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TMI BlogBorrowing CastsX X X X Extracts X X X X X X X X Extracts X X X X ..... e to get ready for its intended use or sale. Explanation: What constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, 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 facts and circumstances of the case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale is considered. 4. Borrowing costs may include: ( a ) interest and commitment charges on bank borrowings and other short-term and long-term borrowings; ( b ) amortisation of discounts or premiums relating to borrowings; ( c ) amortisation of ancillary costs incurred in connection with the arrangement of borrowings; ( d ) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and ( e ) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Explanation: Exchange differences arising from foreign currency borrowings and cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure on the qualifying asset had not been made. When an enterprise borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified. 9. It may be difficult to identify a direct relationship between particular borrowings and a qualifying asset and to determine the borrowings that could otherwise have been avoided. Such a difficulty occurs, for example, when the financing activity of an enterprise is co-ordinated centrally or when a range of debt instruments are used to borrow funds at varying rates of interest and such borrowings are not readily identifiable with a specific qualifying asset. As a result, the determination of the amount of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset is often difficult and the exercise of judgment is required. 10. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest-bearing liabilities. Expenditure is reduced by any progress payments received and grants received in connection with the asset (see Accounting Standard 12, Accounting for Government Grants). The average carrying amount of the asset during a period, including borrowing costs previously capitalised, is normally a reasonable approximation of the expenditure to which the capitalisation rate is applied in that period. 16. The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the asset s condition is taking place. For example, borrowing costs incurred while land is underdevelopment are capitalised during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses which are carried out in sequence at different parts of the plant within the same site, such as a steel mill. Disclosure 23. The financial statements should disclose: (a) the accounting policy adopted for borrowing costs; and (b) the amount of borrowing costs capitalized during the period. Illustration Note: This illustration does not form part of the Accounting Standard. Its purpose is to assist in clarifying the meaning of paragraph 4(e) of the Standard. Facts: XYZ Ltd. has taken a loan of USD 10,000 on April 1, 20X3, for a specific project at an interest rate of 5% p.a., payable annually. On April 1, 20X3, the exchange rate between the currencies was ₹ 45 per USD. The exchange rate, as at March 31, 20X4, 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, 20X3. 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 5% ₹ 48USD = ₹ 24,000. (ii) Increase in the liability towa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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