CMA Final - CFR
Ind AS 23 - Borrowing Costs
Core Principle
The core principle of Ind AS 23 states that:
a. Borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset are included in the cost of that asset i.e. must be capitalised.
b. Other borrowing costs are recognized as an expense in the period in which they are
incurred.
Scope
1. This standard applies to accounting for borrowing costs but excludes actual or imputed
costs of equity, such as preferred capital not classified as a liability.
2. The requirement to capitalize borrowing costs does not apply to:
o Qualifying assets that are measured at fair value, for example, a biological asset
accounted for under Ind AS 41
o Inventories that are manufactured, or otherwise produced, in large quantities on a
repetitive basis
Borrowing Costs
Borrowing costs are interest and other expenses incurred when an entity borrows funds. These
may include:
• Interest expense calculated using the effective interest rate method (Ind AS 109 -
Financial Instruments).
• Interest on lease liabilities recognized as per Ind AS 116 (Leases).
• Exchange differences from foreign currency borrowings, to the extent that they are
regarded as an adjustment to interest costs.
Qualifying Assets
A qualifying asset is one that takes a substantial period of time to be ready for its intended
use or sale. Examples include manufacturing plants, real estate, infrastructure (like bridges
and railways), power generation facilities, and intangible assets.
Ind AS 23 doesn't define "substantial period," but generally, a period of 12 months or more
may be considered substantial.
Depending on the circumstances, any of the following may be qualifying assets:
• Inventories
• Manufacturing plants
• Power generation facilities
• Intangible assets
• Investment properties
• Bearer plants
Exchange Differences in Borrowing Costs
Exchange differences can be included in borrowing costs depending on the foreign currency
borrowing's terms. If a company borrows in a currency different from its functional currency
(e.g., an Indian company taking a USD loan for a project), exchange rate differences may
affect borrowing costs.
To decide how much of the exchange difference should be treated as borrowing costs:
1. Compare the cost of borrowing in the functional currency (INR) with the cost in the foreign
currency (USD). The exchange loss included in borrowing costs should not exceed the
difference between these two borrowing costs. [Example 6]
CA BISHNU KEDIA 1 Ind AS 23
CORPORATE FINANCIAL REPORTING
2. If an unrealized exchange loss was treated as an adjustment to interest and later a gain
occurs (either realized or unrealized), that gain should also be treated as an adjustment to
interest, matching the earlier loss. [Example 7]
Recognition of Borrowing Costs
Borrowing costs are capitalized as part of the cost of a qualifying asset when both of the
following conditions are met:
1. It's probable that future economic benefits will flow to the entity.
2. The costs can be measured reliably.
If these conditions are not met, borrowing costs are recognized as an expense in the period
incurred.
Borrowing Costs Eligible for Capitalisation
Aspect Details
1. Specific Borrowing Borrowing costs capitalised if directly linked to a qualifying
Costs asset.
Amount eligible for capitalisation = Actual borrowing cost
incurred - Investment income from temporary investments.
Only actual borrowing costs can be capitalised (imputed costs
like equity cannot be included).
2. General Borrowing General borrowings refer to all borrowings not tied to a specific
Costs qualifying asset.
Borrowings initially specific but remain outstanding after the
asset is ready, become general borrowing.
Capitalisation = Applying a capitalisation rate to the expenditure
on the qualifying asset.
General borrowing costs can be treated as borrowing costs that
are directly attributable to obtaining qualifying assets because it
could had been avoided if the expenditure on the qualifying asset
had not been made.
3. Capitalisation Rate Capitalisation rate = Weighted average of general borrowing
Calculation costs during the period.
Costs related to specific borrowings are excluded from this rate
until the asset is ready for use.
Total capitalised borrowing costs ≤ Actual borrowing costs
incurred during the period.
4. Expenditure for Expenditures include cash payments, asset transfers, or interest-
Capitalisation bearing liabilities related to the asset.
Expenditures reduced by progress payments or grants received.
Average carrying amount of the asset during the period is used to
apply the capitalisation rate.
5. Excess of Carrying If the asset's carrying amount exceeds its recoverable amount, it
Amount Over is written down or off, following relevant standards. This can be
Recoverable Amount reversed if conditions improve.
Period of Capitalisation:
Aspect Details
1. Commencement Capitalisation starts when the entity meets all of the following
of Capitalisation conditions:
Ind AS 23 2 CA BISHNU KEDIA
CMA Final - CFR
Aspect Details
(a) Expenditures: Cash payments, asset transfers, or interest-bearing
liabilities for the asset.
(b) Borrowing Costs: The entity incurs borrowing costs.
(c) Asset Preparation: Activities necessary to prepare the asset for use
or sale (e.g., obtaining permits). Excludes holding the asset without
any productive development.
2. Suspension of Capitalisation is suspended during extended inactivity (e.g.,
Capitalisation development halted).
Capitalisation continues during necessary temporary delays (e.g.,
weather delays or slow inventory transformation like whiskey aging).
Examples:
(a) Construction suspended between October, 2021 to January, 2022
during which period certain heavy construction equipment under use
was shifted to another site. In this case, capitalization of borrowing
costs needs to be suspended since active development is interrupted.
(b) When Qualifying Asset construction is about to complete, there was
temporary delay of 20 days on account of some technical reasons. In
this case, capitalization of borrowing costs shall be continued.
3. Cessation of Capitalisation ceases when substantially all activities needed to prepare
Capitalisation the asset for use or sale are complete.
