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Accounting Standard (AS) -16 Borrowing Costs VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA CHAIRMAN INMACS MANAGEMENT SERVIC PowerPoint Presentation
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Accounting Standard (AS) -16 Borrowing Costs VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA CHAIRMAN INMACS MANAGEMENT SERVICES LTD. Mobile: 98110 40004 E-mail: vinodjain@inmacsindia.com vinodjainca@gmail.com. Vinod Jain, FCA, FCS, FCWA Vinodjain@inmacsindia.com. INMACS. Borrowing Costs.

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slide1
Accounting Standard (AS) -16

Borrowing Costs

VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA

CHAIRMAN

INMACS MANAGEMENT SERVICES LTD.

Mobile: 98110 40004

E-mail: vinodjain@inmacsindia.com

vinodjainca@gmail.com

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

borrowing costs
Borrowing Costs

Applicability : Effective from accounting periods commencing on or after1st April, 2000.

Nature : Mandatory for all enterprises

Objective of AS – 16 : To prescribe theaccounting treatment for borrowing costs.

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

borrowing costs3
Borrowing Costs

Borrowing Costs

Interest &

commitment

charges

on Borrowings

Amortisation

of ancillary costs

relating to

Borrowings

Exchange

Differences*

Amortisation

of Discount

/ Premium

on Borrowings

Finance charges

for assets

acquired on

Finance Lease

*To the extent they are regarded as an adjustment to interest cost

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide4

Q: Exchange Differences – When to be treated as Borrowing Costs?

Ans: To the extent regarded as ‘adjustment to

interest cost’.

The adjustment is restricted to amount of exchange loss on principal due to devaluation of currency

Adjustment =

Interest on local currency borrowing

– Interest on foreign currency borrowing

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide5

Treatment of Exchange Differences

Loan Amount : USD 10,000

Rate of Interest (in U.S.A.) : 8% p.a.

Exchange rate as at 01.04.2005 : Rs. 40 per USD

Exchange rate as at 31.03.2006 : Rs. 45 per USD

Rate of Interest (in India) : 12%

Contd..

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide6

Treatment of Exchange Differences

  • Computations to be made:
  • Interest for the Period = USD 10,000 x 8% x Rs. 45
  • = Rs. 36,000-
  • Increase in liability towards the principal amount
  • = USD 10,000 x (45-40)
  • = Rs. 50,000/-
  • Interest if loan was raised in India
  • = USD 10,000 x 48 x 12%
  • = Rs. 57,600/-
  • Difference (2-1) = Rs. 57,600 – Rs. 36,000
  • = Rs. 21,600/- Contd..

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide7

Treatment of Exchange Differences

Treatment of Exchange Differences of Rs. 50,000/-

Rs. 21,600/-

Rs. 28,400/-

To be treated

as borrowing cost

as per AS -16

To be capitalised

to loan obligation

as per SCH VI

Note: The amount of borrowing costs capitalised during a period should

not exceed the amount of borrowing costs incurred during the period

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide8

Qualifying Assets

  • Definition:
        • an asset
        • that takes substantial period of time
        • to get ready for intended sale or usage
  • According to ASI – 1, a rebuttable presumption of a period of 12 months is considered as a substantial period of time.
  • Qualifying asset may be:
    • - Fixed assets
    • - Inventories

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide9

Treatment of Borrowing Costs

Borrowing Costs

  • Directly attributable* for:
    • acquisition
    • construction
    • production of

QualifyingAssets

Assets other than

Qualifying assets

Capitalised as part

of asset

Treated as

revenue expenditure

*or that could have been avoided if the expenditure on qualifying assets had not been made

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide10

Criteria for Capitalisation

  • Criteria
        • Future Economic Benefits
        • Reliable Measurement
  • Note : Expenses not fulfilling the criteria to be treated as revenue expenditure

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide11

Borrowings Cost (Interest)

Borrowings Cost

Specifically for

Qualifying Assets

Generally but part used

for Qualifying Assets

Apply weighted

average rate of interest

Apply actual

rate of Interest

Capitalise the Borrowing Costs

less interest income, if any

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide12

Calculation of Weighted Average Rate of Interest

Illustration

ABC Co. Ltd. undertakes significant expansion program and incurs following capital expenditure:

  • Additional Information:
  • Rs. 20 Lacs , 11% p.a. secured debentures raised on July2004 redeemable in four equal installments commencing July 1, 2005
  • Loan from financial institutions amounting to Rs. 30 Lacs bearing interest at 14% p.a. obtained for construction of Plant I & II on May 1,2005
  • Rs. 5 Lacs, 14% working capital loan obtained on April 1, 2005 and repaid Rs. 1 Lac on December 31, 2005. Contd..

