Query based on as 16 - borrowing cost - Accounts

My friends and I were going through AS 16 when we landed upon a few doubts. I post those doubts hereunder. I request you to kindly answer the queries along with the relevant provisions if possible.

Cost is incurred for preparation of feasibility report, paid to a consultant, as required by the bank for approval of loan. Whether the said cost can be included as Borrowing cost and capitalized? Kindly note that AS 16 permits only those borrowing cost to be capitalized which are DIRECTLY ATTRIBUTABLE to the acquisiton, construction or production of qualifying asset.
Capitalization should be suspended during extended period in which active development in interrupted. What would be the accounting treatment of borrowing cost during the period of suspension? Once active development is resumed, how the supsended borrowing cost should be treated? Whether the same should be capitalized?
Say, a company procures borrowing cost at US $ 100,000 @ Rs. 45 with interest payable @ 5% p.a. The qualifying asset takes 5 years to get ready for its intended use. The company defaults payment of interest for 2nd and 3rd year -

a.) The lender waives off the default amount of interest for 2 years but increases the rate of interest to 6% p.a. How much borrowing cost should be capitalized?

b.) The company's bank takes over the liability @ interest rate of 7% p.a. Whether the interest paid to the bank would qualify to be capitalised under AS 16 considering that the said cost is NOT DIRECTLY ATTRIBUTABLE to the acquistion, construction or production of qualifying asset?

Hi Rafi,

I am very happy that you have raised good queries on AS 16. I will clear your problems

1) As per para 4(c) amortisation of ancillary costs incurred in connection with the

arrangement of borrowings. The consulting fees which the company has paid to the consultant for feasibility report required by bank. Its in the nature of miscellaneous cost incurred in conncection with borrowing of funds. Hence, it needs to be capitalised.

2) For your second query nothing is being stated as per para 17 and 18 of AS 16. Indirectly as per para 14 of AS 16 its being stated that activities should be in progress for capitalisation of borrowing costs. Since the activity is interrupted, such borrowing costs should be charged to profit and loss a/c. The intention of AS 16 is that you should not delay the project otherwise suffer the loss. (also refer para 7 of AS 16)

3) a) As per para 14 (b) borrowing costs are being incurred. In your case , the company had defaulted the interest for the two years and the lender waived it. So, the company has not paid and no outstanding interest is provided in books for the 2 years. So it was not incurred for 2 years. So the borrowing cost is neither capitalised nor charged to p&l a/c for the 2 years.

b) If the interest pertaining to the loan which is borrowed specifically for qualifying asset, then such interest needs to be capitalised.