CHAPTER

6 AS-16 : Borrowing Costs

1 Requirement of AS-16
 Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset (should be capitalized as part of the cost of that asset).
 Other borrowing costs should be recognised as an expense (i.e. charged off to P&L account) in
the period in which they are incurred.
 The amount of borrowing cost to be capitalized depends upon –
- Type of borrowed funds
- Expenditure on qualifying assets
- Period taken to complete the acquisition construction or production
- Income from temporary investments of borrowings pending their expenditure on
qualifying assets.

2 Applicability
AS-16 applies to accounting for borrowing costs. It does not deal with the actual or imputed
cost of owners’ equity, including preference share capital not classified as a liability.

3 Accounting for Borrowing Costs

Table 1 : Accounting Treatment - Borrowing Costs

Sr. Nature of borrowing costs Accounting treatment Remarks
no. prescribed by AS-16
1. Borrowing costs that are directly Capitalize as part of the Amount to be capitalized,
attributable to the acquisition, cost of that asset (i.e. period for which capitalization
construction or production of a include in the cost of that should be done to be
qualifying asset assets) determined as per AS-16.
2. Other borrowing costs To be expensed in the -
period in which they are
incurred
From the above table, it is clear that borrowing costs directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized as part of cost of that asset.
So the following questions come to mind from the above principle:
1) What are borrowing costs (See details in para 3.1)
2) What is meant by qualifying asset (See details in para 3.2)
3) What is meant by “directly attributable to acquisition construction or production”. (See details in
para 3.3)
4) What is the amount to be capitalized (See details in para 3.4)
5) What is the period for which borrowing costs are to be capitalized? (See details in para 3.5)
3.1 Borrowing costs
Briefly indicate the items which are included in the expressions “Borrowing Cost” as per AS-16 [Nov,2009]

 Borrowing costs are interest and other costs incurred by an enterprise in connection with the
borrowing of funds. From the above definition it is clear that
1. Interest on borrowings are only borrowing costs. Interest paid due to delay, to supplier of a
qualifying asset are not borrowing costs since it is not incurred in connection with the borrowing
of funds. But if it is in the nature of deferred credit than financing cost shall be included.
2. AS-16 itself gives the following examples of “other costs”
a) Commitment charges on 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 finance leases or other similar arrangements; and
e) Exchange differences arising from foreign currency borrowings to the extent that
they are an adjustment to interest costs.

3.1.1 Commitment Charges

 Often loan is sanctioned. But borrower takes disbursement later. Interest cannot be charged till
he takes disbursement. So the lender charges him commitment charges for this periods, since,
lender had to keep money ready for the borrower.

