Scope and Objective of the Standard and Borrowing Costs | Free ...

Scope and Objective of the Standard and Borrowing Costs

Posted by Rona on March 6, 2012

This standard is mandatory and comes into effect in respect of accounting periods commencing on or after 1.4.2000. This statement should be applied in accounting for borrowing costs. Borrowing costs 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 and under other similar arrangements; and

(e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as adjustment to interest costs.

ICAI in its pronouncement ?Guidance Note on Audit of Miscellaneous Expenditure? have allowed deferment of certain expenses, such as discount, premium and ancillary costs relating to borrowings. The amortisation period may be directly related to some other account as in the case of debenture discount and debenture issue expenses. Where a fixed period is not involved, prudence would dictate write off not exceeding 3-5 years. The cumulative amortised costs upto the time the asset is ready for its intended use are borrowing costs and should be capitalised. The unamortised portion of such expenses at the date the asset is ready for its intended use will continue to be amortised as per the amortisation policy.

Finance charges in respect of assets acquired under finance leases are borrowing costs and can be capitalised. One has to exercise caution in interpreting this clause As per AS-19 on ?Leases?, assets acquired on finance leases are now required to be capitalised by lessees. The lease rentals are allocated against repayment of borrowings and financing costs at the implicit rate of return. Financing costs cannot be capitalised if the asset acquired under finance lease is ready for its intended use when acquired; for example, a car. Financing costs incurred upto the time the asset is prepared for its intended use can be capitalised. For example, if a generator is obtained on finance lease, which is going to form part of a huge power plant, financing costs incurred upto the time the power plant is ready will be capitalised.In the case of foreign borrowings where the interest cost is not hedged any exchange difference arising out of converting the interest payable at the closing exchange rate will be eligible for capitalisation. In the case of forward contracts, the difference in the forward rate and the exchange rate at the date of the transaction is recognised as exchange difference (income or expense as the case may be) over the life of the contract. If interest cost is covered by forward contracts, the exchange difference so arising would be borrowing costs for purposes of AS-16.

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