Ind AS 23 BORROWING COSTS - wirc-icai.org · CA Rajesh A. Mody B.Com, FCA 21st February, 2016 Ind AS 23 BORROWING COSTS For IFRS Study Group

CA Rajesh A. ModyB.Com, FCA

21st February, 2016

Ind AS 23 BORROWING COSTS

For IFRS Study Group

SCOPE OF PRESENTATION Summary of Standard

Key Differences between AS- 16 and Ind AS 23

Issues in implementing Ind AS 23:

1. Managements Intent for deciding whether asset is qualifying asset or not.

2. Capitalization of borrowing costs by operator in service concession arrangements.

3. Capitalization of borrowing Costs to Investment Property if it is measured at fair value.

4. Capitalization of Notional or Opportunity Costs.

5. Asset acquired by inter-company loan by subsidiary and its capitalization.

6. Subsidiary Finances asset through increase of capital by parent.

7. Capitalization of preference dividend as finance cost.

SCOPE OF PRESENTATION8. Interest Income from temporary investment from general

borrowings.

9. Change in nature of specific borrowing into general borrowing.

10. Criteria for determination of borrowing costs from specific borrowings and general borrowings.

11. Option not to capitalize cost of general borrowings by linking the source to Internal accruals.

12. Option to capitalize cost of borrowing in the ratio of debt/ equity.

13. Capitalization of cost on prepayments made to 3rd party constructing qualifying asset on behalf of the entity.

20. Capitalization in group financial statement and subsidiaries financial statement

21. Approach for dealing with exchange difference loss if foreign currency loan extends more than 1 year.

22. Asset completed in parts.

23. First time Adoption Challenges.

SUMMARY OF STANDARD

CORE PRINCIPLE Borrowing Costs that are Directly attributable to the

acquisition, construction or production of qualifying asset form part of that asset.

Other Borrowing cost are recognised as expense.

SCOPE It applies for accounting for borrowing costs.

DEFINITION OFBORROWING COST Borrowing costs are interest and other costs incurred by an

entity in connection with the borrowing of funds.

Borrowing cost may include:

i. Interest Expenses calculated using the effective interest method as described in Ind AS 39 Financial Instruments: Recognition and measurement.

i. Interest on bank overdrafts and short term and long term borrowings (including intercompany borrowings)

ii. Amortization of discounts or premiums relating to borrowings

iii. Amortization of ancillary costs incurred in connection with the arrangement of borrowings.

v. Finance charges in respect of finance leases.

vi. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

.Why meaning of interest Streamlined ?

With regard to exchange difference required to be treated as borrowing costs in accordance with paragraph 6(e), the manner of arriving at the adjustments stated therein shall be as follows:

i. the adjustment should be of an amount which is equivalent to the extent to which the exchange loss does not exceed the difference between the cost of borrowing in functional currency when compared to the cost of borrowing in a foreign currency.

ii. where there is an unrealised exchange loss which is treated as an adjustment to interest and subsequently there is a realised or unrealised gain in respect of the settlement or translation of the same borrowing, the gain to the extent of the loss previously recognised as an adjustment should also be recognised as an adjustment to interest.

QUALIFYING ASSET A Qualifying asset is an asset that necessarily takes a substantial period

of time to get ready for its intended use or sale.

Examples include:

i. Inventories (that are not produced over a short period of time)

ii. Manufacturing Plants

iii. Power Generation Facilities

iv.Intangible Assets

v. Investment Properties

. Assets which are not qualifying assets:

i. Financial Assets

ii. Inventories that are manufactured, or otherwise produced, over a short period of time.

iii.Assets that are ready for their intended use or sale when acquired are not qualifying assets.

EXCLUSIONS This Standard does not deal with the actual or

imputed cost of equity, including any preferred capital not classified as a liability pursuant to standard on financial instrument

Two types of assets that would otherwise be qualifying assets are excluded from the scope of Ind AS 23:o Qualifying assets measured at fair value, such as

biological assets.

o Inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis and that take a substantial period to get ready for sale.(whisky)

Why exclusions of cost of Equity Capital?