3.1.2 Amortisation of discounts or premiums relating to borrowings

 It implies that these costs can be treated as deferred revenue expenditure and amortized as
such.
 Amortization of these costs for the period upto which asset is substantially complete will be
capitalized, if asset construction has been financed by these borrowings.
 Examples: 1) premium on redemption of debentures 2) discount on issue of debentures.
 It is to be noted that premium on redemption of preference shares or discount on issue of those
shares are not borrowing costs within the meaning of AS-16.
3.1.3 Exchange Differences
EXCHANGE DIFFERENCES ARISING FROM FOREIGN CURRENCY BORROWINGS TO THE EXTENT
THEY ARE REGARDED AS AN ADJUSTMENT TO INTEREST COSTS PARA 4(e) OF AS-16:
EXPLANATION TO PARA 4(e)
Enterprises often borrow in foreign currency at a lower interest rate instead of borrowing locally in
rupees, at a higher rate. However, the likely currency depreciation and resulting exchange loss often
offset, fully or partly, the difference in the interest rates. In such cases, the exchange difference on
the foreign currency borrowings to the extent of the difference between interest on local currency
borrowing and interest on foreign currency borrowing, is regarded as an adjustment to the interest
costs. This exchange difference is, in substance, a borrowing cost.
The savings in interest cost or the exchange difference, whichever is less, is added to the borrowing
cost.
This is an illustration annexed to AS-16
Illustration 1 XYZ Ltd. has taken a loan of USD 10,000 on April 1, 20X3, for a specific project at an
interest rate of 5% p.a., payable annually. On April 1, 20X3, the exchange rate between the
currencies was Rs. 45 per USD. The exchange rate, as at March 31, 20X4, is Rs. 48 per USD. The
corresponding amount could have been borrowed by XYZ Ltd. in local currency at an interest rate of
11 per cent per annum as on April 1, 20X3.
Solution:
1. Interest for the period = USD 10,000 x 5%x Rs. 48/USD = Rs. 24,000/-
2. Increase in the liability towards the principal amount = USD 10,000 x (48-45) = Rs. 30,000/-
3. Interest that would have resulted if the loan was taken in Indian currency = USD 10000 x 45 x
11%). = Rs. 49,500
4. Difference between interest on local currency borrowing and foreign currency borrowing = Rs.
49,500 - Rs. 24,000 = Rs. 25,500
Therefore, out of Rs. 30,000 increase in the liability towards principal amount, only Rs. 25,500 will be
considered as the borrowing cost. Thus, total borrowing cost would be Rs. 49,500 being the
aggregate of interest of Rs. 24,000 on foreign currency borrowings plus the exchange difference to
the extent of difference between interest on local currency borrowing and interest on foreign currency
borrowing of Rs. 25,500. and the remaining Rs. 4,500 would be considered as the exchange
difference to be accounted for as per Accounting Standard (AS) 11,.
In the above example, if the interest rate on local currency borrowings is assumed to be 13% instead
of 11%, the entire exchange difference of Rs. 30,000 would be considered as borrowing costs, since
in that case the difference between the interest on local currency borrowings and foreign currency
borrowings (i.e., Rs. 34,500 (Rs. 58,500 - Rs. 24,000) is more than the exchange difference of Rs.
30,000. Therefore, in such a case, the total borrowing cost would be Rs. 54,000 (Rs. 24,000 + Rs.
30,000) which would be accounted for under AS 16 and there would be no exchange difference to be
accounted for under AS-11.

3.2 Qualifying asset

 Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale.
 Examples of qualifying assets are
- manufacturing plants,
- power generation facilities,
- inventories that require a substantial period of time to bring them to a saleable
condition, and
- investment properties.
 The following are not qualifying assets
- Other investments (i.e. investments other than investment properties), and
- those inventories that are routinely manufactured or otherwise produced in large
quantities on a repetitive basis over a short period of time,
- Assets that are ready for their intended use or sale when acquired.
EXPLANATION TO PARA 3.2 of ACCOUNTING STANDARDS-16 CLARIFIES THE TERM SUBSTANTIAL
PERIOD OF TIME AS UNDER
What constitutes a substantial period of time primarily depends on the facts and circumstances of
each case. However, ordinarily, a period of twelve months is considered as substantial period of
time unless a shorter or longer period can be justified in the facts and circumstances of the case.
The period required to make asset ready technologically & commercially for its intended use, is
considered.

3.3 “Directly Attributable to Acquisition, Construction or Production of Qualifying

Asset”
The borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset are those borrowing costs that would have been avoided if the expenditure on the
qualifying asset had not been made.
From express wordings of the standards it appear that income earned on temporary investment of
borrowings should be reduced from borrowing costs to determine the amount be capitalized only in
respect of borrowings specifically for a particular assets. In case of general borrowings which are
used for acquiring assets AS is silent but the wordings that “to the extent borrowed generally and
used for a qualifying asset” justifies the deduction of income from temporary investment of
borrowings, in arriving at the amount to be capitalized.

Illustration 2 Asset 'A' is constructed from 1.7.2000 to 30.6.2001 from borrowing of Rs. 10 lakhs
taken from SBI on 1.7.2000 at 12% per annum interest. The surplus funds were invested till
31.3.2001 which earned interest Rs. 15,000. Show how much borrowing cost will be capitalised
during the year 2000-2001 and 2001-2002. Loan is being repaid in 5 equal annual instalment.
Solution:
Rs.
Interest for 2000-01 (1.7.2000 to 30.3.2001)
90,000
(-) Interest earned on surplus funds 15,000
Borrowing cost to be capitalised with asset 'A' 75,000
Interest for 2001-02 (upto 30.6.2001) 30,000
Rs. 2 lakh is repaid after one year i.e. on 30.6.2001 (1.7.01 to
72,000
31.3.02)
Borrowing cost 1,02,000
Out of the above Rs. 30,000 will be capitalised with asset 'A' as the asset is now completed the cost
incurred thereafter i.e. Rs. 72,000 will be charged to P&L account.

