As 16

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

14 July 2012 If loan is taken as on 1st august of rs 100000 @ 10% p.a and if qualifying asset is acquired on 1st september, then how much int should be capitalised?

if year ending is on 31st march

Sanjay Chauhan (IFRS)

Sanjay Chauhan (IFRS) (Expert)
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14 July 2012 If the borrowing is identified for the capital investment, then the idle time interest can also be capitalised.

This is common in huge projects where the fund are sometimes received in advance and are temporarily invested in mutual funds or fixed deposits. In this case, income earned on those idle funds is also to be capitslised.

Querist : Anonymous

Querist : Anonymous (Querist)

16 July 2012 can you explain with an example?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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14 July 2024 Under Accounting Standard (AS) 16 - Borrowing Costs, the capitalization of borrowing costs begins when all three criteria are met:

1. Expenditure for the acquisition, construction, or production of a qualifying asset has been incurred.
2. Borrowing costs have been incurred.
3. Activities that are necessary to prepare the asset for its intended use or sale are in progress.

### Example Calculation:

Let's apply this to your scenario:

- **Loan Taken:** Rs. 100,000 on 1st August @ 10% per annum.
- **Qualifying Asset Acquired:** 1st September.
- **Financial Year End:** 31st March.

#### Steps to Determine Capitalization:

1. **Identify the Qualifying Asset:**
- Determine when the qualifying asset (e.g., machinery, building) is first recognized in the financial statements. In your case, it's acquired on 1st September.

2. **Calculate Capitalization Period:**
- The capitalization period starts from the date when expenditures for the asset are incurred (in this case, 1st September) until the asset is substantially ready for its intended use or sale.

3. **Determine Capitalization Rate:**
- Use the weighted average of the borrowing costs applicable to the company's borrowings that are outstanding during the period, other than specific borrowings made to finance the qualifying asset.

#### Calculation of Capitalized Interest:

- **Step 1: Determine the Capitalization Rate:**
- Assuming the weighted average borrowing cost is 10% per annum (as per the loan terms).

- **Step 2: Calculate Capitalized Interest:**

- From 1st September to 31st March (7 months):
- Capitalized interest = (Amount of loan) × (Weighted average borrowing cost) × (Time-weighted average)

- Capitalized interest = Rs. 5,833.33

#### Explanation:

- **Qualifying Asset Ready for Use:** AS 16 specifies that borrowing costs incurred for a qualifying asset should be capitalized from the date when expenditures for the asset are incurred until the asset is substantially ready for its intended use or sale.

- **Treatment in Financial Statements:** The capitalized interest of Rs. 5,833.33 will be added to the cost of the qualifying asset in the financial statements. This increases the asset's carrying amount and is depreciated or amortized over its useful life.

### Conclusion:

In summary, under AS 16, borrowing costs incurred on a specific loan taken to finance the acquisition or construction of a qualifying asset should be capitalized from the date when expenditures for the asset are incurred until the asset is substantially ready for its intended use or sale. The amount capitalized is calculated using the weighted average borrowing cost applicable to the company's other borrowings outstanding during the period. This ensures that borrowing costs directly attributable to the acquisition or construction of qualifying assets are included in the cost of those assets rather than expensed immediately.