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide13

Calculation of Weighted Average Rate of Interest

  • Solution
  • Calculation of borrowing costs for the year ended on March 31, 2006
  • Secured debentures
  • = 20,00,000 x 11% x 3 / 12 = 55,000/-
  • = 15,00,000 x 11% x 9 /12 = 1,23,750/-
  • Loan from financial Institutions
  • = 30,00,000 x 14% x 11 / 12 = 3,85,000/-
  • Working Capital Loan
  • = 5,00,000 x 14% x 9 / 12 = 52,500/-
  • = 4,00,000 x 14% x 3 / 12 = 14,000/-
  • Calculation of average unspecified borrowings outstanding during the year
  • Secured debentures
  • = 20,00,000 x 3 / 12 = 5,00,00/-
  • = 15,00,000 x 9/12 = 11,25,000/-
  • Secured working capital loan
  • = 5,00,000 x 9 / 12 = 3,75,000/-
  • = 4,00,000 x 3 / 12 =1,00,000/-
  • Total (1+2) 21,00,000/- Contd..

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide14

Calculation of Weighted Average Rate of Interest

  • Solution
  • Calculation of average interest on unspecified borrowings for the year
  • Secured debentures
  • = 20,00,000 x 11% x 3 / 12 = 55,000/-
  • = 15,00,000 x 11% x 9 /12 = 1,23,750/-
  • Working Capital Loan
  • = 5,00,000 x 14% x 9 / 12 = 52,500/-
  • = 4,00,000 x 14% x 3 / 12 = 14,000/-
  • TOTAL (1+2) 2,45,250/-
  • Average interest rate for the year ( C / B )
  • = (2,45,250 / 21,00,000) * 100 = 11.67%
  • Contd..

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide15

Calculation of Weighted Average Rate of Interest

  • Solution
  • Interest Capitalised
  • Plant I
  • On specific borrowings: 22,00,000 X 14% X 7 / 12 = 1,79,667/-
  • On general Borrowings: 8,00,000 x 11.67% x 7 / 12 = 54,460/-
  • Plant II
  • On specific borrowings: 8,00,000 X 14% X 6 / 12 = 56,000/-
  • On general Borrowings: 12,00,000 x 11.67% x 6 / 12 = 70,020/-

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide16

Excess of the Carrying amount of the Qualifying asset over recoverable Amount

Actual Cost of the Asset Recoverable

+ Borrowing Cost Capitalised amount

of the Asset

<=

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide17

Commencement of Capitalisation

  • Expenditurefor the
    • acquisition
    • construction
    • production
  • of a qualifying asset is being incurred

Borrowing costs are being incurred

Conditions

Necessaryactivities for preparation

of qualifying assets are in progress

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide18

Suspension of Capitalisation

  • Criteria
        • Capitalisation to be suspended during extended periods in which active development is hampered.
  • Suspension not to take place in case:
        • substantial technical & administrative work is being carried on
        • temporary delays necessary for preparation of qualifying assets (seasonal rains etc.)

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide19

Cessation of Capitalisation

  • Criteria
        • Capitalisation should cease when substantially all the the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
  • Cessation to take place even if:
        • routine administrative work still continues
        • minor modifications to property as per users’ specifications is to be made
  • Cessation to take place in part if:
        • Construction of qualifying asset is completed in parts and a part is capable of being used separately

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide20

Disclosure Requirements

  • The financial statements should disclose:
    • the accounting policy adopted for borrowing costs
    • The amount of borrowing costs capitalised

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide21

Disclosure Requirements

  • The financial statements should disclose:
    • the accounting policy adopted for borrowing costs
    • The amount of borrowing costs capitalised

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide22

Disclosure Requirements

Example 1

Name of the Company : MRF

Financial Year : 2004-05

Auditors : Sastri & Shah

M.M. Nissim & Co.

