ICAI Notes- Unit 4: Assets Based Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
ADVANCED ACCOUNTING  
 5.112 
 
 
 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD 16  
BORROWING COSTS 
 
 
 
After studying this unit, you will be able to recognize – 
? Meaning of Borrowing costs;  
? Definition of Qualifying Asset;  
? Accounting treatment for borrowings – Specific and general 
borrowings;  
? Time when does Commencement of Capitalisation takes place;  
? Time when does Suspension  and cessation of Capitalisation takes 
place;  
? Disclosure requirements for this standard. 
4.1 INTRODUCTION 
The objective of AS 16 is to prescribe the accounting treatment for borrowing 
costs. It does not deal with the actual or imputed cost of owners’ equity, including 
preference share capital not classified as a liability. 
Clarification Chart: 
Particulars  Remarks – Is the fund covered 
by AS 16? 
Equity share capital  No  
Retained earnings  No  
Preference Share Capital classified as a 
liability  
Yes  
Preference Share Capital classified as equity  No 
© The Institute of Chartered Accountants of India
Page 2


 
ADVANCED ACCOUNTING  
 5.112 
 
 
 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD 16  
BORROWING COSTS 
 
 
 
After studying this unit, you will be able to recognize – 
? Meaning of Borrowing costs;  
? Definition of Qualifying Asset;  
? Accounting treatment for borrowings – Specific and general 
borrowings;  
? Time when does Commencement of Capitalisation takes place;  
? Time when does Suspension  and cessation of Capitalisation takes 
place;  
? Disclosure requirements for this standard. 
4.1 INTRODUCTION 
The objective of AS 16 is to prescribe the accounting treatment for borrowing 
costs. It does not deal with the actual or imputed cost of owners’ equity, including 
preference share capital not classified as a liability. 
Clarification Chart: 
Particulars  Remarks – Is the fund covered 
by AS 16? 
Equity share capital  No  
Retained earnings  No  
Preference Share Capital classified as a 
liability  
Yes  
Preference Share Capital classified as equity  No 
© The Institute of Chartered Accountants of India
 
 
 ASSETS BASED ACCOUNTING STANDARDS 
 
 
    
v 
 5.113 
 
4.2 DEFINITIONS 
Borrowing costs are interest and other costs incurred by an enterprise in 
connection with the borrowing of funds. 
 
A qualifying asset is an asset (Tangible or intangible) that necessarily takes a 
substantial period of time to get ready for its intended use or sale. 
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. 
Clarification Chart:  
Particulars  Is it a qualifying asset? 
PPE (Property, plant and equipment) Yes  
Intangible assets  Yes  
Investment Properties  
(Building meant for capital appreciation 
and earning rental income) 
Yes  
Borrowing Cost
Interest & 
Commitment 
charges on 
Borrowings
Amortisation 
of Discount/
Premium on 
Borrowings
Amortisation 
of ancillary 
costs 
relating to 
Borrowings
Finance 
charges for 
assets 
acquired on 
Finance 
Lease
Exchange 
Differences*
*To the extent they are regarded as an adjustment to interest cost 
 
© The Institute of Chartered Accountants of India
Page 3


 
ADVANCED ACCOUNTING  
 5.112 
 
 
 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD 16  
BORROWING COSTS 
 
 
 
After studying this unit, you will be able to recognize – 
? Meaning of Borrowing costs;  
? Definition of Qualifying Asset;  
? Accounting treatment for borrowings – Specific and general 
borrowings;  
? Time when does Commencement of Capitalisation takes place;  
? Time when does Suspension  and cessation of Capitalisation takes 
place;  
? Disclosure requirements for this standard. 
4.1 INTRODUCTION 
The objective of AS 16 is to prescribe the accounting treatment for borrowing 
costs. It does not deal with the actual or imputed cost of owners’ equity, including 
preference share capital not classified as a liability. 
Clarification Chart: 
Particulars  Remarks – Is the fund covered 
by AS 16? 
Equity share capital  No  
Retained earnings  No  
Preference Share Capital classified as a 
liability  
Yes  
Preference Share Capital classified as equity  No 
© The Institute of Chartered Accountants of India
 
 
 ASSETS BASED ACCOUNTING STANDARDS 
 
 
    
v 
 5.113 
 
4.2 DEFINITIONS 
Borrowing costs are interest and other costs incurred by an enterprise in 
connection with the borrowing of funds. 
 