Scope out of fair value and inventories above are

mandatory or policy choice?

RECOGNITION Borrowing costs that are directly attributable to the acquisition,

construction or production of a qualifying asset are required to be capitalized as part of the cost of that asset.

Other borrowing costs are recognised as an expense when incurred.MEASUREMENT

If funds are borrowed specifically, the amount of borrowing costs eligible for capitalization are the actual borrowing costs incurred on that borrowing less any investment income on the temporary investment of any excess borrowings not yet used.

If funds are borrowed generally, the amount of borrowing costs eligible for capitalization are determined by applying a capitalization rate (weighted average of borrowing cost applicable to the general borrowings) to the expenditure on that asseto The amount of the borrowing costs capitalized during the period cannot

exceed the amount of borrowing costs during the period.Income from general borrowing whether can be reduced?Capitalization rate, what to exclude from considering as general

borrowing ? (i.e there can be mix of specific borrowing, general borrowing etc.)

SUSPENSION Capitalization is suspended during extended periods

in which active development is interrupted.

Judgmental and differs from case to case basis. Real estate litigation, disputes etc.

COMMENCEMENTCapitalization commences when: Expenditure for the asset are being incurred. Borrowings costs are being incurred. Activities that are necessary to prepare the asset for its

intended use or sale are in progress. Subjective matter can be interpreted as per the facts of

the case i. e when to commence.

CESSATION

Capitalization ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.

Subjective and judgmental

When the construction of a qualifying asset is completed in parts and each part is capable of being used while construction continues on other parts, capitalization of borrowing costs ceases when substantially all the activities necessary to prepare that part for its intended use or sale are completed.

TRANSITIONAL PROVISIONS In Ind AS 23, Transitional Provisions are not given

since all the transitional provisions related to Ind ASs, wherever considered appropriate have been included in Ind AS 101, first time adoption of Indian Accounting Standards.

DISCLOSURE Amount of Borrowing cost capitalized during the

period. Capitalization rate used.

KEY DIFFERENCES Ind AS 23 AS- 16 Impact

Borrowing Costs Borrowing Costs

1. Does not require an entity to apply this standard to borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset measured at fair value.

Does not provide for such scope relaxation

Management has a Accounting Policy choice to decide whether to capitalize borrowings costs on such assets.

Under Revaluation model changes in FV will go to OCI, it will have P & L impact.But under fair value model only reallocation between finance cost and FV movement in P & L. Therefore, NO Impact.



2. Excludes the application of this standard to borrowing costs directly attributable to the acquisition, construction or production of inventories that are manufactured, or otherwise produced, in a large quantities on a repetitive basis

Does not provide for such scope of relaxation and is applicable to borrowing costs related to all inventories that require substantial period of time to bring them in saleable condition.

Management has a Accounting Policy choice to decide whether to capitalize borrowings costs on such assets.It has to disclose the policy.



3. Requires to calculate the interest expense using the effective interest rate method as described in Ind AS 39 Financial Instruments : Recognition and measurement.

Borrowing costs, inter alia, include the following :a) Interest and commitment

charges on bank borrowings and other short term and long term Borrowings.

b) Amortization of discounts or premiums related to borrowings.

c) Amortization of ancillary costs incurred in connection with the arrangement of borrowings.

Ancillary cost which used to be amortized/ written off fully in the year of loan now will get amortized over the tenure of loan.

KEY DIFFERENCES Ind AS 23 AS- 16


4. Explanation is not included in the Ind AS 23.

Gives explanation for meaning of Substantial period of time appearing in the definition of the term qualifying asset.

5. Provides that when the standard on Financial Reporting in Hyperinflationary Economies is applied, part of the borrowing costs that compensates for inflation should be expensed as required by that standard (and not capitalized in respect of qualifying assets).

Does not contain a similar clarification because at present, in India, there is no standard on Financial Reporting in Hyperinflationary Economies.