- Example: Construction is complete, even if minor work (e.g.,
decoration) continues.
For assets built in phases, capitalisation ends when each phase is ready
(e.g., a business park).
For assets that must be completed entirely before use (e.g., a steel mill),
capitalisation continues until all parts are fully ready (e.g., studio).
Example:
H Limited, a real estate company, gives immovable property on rent.
It has completed on 31st May, 2021, a commercial complex consisting
of various offices that could be rented out.
It expects that the commercial complex will be completely rented out
by 30th June, 2021. However, due to adverse market conditions, only
10% of the commercial complex could be rented out by its reporting
date of 31st March, 2022. H Limited wants to capitalise the eligible
borrowing costs incurred up to 31st March, 2022.
H Limited should capitalise borrowing costs only up to 31st May, 2021.
The borrowing cost incurred thereafter cannot be capitalised as the
asset was ready for its intended use on 31st May, 2021. The fact that
only a small portion could be rented out by 31st March, 2022, is not
relevant.
Disclosure Requirements
Entities must disclose the following regarding borrowing costs:
1. Amount Capitalised: The total borrowing costs capitalised during the period.
2. Capitalisation Rate: The rate used to calculate the amount of borrowing costs eligible
for capitalisation.
CA BISHNU KEDIA 3 Ind AS 23
CORPORATE FINANCIAL REPORTING
Questions:
Question 1: [June 2023]
GARLIC TULSI Ltd. began construction of a new building on 1st April, 2022. It
obtained ₹ 2 lakh special loan to finance the construction of the building on 1st April,
2022 at an interest rate of 10%. The company's other outstanding non-specific loans
were as follows:
Date on which Funds
Funds Borrowed Rate of Interest
borrowed
01.04.2022 ₹ 12,00,000 13%
01.07.2022 ₹ 40,00,000 14%
01.10.2022 ₹ 16,00,000 15.5%
Expenditure incurred on Construction
Date on which it is incurred
of a Building
01.04.2022 ₹ 6,00,000
01.05.2022 ₹ 1,50,000
01.07.2022 ₹ 3,00,000
01.12.2022 ₹ 12,00,000
The construction of the building completed on 31.12.2022. However, it was put to use
only on 01.04.2023. A sum of ₹ 20 lakhs has been advanced for purchase of Plant &
machinery which was installed by 31st March, 2023. ₹ 29 lakhs has been utilized for
working capital requirements.
Required: Show the treatment of Interest as per Ind AS 23 and pass the Journal Entries
relating to Interest.
Solution:
Particulars Nature Treatment of Interest
1. Construction of a Not a Qualifying Asset since the Interest to be charged to P&L
Building time taken to construct the building A/c
is not a substantial period i.e. less
than one year.
2. Advance for Not a Qualifying Asset since Plant Interest to be charged to P&L
Purchase of Plant & & Machinery is ready for its A/c
machinery intended use at the time of its
acquisition/purchase.
3. Working Capital Not a Qualifying Asset Interest to be charged to P&L
A/c
Total Interest = ₹ 7,20,000
Ind AS 23 4 CA BISHNU KEDIA
CMA Final - CFR
Date Particulars Dr. (₹) Cr. (₹)
Building A/c
31.12.22 22,50,000
Dr.
To Bank A/c 22,50,000
Interest on Loan A/c
31.03.23 7,20,000
Dr.
To Loan A/c 7,20,000
P & L A/c
31.03.23 7,20,000
Dr.
To Interest on Loan A/c 7,20,000
Question 2
ABC Ltd. has taken a loan of USD 20,000 on 1 st April, 2011 for constructing a plant at an
interest rate of 5% per annum payable on annual basis.
On 1st April, 2011, the exchange rate between the currencies i.e. USD vs Rupees was ₹45 per
USD. The exchange rate on the reporting date i.e. 31 st March, 2012 is ₹48 per USD.
The corresponding amount could have been borrowed by ABC Ltd from State bank of India
in local currency at an interest rate of 11% per annum as on 1 st April, 2011.
Compute the borrowing cost to be capitalized for the construction of plant by ABC Ltd. for
the period ending 31st March, 2012.
Solution
In the above situation, the borrowing cost needs to determine for interest cost on such foreign
currency loan and eligible exchange loss difference if any.
a) Interest on foreign currency loan for the period:
USD 20,000 x 5% = USD 1,000
Converted in: USD 1,000 x 48/USD = 48,000
b) Interest that would have resulted if the loan was taken in Indian Currency:
USD 20,000 x 45/USD x 11% = 99,000
c) Difference between interest on foreign currency borrowing and local currency
borrowing: 99,000 - 48,000 = 51,000
Increase in liability due to change in exchange difference: USD 20,000 x (48 - 45) = Rs.60,000
Hence, out of exchange loss of Rs.60,000 on principal amount of foreign currency loan, only
exchange loss to the extent of 51,000 is considered as borrowing costs.
Total borrowing cost to be capitalized is as under:
a) Interest cost on borrowing = ` 48,000
b) Exchange difference to the extent considered to be an adjustment to Interest cost
= ` 51,000
Total Borrowing Cost = ` 99,000
The exchange difference of Rs.51,000 has been capitalized as borrowing cost and the
remaining Rs.9,000 will be expensed off in the Statement of Profit and Loss.
CA BISHNU KEDIA 5 Ind AS 23