A qualifying asset is an asset (Tangible or intangible) that necessarily takes a 
substantial period of time to get ready for its intended use or sale. 
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. 
Clarification Chart:  
Particulars  Is it a qualifying asset? 
PPE (Property, plant and equipment) Yes  
Intangible assets  Yes  
Investment Properties  
(Building meant for capital appreciation 
and earning rental income) 
Yes  
Borrowing Cost
Interest & 
Commitment 
charges on 
Borrowings
Amortisation 
of Discount/
Premium on 
Borrowings
Amortisation 
of ancillary 
costs 
relating to 
Borrowings
Finance 
charges for 
assets 
acquired on 
Finance 
Lease
Exchange 
Differences*
*To the extent they are regarded as an adjustment to interest cost 
 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 5.114 
Inventory  Yes – If they require a substantial 
period of time to bring them to a 
saleable condition. 
Investments (Financial assets)  No  
Accounting standard further clarifies the meaning of the expression ‘substantial 
period of time’. According to it, substantial period of time primarily depends on 
the facts and circumstances of each case. It further states that, 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 the facts and circumstances of the 
case. Therefore, a rebuttable presumption of a period of twelve months is 
considered “substantial” period of time. In estimating the period, time which an 
asset takes technologically and commercially to get it ready for its intended use 
or sale should be considered. 
4.3 EXCHANGE DIFFERENCES ON FOREIGN 
CURRENCY BORROWINGS  
Exchange differences arising from foreign currency borrowing and considered as 
borrowing costs are those exchange differences which arise on the amount of 
principal of the foreign currency borrowings to the extent of the difference 
between interest on local currency borrowings and interest on foreign currency 
borrowings. Thus, the amount of exchange difference not exceeding the 
difference between interest on local currency borrowings and interest on foreign 
currency borrowings is considered as borrowings cost to be accounted for under 
this Standard and the remaining exchange difference, if any, is accounted for 
under AS 11, ‘The Effect of Changes in Foreign Exchange Rates ’. For this 
purpose, the interest rate for the local currency borrowings is considered as that 
rate at which the enterprise would have raised the borrowings locally had the 
enterprise not decided to raise the foreign currency borrowings. 
Clarification Chart:  
Particulars  Accounting Treatment  
Exchange 
Gain  
Credited to P&L  
© The Institute of Chartered Accountants of India
Page 4


 
ADVANCED ACCOUNTING  
 5.112 
 
 
 
LEARNING OUTCOMES 
UNIT 4: ACCOUNTING STANDARD 16  
BORROWING COSTS 
 
 
 
After studying this unit, you will be able to recognize – 
? Meaning of Borrowing costs;  
? Definition of Qualifying Asset;  
? Accounting treatment for borrowings – Specific and general 
borrowings;  
? Time when does Commencement of Capitalisation takes place;  
? Time when does Suspension  and cessation of Capitalisation takes 
place;  
? Disclosure requirements for this standard. 
4.1 INTRODUCTION 
The objective of AS 16 is to prescribe the accounting treatment for borrowing 
costs. It does not deal with the actual or imputed cost of owners’ equity, including 
preference share capital not classified as a liability. 
Clarification Chart: 
Particulars  Remarks – Is the fund covered 
by AS 16? 
Equity share capital  No  
Retained earnings  No  
Preference Share Capital classified as a 
liability  
Yes  
Preference Share Capital classified as equity  No 
© The Institute of Chartered Accountants of India
 
 
 ASSETS BASED ACCOUNTING STANDARDS 
 
 
    
v 
 5.113 
 
4.2 DEFINITIONS 
Borrowing costs are interest and other costs incurred by an enterprise in 
connection with the borrowing of funds. 
 