Illustration 3 Suppose in the Illustration 2 above, there was no activity undertaken for construction
of the asset from 1.7.2000 to 1.10.2000 and other facts remain same.
Solution: Since, no activity for construction was undertaken from 1.7.2000 to 1.10.2000 the interest
for these three months i.e. Rs. 30,000 will not be capitalized and will be charged to profit and loss
account. The interest income for these three months Rs. 5,000 will not be netted off with interest
cost and will be credited to profit and loss account. This treatment is in accordance with para 15 of
AS 16.

Illustration 4 In Illustration 2 above, suppose the initial cost like processing fees, commission
incurred for the above loan is Rs. 60,000/-
Solution: This cost should be amortised over the term of loan. The loan is being repaid in 5 equal
annual installments of Rs. 2 lakh each, the loan outstanding through 1 st to 5th year will be Rs. 10, 8,
6, 4, 2 lakh & hence, initial cost should be amortised in the ratio of 5:4:3:2:1.=15
Therefore, 1st year (1.7.2000 to 30.6.2001) will be = (60,000 X 5) ÷ 15 = 20,000
This will be included in the borrowing cost and charged to Asset 'A'. The subsequent amortised
amount will be charged to P&L account.
Illustration 5 Suppose in Illustration 2 above, the borrowing was not term loan from SBI but
debentures having rate of interest 12% per annum and issue expenses of debentures were Rs.
60,000. The balance in securities premium account is Rs. 1,50,000. Other facts remain same as in
Illustrations 2 & 3 above.
Solution: Then the treatment for the issue expenses will be similar to the treatment for initial cost as
outlined in Illustration 4 above. Alternatively, the issue expenses can be written off against securities
premium account as allowed by section 52(2)(c). The auditor can not object to this alternative
treatment even though this violates AS-16. This is because there is a legal basis. Only thing is that
the entity should give details of utilization of security premium accounts as required by schedule III.
It may be noted this alternative treatment is not available for the initial cost mentioned in Illustration
4 above.

3.4 Amount of Borrowing cost to be capitalized:

How to quantify these costs is shown in the Table 2 below –
Sr. Type of borrowing
no.
1. Funds are borrowed
specifically for the purpose
of obtaining a qualifying
asset. e.g. Term loan for
purchase of a Machine.
How to determine borrowing costs “Directly Attributable
to Acquisition, Construction or Production of Qualifying
Asset”
Actual borrowing costs incurred
on that borrowing during the period
(refer para 3.4 below) XXX
Less: any income on the temporary investment
of part or whole of those borrowings. XX
Amount to be capitalized XXX

2. Funds are borrowed
generally and used for the
purpose of obtaining a
qualifying asset
Borrowing costs eligible for capitalisation should be determined
by applying a capitalisation rate to the expenditure on that
asset. Expenditure on a qualifying asset includes only such
expenditure that has resulted in payments of cash, transfers of
other assets or the assumption of interest-bearing liabilities as
reduced by any progress payments received and grants received
in connection with the asset (see Accounting Standard 12,
Accounting for Government Grants). The average carrying
amount of the asset during a period, including borrowing costs
previously capitalised, is normally a reasonable approximation of
the expenditure to which the capitalisation rate is applied in that
period.
The capitalisation rate should be the weighted average of the
borrowing costs applicable to the borrowings of the enterprise
that are outstanding during the period (refer para 16.3.4
below), other than borrowings made specifically for the purpose
of obtaining a qualifying asset. The amount of borrowing costs
capitalised during a period should not exceed the amount of
borrowing costs incurred during that period. (i.e. The amount
capitalized should be the actual or amount arrived at as above,
whichever is lower)

3.5 Period of Time during which Borrowing Costs incurred should be capitalized
The time period in respect of which borrowing costs incurred to be capitalize has three aspects……..
1. When should capitalization start (commencement of capitalization)
2. For what period of time should capitalization be temporarily stopped (suspension of capitalization)
3. When should capitalization stop (cessation of capitalization)
3.5.1 Commencement of Capitalisation
When can an enterprise commence to capitalize borrowing cost? What are the conditions to be satisfied for the
commencement of the capitalization? (Nov. 2002)
The capitalisation of borrowing costs should commence when all the following conditions are
satisfied:
(a) Expenditure for the acquisition, construction or production of a qualifying asset is being incurred;
(b) Borrowing costs are being incurred; and
Activities that are necessary to prepare the asset for its intended use or sale are in progress.

