AS 16: Borrowing Costs

What is borrowing cost?

When we borrow funds we have to incur costs, like
Interest charges
Commitment charges
Amortization of discounts related to borrowings
Amortization of premiums related to borrowings
Amortization of ancillary costs incurred in connection with the arrangement of
borrowings
Finance charges in respect of assets acquired under finance lease
Exchange differences arising from foreign currency borrowings to the extent they
are regarded as an adjustment to interest costs
This accounting standard states whether the borrowing costs has to be capitalized or to be
charged to profit & Loss A/C. The following table shows in brief the accounting
treatment.

Particulars
During the development of

Treatment
Capitalize

Correlation with our story

Gifts given will be treated

the Asset

as investment for marriage

(Asset as defined under AS

when their love is

16)

developing

Interruption in the

Charge it to P&L A/C

A break in their love and

development of asset

(Revenue Exp.)

the diamond ring

When the development of

Capitalize

The story after interval.

asset again continues

Common friend joins hero

and heroine

Asset is completed and

Charge it to P&L A/C

After marriage and quarrel

ready for use. If borrowing

(Revenue Exp.)

for mobile.

cost is incurred after

completion
FAQs on AS 16:
1. What is an asset?
Asset under AS 16 means the qualifying asset which takes substantial period of
time for its intended use or for sale.
Eg: Turnkey projects, Construction, power generation facilities, Investment properties,
Inventories that require substantial period to bring them to saleable condition,
Development of steel plants.
2. What is substantial period of time?
As per the consensus, it is 12 months but may be more or less than 12 months,
which depends on the facts and circumstances of each case.
3. When capitalization shall commence, whether from the date of borrowing of funds or
whether from the start of construction of asset or whether at any other time?

The following conditions has to be satisfied

(a) Expenditure for the acquisition, Construction or production of a qualifying asset is
being incurred.
(b) Borrowing costs are being incurred on the other hand
(c) Activities necessary to prepare the asset for its intended use or sale is in progress.

Types of Borrowing

General Borrowing

Amount borrowed in general and

later on used for the qualifying
asset.

Borrowing cost that has to be

capitalized
= Exp. On that asset X Capitalization
rate.
Capitalization rate = Weighted average
cost of borrowing
Note: Borrowing cost capitalized should
not exceed Actual borrowing cost
incurred during the period.

Specific Borrowing

Amount borrowed only for the

qualifying asset.

Borrowing cost has to be capitalized

Borrowing cost =
Borrowing cost during the period
(-) Income from temporary investment
of borrowed amount

Disclosure under AS 16:

a) Accounting Policy adopted
b) Amount of borrowing cost capitalized during the accounting period
Problems on AS 16:
1. A ltd. has taken

5,00,000 for the construction of building for interest rate @

10% and the loan was taken in the beginning of the year 2008-09. The company
has to repay the entire amount of loan after 5 years. On the date of arrangement of
loan the company has incurred

30,000 as commission and

5,000 as agreement

charges. Calculate the borrowing cost for the 1st year and also pass journal entries.
2. Same as problem 1 and assume that out of borrowed funds of
amount utilized for building is only

5,00,000, the

3,00,000.

3. Calculate the amount of borrowing cost to be capitalized for the year end 2009
-10 from the following information.
Amount borrowed upto 2008-09 = 3,00,000
Expenditure incurred upto 2008-09 on qualifying asset = 5,00,000
Interest cost capitalized for the year 2008-09 @ 13% = 3,00,000 X 13% =
39,000
Expenditure incurred on qualifying asset during 2009-10 = 2,00,000
Progress payments received = 3,50,000
Amount borrowed during 2009-10 = 2,00,000.
4. Narayan Ltd. started constructing manufacturing plant on 1/04/08. During the year
1,200 crores were evenly incurred for construction of plant. At the beginning of the year,
the company had the following borrowings:
Amount

Rate of Interest

Term loan from FI

(Specifically for manufacturing plant)

300 crores

10%

Bank Loans
- Indian Bank

400 crores

11%

- ICICI Bank

400 crores

12%

- SBI

200 crores

12%

What is the amount of interest to be capitalized for the year ended 31/03/09?
5. Amulya Ltd. has taken

10,00,000 @ 15% in the beginning of the year for

construction of building. In addition to above loan, the company has taken multiple
borrowings as follows:
(a) 10% debentures

5,00,000

(b) 20% Term loan

10,00,000

(c) 15% other loans

5,00,000

The above funds have been utilized by the company in the following assets.
1. Building 25,00,000
2. Furniture 10,00,000
3. Plant 40,00,000
4. Factory shed 15,00,000
Calculate the borrowing cost and also pass journal entries.
6. A company capitalizes interest cost of holding investments and adds to cost of
investment every year, thereby understating interest cost in profit and loss account.
Whether it leads to unusual accounting?
7. X Ltd. has obtained an institutional loan of Rs. 800 lakhs for modernization and
renovation of its machinery. Machinery acquired under the modernization scheme and
installation completed on 31.3.08 amounts to Rs. 600 lakhs. Rs. 80 lakhs has been
advanced to suppliers for additional assets and balance loan of Rs.120 lakhs has been
utilized for working capital purpose. The total interest paid for the above loan amounted
to Rs.80 lakhs during 2007-08.You are required to state how the interest on the
institutional loan is to be accounted in the year 2007-08.

8. On 30.4.2008 MNC Ltd. obtained a loan from the bank for Rs.50 lakhs to be utilized as
under:
(i) Construction of a factory shed

Rs.2 crores.

(ii) Purchase of Machinery

Rs. 1.5 crores.

(iii) Working Capital

Rs. 1 crore.

(iv) Advance for Purchase of truck

Rs. 50 lakhs.

In March 2008, construction of shed was completed and machinery installed. Delivery of
truck was not received. Total interest charged by the bank for the year ended 31.3.08 was
Rs.90 lakhs. Show the treatment of interest as per AS-16.
9. Kesava Ltd. took a loan of USD 20,000 at 6% p.a on 1st April, for a specific capital
expansion project. The interest was payable annually. The exchange rate at the date of the
loan was 1 USD =

45. However, the company could have taken a corresponding rupee

loan from banks @ 12% p.a on that date. At the end of the year, the exchange rate was 1
USD =

48. How would you treat the borrowing costs and exchange differences in the

above case. What would be the accounting treatment if the rupee loan were to carry
interest @ 14% p.a.? What will be the treatment if the exchange rate at the end of the year
were 1 USD =

46?

10. X Ltd. began construction of a new building on 1 st January, 2007. It obtained Rs.1
lakh special loan to finance the construction of the building on 1 st January, 2007 at an
interest rate of 10%. The companys other outstanding two non-specific loans were:
Amount

Rate of Interest

Rs.5,00,000

11%

Rs.9,00,000

13%

The expenditure that were made on the building project were as follows:
Rs.
January

2007

2,00,000

April

2007

2,50,000

July

2007

4,50,000

Decembe

2007

1,20,000

r
Building was completed by 31st December, 2007. Following the principles prescribed in
AS-16 Borrowing Cost, calculate the amount of interest to be capitalized and pass one
Journal Entry for capitalizing the cost and borrowing cost in respect of the building.