KEY DIFFERENCES

Ind AS 23 AS- 16


6. Requires Adjustment to unrealized exchange loss, if subsequently there is realized or unrealized gain on the same borrowing, the gain to the extent of the loss previously recognized as an adjustment.

It does not require/ restrict foreign currency gain adjustment only to the extent of previously adjusted loss.

KEY DIFFERENCES Ind AS 23 AS- 16


7. General Borrowing Costs:Under Ind AS 23 : The qualifying assets are presumed to have first claim on the proceeds of the entitys general borrowings. Determination is based on the notion of avoidable borrowing cost as against forceful allocation.

As per EAC opinion on AS 16 : Source of usage is relevant to decide on capitalization out of general funds i.e based on facts, decision will come whether equity used, debt used and then the question of capitalization to be considered.

8. Specifically provides that in some circumstances, it is appropriate to include all borrowings of the parent and its subsidiaries when computing a weighted average of the borrowing costs while in other circumstances, it is appropriate for each subsidiary to use a weighted average of the borrowing costs applicable to its own borrowings.

This Specific provision is not there in the existing AS

KEY DIFFERENCES

Ind AS 23 AS- 16


9. Requires Disclosure of capitalization rate used to determine the amount of borrowing costs eligible for capitalization.

Does not have this disclosure requirement.

ISSUES1. Managements Intent for deciding whether asset is

qualifying asset or not. Should managements intention be taken into account to assess the substantial period of time to get ready for its intended use or sale?

When an asset is acquired, management should assess whether, at the date of acquisition, it is ready for its intended use or sale. Depending on how management intends to use the assets, it may be a qualifying asset.

Eg: When an acquired asset can only be used in combination with a larger group of fixed assets or was acquired specifically for the construction of one specific qualifying asset, the assessment of whether the acquired asset is a qualifying asset is made on a combined basis.

Eg : license, Investment property, developer, etc.

CASE 1 : A Telecom Company has acquired a 3G license. The license could be sold or licensed to a third party. However, management intends to use it to operate a wireless network. Development of the network starts when the license is acquired.Should borrowing costs on the acquisition of the 3G license be capitalized until the network is ready for its intended use?

Solution:Yes. The license has been exclusively acquired to operate the wireless network. The fact that the license can be used or licensed to a third party is irrelevant.The acquisition of the license is the first step in a wider investment project (developing the network). It is part of the network investment, which meets the definition of a qualifying asset under Ind AS 23.

CASE 2 : A Real Estate company has incurred expenses for the acquisition of a permit allowing the construction of a building. It has also acquired equipment that will used for the construction of various buildings.Can borrowing costs on the acquisition of the permit and the equipment be capitalized until the construction of the building is complete?

Solution:Yes for the permit, which is specific to one building. It is the first step in a wider investment project. It is part of the construction cost of the building, which meets the definition of a qualifying asset.No for the equipment, which will be used for other construction projects. It is ready for its intended use at the acquisition date. It does not meet the definition of a qualifying asset.

2. Capitalization of borrowing costs by operator in service concession arrangements.

In a service concession arrangement, should an operator capitalize borrowing costs incurred when constructing or upgrading an infrastructure asset?

Service concession arrangements are accounted for under IFRIC 12. The consideration received in exchange for the construction or upgrade services is recognised at its fair value either as a financial asset or an intangible asset depending on the terms of the agreement.

An operator that recognizes an intangible asset in exchange for the construction capitalizes the associated borrowing costs incurred during the construction phase.

However, an operator that recognizes a financial asset expenses the associated borrowing costs as incurred.

3. Capitalization of borrowing Costs to Investment Property if it is measured at fair value.

Property under construction or development for future use as an investment property is covered under Ind AS 40 and should be measured at fair value also during the construction period, if fair value is the accounting policy of the entity for investment property.

Can borrowing costs attributable to investment property measured at fair value be capitalized?