3.5.2 Suspension of Capitalisation

 Capitalisation of borrowing costs should be suspended during extended periods in which active
development is interrupted.
 Borrowing costs may be incurred during an extended period in which the activities necessary to
prepare an asset for its intended use or sale are interrupted.
 Such costs are costs of holding partially completed assets and do not qualify for capitalisation.
 However, capitalisation of borrowing costs is not normally suspended during a period when
substantial technical and administrative work is being carried out.
 Capitalisation of borrowing costs is also not suspended when a temporary delay is a necessary
part of the process of getting an asset ready for its intended use or sale. For example,
capitalisation continues during the extended period needed for inventories to mature or the
extended period during which high water levels delay construction of a bridge, if such high water
levels are common during the construction period in the geographic region involved.

Illustration 6 Suppose in Illustration 2 above, the construction activity was suspended from
1.8.2000 to 31.10.2000, i.e. for 3 month due to some technical problems,
Solution: then borrowing cost of this period will be charged to P&L i.e. and only Rs. 50,000 will be
capitalised in year 2000-01.In such case if information of illustration 16.3 is applicable then that
proportionate amount will also be charged to profit & loss account.

Illustration 7 In Illustration 6 above, if the suspension of work is a normal feature of such activity
say construction work of bridge is suspended due to heavy rains.
Solution: In such cases full amount will be capitalised.

3.5.3 Cessation of Capitalisation

When Capitalisation of borrowing cost should cease as per Accounting Standard 16? [Nov. 2002]

 Capitalisation of borrowing costs should cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale are complete.
 An asset is normally ready for its intended use or sale when its physical construction or
production is complete even though routine administrative work might still continue. If minor
modifications, (such as the decoration of a property to the user’s specification) only that are
outstanding, this indicates that substantially all the activities are complete.
 When the construction of a qualifying asset is completed in parts and a completed part is capable
of being used while construction continues for the other parts, capitalisation of borrowing costs in
relation to a part should cease when substantially all the activities necessary to prepare that part
for its intended use or sale are complete.
 A business park comprising several buildings, each of which can be used individually, is an
example of a qualifying asset for which each part is capable of being used while construction
continues for the other parts.

5 Disclosure
 Enumerate two points which the financial statements should disclose in respect of Borrowing costs as per AS-16. [May
2009]
The financial statements should disclose:
(a) the accounting policy adopted for borrowing costs; and
(b) the amount of borrowing costs capitalised during the period.

SOME ADVANCED ILLUSTRATION

Illustration 8 Y Ltd. is constructing a new plant. Given below are the details of the project cost:
Materials Rs. 70,00,000. Direct expenses Rs. 10,00,000. Total wages of the company during the year
Rs. 1,20,00,000 of which 1/10 is chargeable to project. 2% of the administration expenses Rs.
80,00,000 should be charged to the project. Depreciation on assets used for the project Rs. 1,20,000.
The company had the following fixed assets and borrowings during the year:
Fixed asset Rs. 2,50,00,000
13.5% term loan Rs. 1,00,00,000
14.5% debentures Rs. 1,10,00,000
The company used the borrowed funds for acquiring raw materials but there was no specific
borrowing for that purpose. Other elements of project cost were met from internal accruals.
Find out the cost of the assets/ capital work in progress.

Solution:
Particulars Cost Borrowing Cost
1. Material (incurred over the year) 70,00,000 70,00,000 x 14.02% x 6/12 = 4,90,700
2. Direct Expenses 10,00,000 Borrowing cost not incurred being financed
out of internal accrual.
3. Wages 1,20,000 x 1/10 12,00,000 Borrowing cost not incurred being financed
out of internal accrual
4. Administrative Expenses 80,00,000 x 1,60,000 Borrowing cost not incurred being financed
2% out of internal accrual
5. Depreciation 1,20,000 N.A. being non cash expense
94,80,000
+ Borrowing Cost 4,90,700
Cost of Asset / Capital WIP 99,70,700
Working Note:
Average Borrowing Cost =
Illustration 9 Given below are some relevant data as regards a construction contact:
Rs. in lacs
Expenditure incurred till 31.3.2001 450
Interest cost capitalized for 2000-01 @12% p.a. 24
Amount specifically borrowed till 31.3.2001 200
Asset transferred to construction during 2001-02 100
Cash payments during 2001-02 78
Progress payment received 300
New borrowings during 2001-02 @12% per annum 200
The company intends to capitalise total borrowing cost of Rs. 48 lakhs. Is this treatment in conformity
with the Accounting Standard issued by ICAI? (Assume that all transactions of 2001-02 took place at
the beginning of the financial year).