A qualifying asset is an asset (Tangible or intangible) that necessarily takes a 
substantial period of time to get ready for its intended use or sale. 
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. 
Clarification Chart:  
Particulars  Is it a qualifying asset? 
PPE (Property, plant and equipment) Yes  
Intangible assets  Yes  
Investment Properties  
(Building meant for capital appreciation 
and earning rental income) 
Yes  
Borrowing Cost
Interest & 
Commitment 
charges on 
Borrowings
Amortisation 
of Discount/
Premium on 
Borrowings
Amortisation 
of ancillary 
costs 
relating to 
Borrowings
Finance 
charges for 
assets 
acquired on 
Finance 
Lease
Exchange 
Differences*
*To the extent they are regarded as an adjustment to interest cost 
 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 5.114 
Inventory  Yes – If they require a substantial 
period of time to bring them to a 
saleable condition. 
Investments (Financial assets)  No  
Accounting standard further clarifies the meaning of the expression ‘substantial 
period of time’. According to it, substantial period of time primarily depends on 
the facts and circumstances of each case. It further states that, 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 the facts and circumstances of the 
case. Therefore, a rebuttable presumption of a period of twelve months is 
considered “substantial” period of time. In estimating the period, time which an 
asset takes technologically and commercially to get it ready for its intended use 
or sale should be considered. 
4.3 EXCHANGE DIFFERENCES ON FOREIGN 
CURRENCY BORROWINGS  
Exchange differences arising from foreign currency borrowing and considered as 
borrowing costs are those exchange differences which arise on the amount of 
principal of the foreign currency borrowings to the extent of the difference 
between interest on local currency borrowings and interest on foreign currency 
borrowings. Thus, the amount of exchange difference not exceeding the 
difference between interest on local currency borrowings and interest on foreign 
currency borrowings is considered as borrowings cost to be accounted for under 
this Standard and the remaining exchange difference, if any, is accounted for 
under AS 11, ‘The Effect of Changes in Foreign Exchange Rates ’. For this 
purpose, the interest rate for the local currency borrowings is considered as that 
rate at which the enterprise would have raised the borrowings locally had the 
enterprise not decided to raise the foreign currency borrowings. 
Clarification Chart:  
Particulars  Accounting Treatment  
Exchange 
Gain  
Credited to P&L  
© The Institute of Chartered Accountants of India
 
 
 ASSETS BASED ACCOUNTING STANDARDS 
 
 
v
v 
v
v 
    
v 
 5.115 
 
Exchange 
Loss  
Lower of the following is treated as a part of borrowing costs: 
1. Actual exchange loss;  
2. Difference between interest on local currency borrowings 
and interest on foreign currency borrowings. 
Note: The excess exchange difference if any will be charged to 
P&L A/c.  
If the difference between the interest on local currency borrowings and the interest 
on foreign currency borrowings is equal to or more than the exchange difference on 
the amount of principal of the foreign currency borrowings, the entire amount of 
exchange difference is covered under paragraph 4 (e) of AS 16. 
If there is exchange gain in the next year, then it will reduce the borrowing cost in 
that year to the extent exchange loss was earlier treated as borrowing cost for that 
borrowing. 
Example 
XYZ Ltd. has taken a loan of USD 10,000 on April 1, 20X1, for a specific project at 
an interest rate of 5% p.a., payable annually. On April 1, 20X1, the exchange rate 
between the currencies was ` 45 per USD. The exchange rate, as at March 31, 20X2, 
is ` 48 per USD. The corresponding amount could have been borrowed by XYZ Ltd. 
in local currency at an interest rate of 11 per cent per annum as on April 1, 20X1.  
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 x 5% x ` 48/USD = ` 24,000 
(ii)  Increase in the liability towards the principal amount = USD 10,000 x (48-45) 
= ` 30,000 
(iii)  Interest that would have resulted if the loan was taken in Indian currency  
= USD 10,000 x 45 x 11% = ` 49,500 
(iv)  Difference between interest on local currency borrowing and foreign currency 
borrowing = ` 49,500 – ` 24,000 = ` 25,500 
Therefore, out of ` 30,000 increase in the liability towards principal amount, only  
` 25,500 will be considered as the borrowing cost. Thus, total borrowing cost would 
be ` 49,500 being the aggregate of interest of ` 24,000 on foreign currency 
borrowings (covered by paragraph 4(a) of AS 16) plus the exchange difference to 
© The Institute of Chartered Accountants of India