Yes. Ind AS 23 does not mandate the capitalization of borrowing costs for assets measured at fair value as, on a net basis, the management can still elect to capitalize those borrowing costs. An entity that elects to do so reduces its interest expense incurred during the period by the amount of borrowing costs capitalized and adjusts the carrying amount of the investment property accordingly. Re-measurement of the investment property to fair value has a direct effect on the gain or loss arising from a change in the fair value of investment property recorded in profit or loss for the period.

4. Capitalization of Notional or Opportunity Costs.

An entity has no borrowings and uses its own cash resources to finance the construction of property, plant and equipment. Cash being used to finance the construction could, otherwise have been used to earn interest. Can management capitalize a notional borrowing cost representing the opportunity cost of the cash employed in financing the assets construction?

No. A notional borrowing cost cannot be capitalized. Ind AS 23 limits the amount that can be capitalized to the actual borrowing costs incurred. The standard state it does not address actual or imputed cost of equity.

5. Asset acquired by inter-company loan by subsidiary and its capitalization.

A subsidiary (or jointly controlled entity or associate) finances the construction of a qualifying asset with an inter-company loan. Are borrowing costs incurred on the inter-company loan capitalized in the separate financial statements of the subsidiary (or jointly controlled entity or associate)?

Yes. Borrowing costs are capitalized to the extent of the actual costs incurred by the subsidiary (or jointly controlled entity or associate).

6. Subsidiary Finances asset through increase of capital by parent.

A subsidiary (or jointly controlled entity or associate) finances a qualifying asset through a capital increase, which is provided by the parent company (or venturer or investor). Can a notional amount of borrowing costs be capitalized in the separate financial statements of the subsidiary (or jointly controlled entity or associate)?

No, as the subsidiary (or jointly controlled entity or associate) has not incurred any borrowing costs. The standard does not deal with actual or imputed cost of equity.

7. Capitalization of preference dividend as finance cost.

If under Ind AS 32 Financial Instruments : Presentation, preference shares are treated as a liability then dividend thereon is an interest charges.

Whether the entity can capitalize the dividend payable?

Depends on facts and circumstances of each case and requires management to exercise significant judgment.

8. Interest Income from temporary investment from general borrowings.

An entity has investment income on general borrowings. Does management deduct investment income from the borrowing costs available for capitalisation?

No, no specific guidance is given about general borrowings, unlike specific borrowings (borrowing cost less investment income). The funds invested temporarily cannot be considered to be those from the general borrowings rather than from other sources (equity or cash generated from operating activities). It cannot therefore be demonstrated that the income is earned from the general borrowings.

Notion is avoidable borrowing.

9. Change in nature of specific borrowing into general borrowing.

Whether a specific borrowing undertaken to obtain a qualifying asset ever changes its nature into a general borrowing?

No. if loan repayment is linked to the asset taken.

However, if loan is not linked and carried on without repayment then can be considered as general.

It is a policy matter requiring exercise of judgment.

10. Criteria for determination of borrowing costs from specific borrowings and general borrowings.

How is the amount of borrowing costs eligible for capitalisation determined when a qualifying asset is financed by a combination of borrowings that are specific to the asset and by general borrowings?

The amount of borrowing costs eligible for capitalisation is calculated as follows:

To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, management determines the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period, less any investment income on the temporary investment of those borrowings. (Ind AS 23 paragraph 12)

To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset, management determines the amount of borrowing costs eligible for capitalisation by applying a capitalisation rate to the expenditure on that asset. The capitalisation rate is the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period, other than made specifically for the purpose of obtaining a borrowings qualifying asset (Ind AS 23 paragraph 14).

CASE 1 : On 1st April, 2014, entity A entered into a 22 lakhs contract for the construction of a building. The building was completed at the end of march, 2015. During the period, the following payments were made to the contractor.

Payment Date Amount1st April, 2014 2 lakhs30th June, 2014 6 lakhs31st December, 2014 12 lakhs31st March, 2015 2 lakhsTotal 22 lakhsEntity As borrowings as at its year end 31/03/2015 were as follows:1. 10% four year debentures with simple interest payable annually,

which relates specifically to the project; debt outstanding at 31/03/2015 amounted to 7 lakhs. Interest of Rs 65,000/- was incurred on these borrowings during the year, and interest income of Rs 20,000 was earned on these funds while they were held in anticipation of payments.