Solution: Capitalisation of Borrowing cost for 2001-02

 Rs. In lacs
Opening Balance of Asset including borrowing cost capitalised 450 + 24 474
Cost incurred at the beginning of the year 100 + 78 178
Total cost incurred 652
Less: Financed from progress payment received 300
Financed from borrowed fund 352
Less: Specific borrowing @ 12% 200
Balance financed from general borrowing @ 12% 152
Borrowing cost to be capitalised
On specific borrowing 200 x 12% = 24
On general borrowing 152 x 12% = 18.24
42.24

PRACTICAL EXAM QUESTIONS

Problem No.1: (Nov. 2002) Interest on loan borrowed to purchase a machinery which has been
installed two years back is still debited to Machinery Account.
Solution: It should be written off to P& L a/c.

Problem No.2: (May 2008) An industry borrowed Rs.40,00,000 for purchase of machinery on
1.6.2007. Interest on loan is 9% per annum. The machinery was put to use from 1.1.2008. Pass
journal entry for the year ended 31.3.2008 to record the borrowing cost of loan as per AS 16.
Solution: Rs.
Interest upto 31.3.2008 for 10 months (40,00,000 × 9% × 10/12 ) = 3,00,000
Less: Interest relating to pre-operative period 3,00,000 × 7/10 = 2,10,000
Amount to be charged to P&L A/c = 90,000
Pre-operative interest to be capitalized = 2,10,000

Journal Entry
Machinery A/c Dr. 2,10,000
To Loan A/c
2,10,000
(Being interest on loan for pre-operative period capitalized)

Interest on loan A/c Dr. 90,000

To Loan A/c 90,000
(Being the interest on loan for the post-operative period)

Profit and Loss A/c Dr. 90,000

To Interest on loan A/c 90,000
(Being interest on loan transferred to P&L A/c)

Problem No.3: (Nov. 2009) Axe Limited began construction of a new plant on 1 st April, 08 and
obtained a special loan of Rs. 4,00,000 to finance the construction of the plant. The rate of interest
on loan was 10%.
The expenditure that were made on the project of plant were as follows:
1st April, 08 Rs.5,00,000, 1st August, 08 Rs.12,00,000, 1st January, 09 Rs.2,00,000
The company’s other outstanding non-specific loan was Rs. 23,00,000 at an interest rate of 12%.
The construction of the plant completed on 31st March, 09. You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS-16 “Borrowing cost”.
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant.
Solution:
Interest on specific borrowings used for qualifying assets:
From 1.4.08 to 31.3.09 4,00,000 X 10% X 12/12 = 40,000
Interest on non-specific borrowings used for qualifying assets:
From 1.4.08 to 31.3.09 (5,00,000 – 4,00,000) 1,00,000 X 12% X 12/12 = 12,000
From 1.8.08 to 31.3.09 12,00,000 X 12% X 8/12 = 96,000
From 1.1.09 to 31.3.09 2,00,000 X 12% X 3/12 = 6,000
Interest to be capitalised 1,54,000

Problem No.4: [May 2010] Rohini Limited has obtained loan from an Institution for Rs. 500 lacs
for modernization and renovating its Plant and Machinery. The installation of plant and machinery
was completed on 31.3.2009 amounting to Rs. 320 lacs and Rs. 50 lacs advanced to suppliers of
additional assets and the balance of Rs. 130 lacs has been utilized for working capital requirements.
Total interest paid for the above loan amounted to Rs. 65 lacs during 2008-09. You are required to
state how the interest on institutional loan is to be accounted for in the year 2008-09.
Solution:
Treatment of interest as per AS 16
Particulars Nature Interest to be capitalized Interest to be charged to profit
and loss account
(1) Construction of Qualifying asset = Rs.41.60 lakhs
plant and
machinery
(2) Working capital Not qualifying
asset = Rs. 16.90 lakhs.
(3) Advance for Not a qualifying
purchase of asset = Rs. 6.50 lakhs
additional asset
Total Rs. 41.60 lakhs Rs.23.40 lakhs
Assumed that additional asset will be ready to use when acquired.

