QA intended use or sale
in progress
Total amt of exp incurred including BC shall be
the amount on which capitalization rate is
applied
Period of No activity in which QAs condition
does not change is excluded.
-
7/29/2019 Borrowing Cosct - As 16
11/20
Suspension of capitalization
BC capitalization suspended during
extended periods in which active
development is interrupted.
Such cost are cost of partially developed
QA
No suspension allowed during temporary
delay which is a necessary part of process
of getting QA ready.
-
7/29/2019 Borrowing Cosct - As 16
12/20
Cessation of Capitalization of
BC
Substantially all activities arecomplete
Pending routine administrative
matters does not allowcapitalization of BC
Part completion when part is
capable of use independently,provision should be applied as ifit is an independent QA
-
7/29/2019 Borrowing Cosct - As 16
13/20
Disclosure
A. Accounting policy adopted for
borrowing cost
B. The amount of borrowing cost
capitalized during the period
-
7/29/2019 Borrowing Cosct - As 16
14/20
Auditors Checklist
C:\Documents and Settings\pmm\Desktop\Checklist for Auditor Accounting standard 16
borrowing Costs.doc
http://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.dochttp://localhost/var/www/apps/conversion/tmp/Checklist%20for%20Auditor%20Accounting%20standard%2016%20borrowing%20%20Costs.doc -
7/29/2019 Borrowing Cosct - As 16
15/20
Issues
Whether BC of preference share capital can becapitalized?
Treatment of fees paid for prepayment of loan
Restructuring of loans and interest payablethereon whether eligible for capitalization?
BC on working capital finance can be capitalized?
What happens to waiver of Interest alreadycapitalized?
Interest payments on Inventory can be included inthe valuation of closing stock?
Addition of Interest to the cost of investments ispossible?
What is substantial period of time? ASI 1 - says 12months time.
-
7/29/2019 Borrowing Cosct - As 16
16/20
Practical issues
1. R ltd has borrowed Rs.25 crores from financial
institution during the financial year 2001-02. these
borrowings are used to invest in shares of A Ltd, a
subsidiary company, which is implementing a new
project estimated to cost 50 crores. As on 31st March,
2002 since the said project was not yet complete, theDirectors of R Ltd, resolved to capitalize the interest on
the borrowings amounting to Rs. 3 crores and add it to
the cost of investments. As statutory auditor, please
comment.
2. A fast food chain takes about 6 months to open a new
retail outlet. Can it capitalize borrowing cost incurred inconnection with setting up the new outlet?
-
7/29/2019 Borrowing Cosct - As 16
17/20
Practical issues ASI 10
3. XYZ Ltd. has taken a loan of USD 10,000 on April 1, 20X3 fora specific project at an interest rate of 5% p.a. payableannually. On April 1, 20X3, the exchange rate between thecurrencies was Rs. 45 per USD. The exchange rate, as atMarch 31, 20X4, is Rs.48 per USD. The correspondingamount could have been borrowed by XYZ Ltd. in localcurrency at an interest rate of 11 percent per annum as on
April 1, 20X3.
The following computation would be made to determine theamount of borrowing costs for the purposes of paragraph 4(e)of AS 16;
Interest for the period = USD 10,000 x 5% x Rs. 48/USD =Rs. 24,000/-
Increase in the liability towards the principal amount = USD10,000 x (48-45) = Rs. 30,000/-
Interest that would have resulted if the loan was taken inIndian currency = USD 10000 x 45 x 11%) = Rs. 49,500
Difference between interest local currency borrowing andforeign currency borrowing = Rs.49,5000 Rs.24,000 = Rs.25,500
-
7/29/2019 Borrowing Cosct - As 16
18/20
Practical issues
4. A Refinery started erecting in June 1997. Till2001 erection work continued. In 2001 work wassuspended because of financial crunches. In2005 work was restarted. In September 2006refinery started its operation in part and sellingrefined petrol etc. However it could refine only
sweet crude till may 2007 because of one unit ofrefinery could not be set up. It is contended byCompany that Till May 2007 all production andsales is trial run of the company. Huge borrowingcost are incurred by the company during theperiod 1997 to 2007. Till now all expensesincluding interest cost is debited in expenditureduring construction period. Please advise :-What will happen to Interest cost a) from 1997to 2001 b) 2001 to 2005 c) September 2006 tomarch 2007 d) March 2007 to May 2007.
-
7/29/2019 Borrowing Cosct - As 16
19/20
Practical Issues
5. On April 1, 2005, MGH constructions undertook construction of a factorybuilding for expansion purpose. Total cost of project was Rs. 3,00,00,000.The Building was completed by end of March 2006 and during the periodfollowing payments were made:
Payment made
1 April 2005 - 20,00,000 ,
30 June 2005 - 60,00,000 ,
31 December 2005 - 1,80,00,000
and 31 March 2006 - 40,00,000Total 3,00,00,000
MGH constructions borrowings as at March 31, 2006 were as follows;
9% term loan amounting to Rs.80,00,000 taken on December 31, 2004.Simple interest is payable annually. Amount outstanding as at March 31,2005 and during 05-06 is Rs.80,00,000. the loan was taken specifically forthe project.
11% debentures issued on March 31, 2004 with simple interest payable
annually. Amount outstanding for the year 05-06 is rs.1,50,00,000.10% bonds issued on December 31,2003 amounting to Rs.1,70,00,000.simple interest payable at annual rest. Amount outstanding for the year 05-06 is rs.1,60,00,000.
How much borrowing cost should be capitalized for construction of thebuilding as per AS-16 borrowing Cost?
-
7/29/2019 Borrowing Cosct - As 16
20/20
Practical issues
6. A company obtained term loan during the yearended 31st March, 2002 to the extent of Rs. 650lakhs for modernization and development of itsfactory. Buildings worth Rs. 120 lakhs werecompleted and Plant and Machinery worth Rs. 350lakhs were installed by 31st March, 2002. A sum of
Rs. 70 lakhs has been advanced for assets, theinstallation of which is expected in the followingyear. Rs. 100 lakhs has been utilized for WorkingCapital requirements. Interest paid on the loan ofRs. 650 lakhs during the year 2001-2002 amountedto Rs. 25.50 lakhs. How should the interest amountbe treated in the Accounts of the Company?
top related