CASE 1 (Continued):

2. 12.5% 10 year debentures with simple interest payable annually; debt outstanding at 1st April, 2014 amounted to 10 lakhs and remained unchanged during the year.

3. 10% 10-year debentures with simple interest payable annually; debt outstanding at 01/04/2014 amounted to 15 lakhs and remained unchanged during the year.

Assume for purposes of this example that interest expenses equals borrowing costs.Calculate the amount of Borrowing costs to be capitalized for the year ended 31/03/2015.

Solution:

Expenditures incurred in obtaining a qualifying asset are first allocated to any specific borrowings. The remaining expenditures are allocated to any general borrowings.

CASE 1 (Continued):Analysis of expenditure

Expenditure Amount allocated to Weighted for (Rs in 000)General Borrowings period O/s 01/04/2014200 0 0 30/06/2014 600 100*

100 x 9/12 31/12/2014 1,200 1,200 1,200 x 3/12 31/03/2015 200 200 200 x 0/12

2,200 375* Specific borrowings of 7,00,000 are fully utilised; remainder of expenditure is therefore allocated to general borrowings.

The capitalisation rate relating to general borrowings is the weighted average of the borrowing costs applicable to the entitys borrowings that are outstanding during the period. Other than borrowings made specifically for the purpose of obtaining a qualifying asset.

Weighted average borrowing cost : 12.5% (1000/2,500)+10% (1,500/2,500) = 11%.

CASE 1 (Continued):

Borrowing cost to be capitalized

AmountSpecific Loan 65,000General Borrowings (3,75,000 x 11%) 41, 250Total 1,16,250Less: Interest income on specific borrowings (20,000)Amount eligible for capitalisation 86,250

Therefore, the borrowing costs to be capitalized are 86,250.

11. Option not to capitalize cost of general borrowings by linking the source to Internal accruals.

The entity uses general borrowings to finance its qualifying assets. However, cash flows from the operating activities would be sufficient to finance the capital expenditures incurred during the period. Can management claim that the general borrowings are used to finance working capital and other transactions (for example, merger and acquisition activity, finance leases) but not to finance the qualifying assets, in which case no borrowing costs would be capitalized?

No. it is presumed that any general borrowings in the first instance are used to finance the qualifying assets (after any funds specific to a qualifying asset). This is the case even where the cash flows from operating activities are sufficient to finance the capital expenditures.

12. Option to capitalize cost of borrowing in the ratio of debt/ equity.

The entity uses general borrowings and cash from operating activities to finance its qualifying assets. It has a capital structure of 20% equity and 80% current and non- current liabilities including interest- bearing debt from general borrowings. Can management argue that only 80% of the qualifying assets are financed with borrowings and apply the capitalisation rate to only 80% of the amount of qualifying assets?

No. The borrowing rate is applied to the full carrying amount of the qualifying asset. Ind AS 23 does not deal with the actual or imputed cost of capital.

13. Capitalization of cost on prepayments made to 3rd party constructing qualifying asset on behalf of the entity.

When the construction of a qualifying asset is performed by a third party, are borrowing costs capitalized on the prepayments made to the third party for the acquisition of the asset?

Yes. The borrowing costs incurred by an entity to finance prepayments on a qualifying asset are capitalized on the same basis as the borrowing costs incurred on assets constructed by the entity.

The capitalisation starts when all three conditions are met: expenditures are incurred, borrowing costs are incurred, and the activities necessary to prepare the asset for its intended use or sale in progress.

Expenditures on the asset are incurred when the prepayments are made (payments of the installments). Borrowing costs are incurred when borrowing is obtained. The last condition the activities necessary to prepare the asset for its intended use or sale are in progress can vary depending on facts and circumstances. When the construction process by the third party doe not start at the prepayment date, management assesses whether it is appropriate to start capitalisation from this date or whether it should be deferred to a later date.

