ICDS IX : Borrowing Costs - Income Tax - Ready Reckoner - Income Tax

ICDS IX : BORROWING COSTS This Income Computation and Disclosure Standard deals with treatment of borrowing costs. This Standard, dealing with Borrowing Costs, corresponds to AS 16 of the Companies (Accounting Standards) Rules, 2006 and Indian Accounting Standard (Ind AS) 23 . 1. Scope:- This Income Computation and Disclosure Standard does not deal with the actual or imputed cost of owners' equity and preference share capital. The reason for the specific exclusion is on account of the fact that under Ind AS, redeemable preference share capital is treated as a liability. Ind AS 23 specifically excludes only actual or imputed cost of equity and of preferred capital not classified as a liability. This ICDS primarily deals with the timing and the circumstances under which borrowing costs are to be capitalised. Borrowing costs: Borrowing costs includes interest, commitment charges on borrowings, and discounts or premiums related to the borrowings. It needs to be noted that so far as discounts or premiums relating to borrowings, and ancillary costs incurred in connection with the arrangement of borrowings, only the amortised amount is to be considered as borrowing costs, and not the entire amount of discount, premium or ancillary costs. In effect, therefore, the ICDS covers only deferred expenditure for the purposes of capitalisation, if such expenditure is deferred. 'Borrowing of funds' would imply that amounts paid for borrowing of stock in trade, or other assets, such as gold, raw material, etc., would not be regarded as interest for the purposes of this ICDS, since no funds are borrowed in such cases. ICDS also includes finance charges in respect of assets acquired under Finance lease or similar arrangements as borrowing cost. Qualifying assets: Under ICDS IX, all tangible assets and intangible assets, irrespective of the period of time to get ready for their intended use, are qualifying assets. It is only in the case of inventories that ICDS IX requires a qualifying period of at least twelve months, in order to fall within the definition of a qualifying asset. 2. Recognition:- Recognition represent capitalisation of borrowing costs that are directly attributable to acquisition, construction or production of a qualifying asset as part of the cost of that asset till the asset is put to use. The quantum of borrowing costs to be capitalised is to be determined in accordance with this ICDS. Borrowing costs which are allowable as a deduction are not governed by this ICDS. Other borrowing costs shall be recognised in accordance with the provisions of the Act . In the context of inventories, capitalisation would mean addition of the borrowing cost to the cost of the inventory. 3. Borrowing Costs Eligible for Capitalisation:- The actual borrowing costs incurred during the period, on funds borrowed specifically for the purposes of acquisition, construction or production of a qualifying asset, are to be capitalised. The ICDS provides a formula for computing borrowing costs on general borrowings. It presumes that qualifying assets are acquired in the middle of the year, for the purposes of computing the borrowing cost attributable to such qualifying assets. A X B/C Where A = Borrowing cost incurred during the previous year (except on borrowing directly relatable to specific purposes) B = The average of cost of qualifying assets as appearing in the balance sheet of a person on the first day and the last day of previous year (excluding qualifying assets which are directly funded out of specific borrowing ) C = The average of the amount of total assets as appearing in the balance sheet of a person on the first day and the last day o the previous year (excluding assets which are directly funded out of specific borrowing ) Note: While computing borrowing costs to be considered in (A) of the formula, all borrowing costs specifically incurred for acquisition of assets should be excluded, irrespective of whether the assets are qualifying assets or not. Again, this is irrespective of whether the period of interest is before the date when the asset was put to use, or after the date when the asset was put to use. Capital work-in-progress outstanding on balance sheet date and capitalised in subsequent year, needs to be included in total assets only in the year in which cost is incurred, otherwise it may get included twice. The reduction from qualifying asset as well as total assets is only to the extent that they are funded directly out of specific borrowings. For the purposes of computation of capitalisation of general borrowing costs, not all tangible and intangible assets are qualifying assets, as is the case for capitalisation of specific borrowing costs, but only those assets which necessarily require a period of 12 months or more for its acquisition, construction or production. In other words, unless the qualifying asset (tangible and intangible asset) necessarily require a period of twelve months or more for its acquisition, construction or production, general borrowing is not required to be capitalised. 4. Commencement of Capitalisation:- (a) In case of borrowing costs specifically related to acquisition of assets, the period from which borrowing costs are to be counted begins with the date on which funds are borrowed. Borrowing of funds would mean actual drawing of funds. Borrowing costs on loans utilised for payment of advances for acquisition of assets would need to be added to the cost of assets commencing from the date of borrowing, which may be before the date of acquisition of the asset, up to the date of asset being first put to use. Interest payable on borrowings taken for acquisition of a qualifying asset relating to the period after the date of put to use of the asset would be allowable as a deduction under . (b) In case of general borrowings, the interest to be capitalised is to be considered from the date of utilisation of the funds borrowed. There could therefore be a period between the date of borrowing and the date of utilisation, in respect of which period the borrowing costs are not to be capitalised as per the ICDS. 5. Cessation of Capitalisation:- (a) For tangible and intangible assets, borrowing costs up to the date when the asset is first put to use are to be added to the cost of the assets. In case of inventories, which require 12 months or more to bring them to a saleable condition, the date of completion of substantially all the activities necessary to prepare the inventory for its intended sale is the date up to which borrowing costs are to be added to the cost of inventories. This would apply not only to specific borrowings for acquisition of assets, but also to general borrowings. Note: The major part of the activities necessary to manufacture and prepare the inventory for sale would need to be completed, for the capitalisation of interest costs to cease. For example, where the manufacture of the inventory has been completed, to the extent that it is fit for its intended use, but only certain processes to render it fit for sale, such as painting or packaging, are pending. (b) 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 shall cease:- in case of part of a qualifying asset when such part of a qualifying asset is first put to use in case of part of inventory when substantially all the activities necessary to prepare such part of inventory for its intended sale are complete. For example a business park comprising several buildings, each of which can be used individually, while construction may continue on other parts. 6. Disclosure:- The following disclosure shall be made in respect of borrowing costs, namely:- the accounting policy adopted for borrowing costs; and the amount of borrowing costs capitalised during the previous year. The ICDS requirement of disclosure of the amount of borrowing costs capitalised during the previous year does not state whether such details are required to be given block -wise or whether such disclosure has to be given in aggregate. A disclosure of the aggregate amount should suffice. It is, however, necessary to keep the details of block -wise, capitalisation of borrowing costs to tally the total figure with the additions to the respective blocks of assets. AS 16 vs ICDS IX Income earned on temporary investment of borrowed funds pending their expensiture on qualifying asset to be reduced from borrowing cost incurred as per AS 16. However, ICDS IX does not permit such reduction from borrowing cost. Suspension of capitalisation of borrowing cost: Paragraph 17 of AS 16 permits suspension of capitalisation of borrrowing cost during the extended period in which active developments interrupted. ICDS IX does not permit suspension of capitalisation of borrowing cost in such cases. Above deviations between AS 16 and ICDS IX would result in increase in taxable income.