Problem No.5: (Nov 2004) On 20.4.2003 JLC Ltd. obtained a loan from the Bank for Rs. 50 lakhs
to be utilized as under:
Rs.
Construction of a shed 20 lakhs
Purchase of machinery 15 lakhs
Working capital 10 lakhs
Advance for purchase of truck 5 lakhs
In March, 2004 construction of shed was completed and machinery installed. Delivery of truck
was not received. Total interest charged by the bank for the year ending 31.3.2004 was Rs. 9
lakhs. Show the treatment of interest under AS 16.
Solution: As per AS 16, borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset should be capitalized. A qualifying asset is an asset that necessarily
takes a substantial period of time (usually 12 months of more) to get ready for its intended use or
sale. If an asset is ready for its intended use or sale at the time of its acquisition then it is not treated
as a qualifying asset for the purposes of AS 16.
Treatment of interest as per AS 16
Particulars Nature Interest to be capitalized Interest to be charged to profit
and loss account
(1) Construction of Qualifying asset = Rs. 3.60 lakhs
a shed
(2) Purchase of Not a qualifying
machinery asset* = Rs. 2.70 lakhs.
(3) Working capital Not qualifying
asset = Rs. 1.80 lakhs.
(4) Advance for Not a qualifying
 purchase of asset = Rs. 0.90 lakhs
truck
Total Rs. 3.60 lakhs Rs. 5.40 lakhs
 On the basis that machinery is ready for its intended use at the time of its
acquisition/purchase.

Problem No.6: (May 2011) GHI Limited obtained a loan for Rs. 70 lakhs on 15 th April, 2010 from
JKL Bank, to be utilized as under:
Construction of Factory shed 25 Lakhs
Purchase of Machinery 20 Lakhs
Working capital 15 Lakhs
Advance for purchase of Truck 10 Lakhs
In March 2011 construction of the factory shed was completed and machinery which was ready for its
intended use installed. Delivery of Truck was received in the next financial year. Total interest Rs.
9,10,000 charged by the bank for the financial year ending 31-03-2011.
Show the treatment of interest under AS 16 and also explain the nature of Assets.
Solution: Interest on loan to be treated as follows:
Particulars Amount
To be capitalized
As part of factory shed 3,25,000
To be written off to P&L a/c
Machinery assumed to be ready when purchased 2,60,000
Truck can’t be considered as qualifying asset
1,30,000
Working capital borrowing 1,95,000
5,85,000
9,10,000

Problem No.7: (Nov. 2011) On 25th April, 2010 Neel Limited obtained a loan from the bank for Rs.
70 lakhs to be utilized as under:
Rs. in lakhs
Construction of factory shed 28
Purchase of Machinery 21
Working Capital 14
Advance for purchase of truck 7
In March 2011, Construction of shed was completed and machinery installed. Delivery of truck was
not received. Total interest charged by the bank for the year ending 31 st March, 2011 was Rs. 12
lakhs. Show the treatment of interest under Accounting Standard – 16.

Solution: Interest on loan to be treated as follows:

Particulars Rs. In lacs
To be capitalized
As part of factory shed 4.80
To be written off to P&L a/c
Machinery assumed to be ready when purchased 3.60
Truck can’t be considered as qualifying asset
2.40
Working capital borrowing
1.20
7.20
12.00
Problem No.8: (Nov. 2010) On 1st April 2009 Amazing Construction Ltd. obtained a loan of Rs. 32
crores to be utilized as under:
(i) Construction of sea link across two cities:
(work was held up totally for a month during the year due to high
water levels) : Rs. 25 crores
(ii) Purchase of equipments and machineries : Rs. 3 crores
(iii) Working capital : Rs. 2 crores
(iv) Purchase of vehicles : Rs. 50,00,000
(v) Advance for tools/cranes etc. : Rs. 50,00,000
(vi) Purchase of technical know-how : Rs. 1 crores
(vii) Total interest charged by the bank for the year ending 31.03.2010 : Rs. 80,00,000
Show the treatment of interest by Amazing Construction Ltd.
Solution: Interest on loan to be treated as follows:
Particulars Amount
To be capitalized
As part of factory shed 62,50,000
To be written off to P&L a/c
(ii) Equipment & Machinery, (vi) Technical Know-how, (v) 11,25,000
Advance for tools/cranes.
Such assets are assumed to be ready when purchased
Vehicles can’t be considered as qualifying asset because 1,25,000
these are ready when purchased.
Working capital borrowing 5,00,000
80,00,000