CASE 1 :

During the year ended 31st March 2016, Raftaar Limited (the company) ordered two aircraft. The manufacturer will deliver the aircraft in march 2019. The company is required to make a down payment of 50% for each aircraft at the time of placing the order. The balance amount is payable on delivery. The company funded the entire down payment from bank borrowings.

The manufacturer has informed that manufacture of each aircraft, including planning, production of parts and assembly, involves a typical time period of 24 to 30 months. The manufacturer will start the manufacturing process for the aircraft in september, 2016. can the company capitalize the borrowing costs incurred on the funds borrowed for down payment? If yes, from which date?

CASE 1 (Continued):Solution:Ind AS 23 defines a qualifying asset as an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. In this case, the manufacture of each aircraft involves a normal time period of 24 to 30 months. Hence, the aircraft is a qualifying asset under Ind AS 23.

The Ind-AS 23 criteria for the capitalization of borrowing costs and its analysis are given below:

Sr no. Ind- AS 23 criteria Analysis

1. Expenditure for the acquisition, construction or production of the qualifying asset is being incurred.

The Company has paid 50% down payment for the acquisition of asset. Thus, this criterion is met.

2. Borrowing costs are being incurred

The Company is incurring the borrowing cost on the amount borrowed from the bank.

CASE 1 (Continued) :

Keeping the above in view, the company can start capitalizing borrowing cost only from September 2016 when the actual manufacturing process started on the aircraft.

Sr. No. Ind- AS 23 criteria Analysis3. Activities that are

necessary to prepare an asset for its intended use or sale in progress

Ind AS 23 does not mandate that activities to prepare the asset for its intended use should always be carried by the company itself. Therefore, it is acceptable to capitalize the borrowing cost even if these activities are being carried out by a third party. However, these activities should actually be in progress.

14. Capitalization in group financial statement and subsidiaries financial statement

When to include all borrowings of the parent and its subsidiaries when computing a weighted average of the borrowings costs?

Solution:

If the major borrowings are made centrally (and cost also met centrally) and passed through to individual group companies via inter-company accounts and inter-group loans.

15. Group Borrowing cost

The parent has incurred borrowings costs, whereas, the qualifying asset is appearing in the subsidiarys financial statements. Whether to capitalize?

Solution:

Capitalization is appropriate if the amount capitalized fairly reflects the interest cost of the group on borrowings from third parties that could have been avoided if the expenditure on qualifying asset were not made.

The Interest should be capitalized in the group financial statements and not in the subsidiary carrying out the development, if it has no borrowings. If, however, the subsidiary has intra-group borrowings then interest on such borrowings may be capitalized in its own financial Statements.


Discrete vs. Cumulative approach

In accordance with para 6(e) of Ind AS 23, borrowing cost may include exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Paragraph 6A of Ind AS 23 states that the manner of arriving at the adjustments stated will be as below:

i. The adjustment should be of an amount which is equivalent to the extent to which the exchange loss does not exceed the difference between the cost of borrowing in functional currency when compared to the cost of foreign currency.

ii. Where there is an unrealized exchange loss which is treated as an adjustment to interest and subsequently there is a realized or unrealized gain in respect of the settlement or translation of the same borrowing, the gain to the extent of the loss previously recognised as an adjustment should be recognised as an adjustment to interest.


In case of exchange loss scenario, the above paragraphs primarily explain computation of adjustment for one year. However, it does not deal with a scenario where foreign currency (FC) loan extends for more than one year and there is loss in both the years. Two methods seem possible for dealing with this issue.

Method A The discrete period approach

Exchange loss adjustment is determined for each period separately. FC losses that did not meet the criteria for treatment as borrowing cost in the previous year cannot be treated as exchange difference adjustment in the subsequent years and vice versa


Method B The cumulative approach

Exchange loss adjustments are assessed/ identified on a cumulative basis, after considering the cumulative amount of interest expense that is likely to have been incurred had the company borrowed in local currency. The amount of exchange loss adjustment cannot exceed the amount of FC losses incurred on a cumulative basis at the end of the reporting period. The cumulative approach looks at the project as a whole as the unit of account, ignoring the occurrence of reporting dates.