Significant Accounting Policy

Borrowing costs that are attributable to the acquisition of or construction of qualifying assets are capitalized as part of the cost of such assets. A qualifying asset is one that necessarily takes substantial period of time to get ready for intended use. All other borrowing costs are charged to revenue.

Notes to Accounts

The total borrowing cost capitalized during the year is Rs. 4.13 Crores.

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide23

Disclosure Requirements

Example 2

Name of the Company : NICHOLAS PIRAMAL INDIA LIMITED

Financial Year : 2004-05

Auditors : Price Waterhouse

Notes to Accounts

Interest amounting to Rs. 2.4 Million has been capitalized during the year in compliance with AS-16.

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide24

Disclosure Requirements

Example 3

Name of the Company : GHCL

Financial Year : 2004-05

Auditors : Jayantilal Thakkar & Co.

Rahul Gautam Divan & Associates

Significant Accounting Policy

Borrowing Costs that are attributable to the acquisition , construction or production of qualifying assets are capitalized as part of cost of such assets. The capitalized rate is the weighted average of the borrowing costs applicable to the borrowings of the company that are outstanding during the period. All other borrowing costs are recognized as an expense in the period in which they are incurred.

Notes to Accounts

Borrowing Costs capitalized during the year Rs. 8.26 Million (Previous Year Rs. 5.54 Million)

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide25

Disclosure Requirements

Example 4

Name of the Company : EIH LIMITED

Financial Year : 2004-05

Auditors : Ray & Ray

Significant Accounting Policy

  Borrowing Costs that are attributable to the acquisition / construction of fixed assets are capitalized as part of the cost of the respective assets. Other borrowing costs are recognized as expenses in the year in which they arise.

Notes to Accounts

Interest debited to the Profit & Loss Account is net of interest capitalized amounting to Rs. Nil (2004 – Rs. 233,156,467)

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide26

COP - Capitalisation of Borrowing Costs

  • Q. Whether borrowing cost avoidable or unavoidable?
  • Said to be unavoidable if expenditure on qualifying assets had been incurred and borrowing is taken ,Existing borrowing exercise of judgement required.
  • Factors to be considered as to whether and to what extent general borrowings have been so used
  • A. Information of cash inflows and outflows, close scrutiny required.
  • General borrowings made but equity specifically infused for financing qualifying assets
  • No question of capitalizing borrowing cost.
  • Calculation of weighted average borrowing rate?
  • A. Based on borrowing during period of expenditure and not borrowings made for the whole year.

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide27

COP - Capitalisation of completed parts of a project

Q. Capitalisation of commissioned packages when capitalization of remaining incomplete packages is pending?

A. Necessary to capitalize commissioned packages .

Q. Date of capitalization?

A. Date on which package is ready to commence commercial production.

Q. Allocation of incidental expenditure during construction?

A. On appropriate basis.

Q. Capitalisation of independent packages which are complete when capitalization of main packages is pending ?

A. Capitalisedwhen ready for their intended use.

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide28

COP - Capitalisation of completed parts of a project

Q. Capitalisation of main packages when capitalization of ancillary packages is pending or vice versa?

A. Capitalisation of main packages to be done when ready to commence commercial production or ready for use.

Q. Treatment of general and administrative overheads after part capitalisation?

A.Segregation on appropriate basis between P/L A/C & Expenditure during construction A/C

Q. Treatment of depreciation on infrastructure?

A.Allocation on appropriate basis to P & L A/c and Expenditure during construction A/c

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS

slide29
Thank You

VINOD JAIN, FCA, FCS, FCWA , LL.B.,DISA

CHAIRMAN

INMACS MANAGEMENT SERVICES LTD.

Mobile: 98110 40004

E-mail: vinodjain@inmacsindia.com

vinodjainca@gmail.com

Vinod Jain, FCA, FCS, FCWA

Vinodjain@inmacsindia.com

INMACS