Problem No.9: (Nov. 2011) On 25th April, 2010 Neel Limited obtained a loan from the bank for Rs.
70 lakhs to be utilized as under:
Rs. in lakhs
Construction of factory shed 28
Purchase of Machinery 21
Working Capital 14
Advance for purchase of truck 7
In March 2011, Construction of shed was completed and machinery installed. Delivery of truck was
not received. Total interest charged by the bank for the year ending 31 st March, 2011 was Rs. 12
lakhs. Show the treatment of interest under Accounting Standard – 16.

Solution:
Allocating the interest  Capitalisation of Borrowing Cost
(i) 4.8 Lacs
Factory Shed :
A, qualifying asset hence to be Capitalized
(ii) 3.6 Lacs
Purchase of Machinery:
Assumptions:
- If Machinery takes substantial
time to be ready for use then can be Capitalized
- If when Purchased it is ready
for use then changed to Profit & Loss A/c
(iii) 2.4 Lacs
Working Capital:
- Charged to Profit & Loss A/c
 (iv) 1.2 Lacs
Advance for Purchase of Truck:
- Since asset like Truck can be
considered as ready to use when received hence interest amount should
be Charged to Profit & Loss A/c.

Problem No.10: (May 2014) Suhana Ltd. issued 12% secured debentures of Rs. 100 Lakhs on
01.05.2013, to be utilized as under:
Amount
Particulars (Rs. in
Lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2014, construction of the factory building was completed and machinery was installed
and ready for it's intended use. Total interest on debentures for the financial year ended
31.03.2014 was Rs. 11,00,000. During the year 2013-14, the company had invested idle fund
out of money raised from debentures in banks' fixed deposit and had earned an interest of
Rs. 2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain nature of assets.
Solution:
Interest to be capitalized = Debenture interest – Temporary Investment Income
= Rs. 11,00,000 - Rs. 2,00,000 = Rs. 9,00,000
Allocating the Debenture interest  Capitalisation of Borrowing Cost
(v) 3,60,000
Factory Shed : 9,00,000/100 X 40 =
A, qualifying asset hence to be Capitalized
(vi) 3,15,000
Purchase of Machinery: 9,00,000/100 X 35 =
Assumptions:
- If Machinery takes substantial
time to be ready for use then can be Capitalized
- If when Purchased it is ready
for use then changed to Profit & Loss A/c
(vii) 2,25,000
Working Capital: 9,00,000/100 X 25 =
- Charged to Profit & Loss A/c
- Total 9,00,000
Problem No. 11: (Nov. 2013) Raj & Co. has taken a loan of US$ 20,000 at the beginning of the
financial year for a specific project at an interest rate of 6% per annum, payable annually. On the
day of taking loan, the exchange rate between currencies was Rs.48 per 1 US$. The exchange
rate at the closing of the financial year was Rs.50 per 1 US$. The corresponding amount could
have been borrowed by the company in Indian Rupee at an interest rate of 11 % per annum.
Determine the treatment of borrowing cost in the books of accounts.
Solution:
5. Interest for the period = USD 20,000 x 6% = $ 1,200 x Rs. 50/USD = Rs. 60,000/-
6. Increase in the liability towards the principal amount (Exchange rate difference) = USD
20,000 x (50-48) = Rs. 40,000/-
7. Interest that would have resulted if the loan was taken in Indian currency = USD 20,000 x 48
x 11%). = Rs. 1,05,600
8. Difference between interest on local currency borrowing and foreign currency borrowing =
Rs. 1,05,600 - Rs. 60,000 = Rs. 45,600
The exchange rate difference is lower than the saving in interest due to foreign currency borrowing
hence increase in the liability towards principal amount, Rs. 40,000 will be considered as the
borrowing cost. Thus, total borrowing cost would be Rs. 1,00,000 being the aggregate of interest of
Rs. 60,000 on foreign currency borrowings plus the exchange difference of Rs.40,000 and the
remaining Rs. Nil would be considered as the exchange difference to be accounted for as per
Accounting Standard (AS) 11,.

