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Edit Comment Close Premium member Presentation Transcript Slide 1: Accounting Standard -16 Borrowing Costs By Gyan A gnihotri Borrowing Costs : Borrowing Costs Applicability : Effective from accounting periods commencing on or after 1st April, 2000. Nature : Mandatory for all enterprises Objective of AS – 16 : To prescribe the accounting treatment for borrowing costs. Borrowing Costs : Borrowing Costs Borrowing Costs 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 Slide 4: 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 Q: Exchange Differences – When to be treated as Borrowing Costs? Adjustment = Interest on local currency borrowing – Interest on foreign currency borrowing Slide 5: 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.. Slide 6: 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.. Slide 7: 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 Slide 8: 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 Slide 9: Treatment of Borrowing Costs Borrowing Costs Directly attributable* for: acquisition construction production of Qualifying Assets 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 Slide 10: Criteria for Capitalisation Criteria Future Economic Benefits Reliable Measurement Note : Expenses not fulfilling the criteria to be treated as revenue expenditure Slide 11: Borrowings Cost (Interest) Borrowings Cost Specifically for Qualifying Assets Generally but part used for Qualifying Assets Capitalise the Borrowing Costs less interest income, if any Apply actual rate of Interest Apply weighted average rate of interest Slide 12: 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.. Slide 13: 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.. Slide 14: 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.. Slide 15: 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/- Slide 16: 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 <= Slide 17: Commencement of Capitalisation Conditions Borrowing costs are being incurred Expenditure for the acquisition construction production of a qualifying asset is being incurred Necessary activities for preparation of qualifying assets are in progress Slide 18: 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.) Slide 19: 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 Slide 20: Disclosure Requirements The financial statements should disclose: the accounting policy adopted for borrowing costs The amount of borrowing costs capitalised Slide 21: Disclosure Requirements The financial statements should disclose: the accounting policy adopted for borrowing costs The amount of borrowing costs capitalised Slide 22: 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. Slide 23: 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. Slide 24: 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) Slide 25: 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) Slide 26: 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. Slide 27: 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. Capitalised when ready for their intended use. Slide 28: 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 Slide 29: Thank You Gyan Agnihotri You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.
accounting stan\dard 16 borrowing cost gyanagnihotri Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 651 Category: Education License: All Rights Reserved Like it (5) Dislike it (0) Added: July 07, 2010 This Presentation is Public Favorites: 1 Presentation Description each and everything related this Comments Posting comment... By: shiraj4u (11 month(s) ago) Please send a copy of above presentation Saving..... Post Reply Close Saving..... Edit Comment Close By: raokhan (20 month(s) ago) Please send me a copy of the presentation on rao_sabir@hotmail.com Many thanks. Saving..... Post Reply Close Saving..... Edit Comment Close Premium member Presentation Transcript Slide 1: Accounting Standard -16 Borrowing Costs By Gyan A gnihotri Borrowing Costs : Borrowing Costs Applicability : Effective from accounting periods commencing on or after 1st April, 2000. Nature : Mandatory for all enterprises Objective of AS – 16 : To prescribe the accounting treatment for borrowing costs. Borrowing Costs : Borrowing Costs Borrowing Costs 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 Slide 4: 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 Q: Exchange Differences – When to be treated as Borrowing Costs? Adjustment = Interest on local currency borrowing – Interest on foreign currency borrowing Slide 5: 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.. Slide 6: 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.. Slide 7: 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 Slide 8: 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 Slide 9: Treatment of Borrowing Costs Borrowing Costs Directly attributable* for: acquisition construction production of Qualifying Assets 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 Slide 10: Criteria for Capitalisation Criteria Future Economic Benefits Reliable Measurement Note : Expenses not fulfilling the criteria to be treated as revenue expenditure Slide 11: Borrowings Cost (Interest) Borrowings Cost Specifically for Qualifying Assets Generally but part used for Qualifying Assets Capitalise the Borrowing Costs less interest income, if any Apply actual rate of Interest Apply weighted average rate of interest Slide 12: 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.. Slide 13: 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.. Slide 14: 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.. Slide 15: 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/- Slide 16: 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 <= Slide 17: Commencement of Capitalisation Conditions Borrowing costs are being incurred Expenditure for the acquisition construction production of a qualifying asset is being incurred Necessary activities for preparation of qualifying assets are in progress Slide 18: 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.) Slide 19: 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 Slide 20: Disclosure Requirements The financial statements should disclose: the accounting policy adopted for borrowing costs The amount of borrowing costs capitalised Slide 21: Disclosure Requirements The financial statements should disclose: the accounting policy adopted for borrowing costs The amount of borrowing costs capitalised Slide 22: 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. Slide 23: 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. Slide 24: 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) Slide 25: 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) Slide 26: 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. Slide 27: 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. Capitalised when ready for their intended use. Slide 28: 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 Slide 29: Thank You Gyan Agnihotri