CASE 1 :An illustrative calculation of the amount of FC differences that may be regarded as borrowing cost under method A and method B is set out below:

Method A Discrete Approach

Method B Cumulative Approach

Particulars Year 1 Year 2 Total

Interest Expense in FC (A) 25,000 25,000 50,000

Hypothetical Interest in LC (B) 30,000 30,000 60,000

FC Loss (C) 6,000 3,000 9,000


6(e) adjustment lower of C and (B minus A) 5,000 3,000 8,000

FC Loss (net) 1,000 Nil 1,000


6(e) adjustment 5,000 4,000 9,000

FC Loss (net) 1,000 (1,000) Nil

17. Asset completed in parts.

Real Estate limited (the company) is constructing a building with seven floors. The first five floors of the building, meant for office use, are ready for occupation. However, the construction work on the remaining two floors is still under progress. Should the capitalisation of borrowing costs cease on the first five floors?

Solution:

Para 24 of Ind AS 23 provide that when the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalisation of borrowing costs in relation to a part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are complete. Para 25 of Ind AS 23 cites a business park comprising several buildings, each of which can be used individually, as an example of an asset that may be completed in parts. The same principles can be applied to individual floors of a large building that are substantially complete and ready for their intended use.

First Time Adoption Challenges Ind AS 101 does not contain any exemption/

exception with respect to borrowing costs. However, differences may arise in practice with regard to amount of borrowing costs eligible for capitalisation:a) The application of effective interest method under

Ind AS 109.

b) Classification of preference shares as liability under Ind- AS 32 which was classified as part of share capital under Indian GAAP.

c) Differences in judgment with regard to identification of general borrowing costs.

First Time Adoption Challenges In the absence of any specific exemption/ exception, a

first time adoption to apply Ind- AS 23 retrospectively.

However, it needs to consider interaction with other exemptions and exceptions in Ind- AS 101.

Eg:

Scenario 1

For PPE, intangible assets and investment property, if the entity has applied previous GAAP carrying amount as deemed cost exemption , the entity cannot change the amount of borrowing costs capitalized under Indian GAAP.

First Time Adoption ChallengesScenario 2

And if entity uses Fair Value as deemed cost exemption need not restrict the borrowing costs capitalized under Indian GAAP since it will record those items of PPE, intangible assets and investment property at fair value at the due date of transition to Ind AS.

Scenario 3

Entity chooses to reconstruct the cost of these items through retrospective application of Ind AS, then it needs to consider the impact arising from retrospective application of Ind AS 23.

Rajesh A. Mody

Partner

Rajeev Shah & Co.

Email: [email protected]

Mob: 98203 06861

Slide 1SCOPE OF PRESENTATIONSCOPE OF PRESENTATIONSUMMARY OF STANDARDDEFINITION OFBORROWING COSTSlide 6QUALIFYING ASSETEXCLUSIONSRECOGNITIONSUSPENSIONCESSATIONTRANSITIONAL PROVISIONSKEY DIFFERENCESKEY DIFFERENCESKEY DIFFERENCESKEY DIFFERENCESKEY DIFFERENCESKEY DIFFERENCESKEY DIFFERENCESSlide 20Slide 21Slide 22Slide 23Slide 244. Capitalization of Notional or Opportunity Costs.Slide 26Slide 277. Capitalization of preference dividend as finance cost.Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 4215. Group Borrowing costSlide 44Slide 45Slide 46Slide 4717. Asset completed in parts.First Time Adoption ChallengesFirst Time Adoption ChallengesFirst Time Adoption ChallengesSlide 52

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Ind AS 23 BORROWING COSTS - wirc-icai.org · CA Rajesh A. Mody B.Com, FCA 21st February, 2016 Ind AS 23 BORROWING COSTS For IFRS Study Group