Problem No. 12: (May 2015) M/s. Ayush Ltd. began construction of a new building on 1 st January,
2014. It obtained Rs.3 lakh special loan to finance the construction of the building on 1 st January,
2014 at an interest rate of 12% p.a.. The company's other outstanding two non-specific loans were:

Amount Rate of Interest

Rs. 6,00,000 11% p.a.
Rs.11,00,000 13% p.a.

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

Amount (Rs.)
January, 2014 3,00,000
April, 2014 3,50,000
July, 2014 5,50,000
December, 2014 1,50,000

Building was completed on 31st December, 2014. 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 in respect of the building.

Solution:
Capitalisation of borrowing cost- Specific & Non-specific borrowing
(i) Computation of average accumulated expenses Rs.
Rs. 3,00,000 x 12 / 12 = 3,00,000
Rs. 3,50,000 x 9 / 12 = 2,62,500
Rs. 5,50,000 x 6 / 12 = 2,75,000
Rs. 1,50,000 x 1 / 12 = 12,500
8,50,000
Note: Expenditure of each month is assumed to have been incurred at the beginning of
that month.

(ii) Calculation of average interest rate for non-specific borrowings

Amount of loan (in Rs.) Rate of interest Amount of interest (in Rs.)
6,00,000 11% = 66,000
11,00,000 13% = 1,43,000
17,00,000 2,09,000
Weighted average rate of interest
= 12.294% (approx)

(iii) Interest on average accumulated expenses

Rs.
Specific borrowings (Rs. 3,00,000 X 12%) = 36,000
Non-specific borrowings (Rs. 5,50,000*** X 12.294%) = 67,617
Amount of interest to be capitalized = 1,03,617
***Average expenditure 8,50,000 – 3,00,000 = 5,50,000

(iv) Total expenses to be capitalized for building

Rs.
Cost of building Rs.(3,00,000 + 3,50,000 + 5,50,000 + 1,50,000) 13,50,000
Add: Amount of interest to be capitalised 1,03,617
14,53,617
(v) Journal Entry
Date Particulars Dr. (Rs.) Cr. (Rs.)
31.12.2014 Building account Dr. 14,53,617
To Bank account 14,53,617
(Being amount of cost of building and borrowing cost thereon capitalized)

Problem No. 13: (Nov. 2015) Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the
5 beginning of Financial Year 2014-15 for its residential project at LIBOR + 3%. The interest is
payable at the end of the Financial Year. At the time of availment, exchange rate was Rs. 56 per US
$ and the rate as on 31st March, 2015 was Rs. 62 per US $. If Shan Builders Limited borrowed the
loan in India in Indian Rupee equivalent, the pricing of loan would have been 10.50%. Compute
Borrowing Cost and exchange difference for the year ending 31st March, 2015 as per applicable
Accounting Standards. (Applicable LIBOR is 1%)
Solution:
9. Interest for the period = USD 10,00,000 x 4% = $ 40,000 x Rs. 62/USD = Rs. 24,80,000/-
10. Increase in the liability towards the principal amount (Exchange rate difference) = USD
10,00,000 x (62-56) = Rs.60,00,000/-
11. Interest that would have resulted if the loan was taken in Indian currency = USD 10,00,000 x
56 x 10.50%). = Rs. 58,80,000
12. Difference between interest on local currency borrowing and foreign currency borrowing =
Rs. 58,80,000 - Rs. 24,80,000 = Rs. 34,00,000
The exchange rate difference is higher than the saving in interest due to foreign currency borrowing
hence increase in the liability towards principal amount, to the extent of Rs. 34,00,000 will be
considered as the borrowing cost.
Thus, total borrowing cost would be Rs. 58,80,000 being the aggregate of interest of Rs. 24,80,000
on foreign currency borrowings plus the exchange difference of Rs.34,00,000 and the remaining Rs.
26,00,000 would be considered as the exchange difference to be accounted for as per Accounting
Standard (AS) 11,.

Problem No. 14: (May-2016) Write short note on 'Suspension of Capitalisation' in context of
Accounting Standard 16
Solution: Suspension of Capitalisation
 Capitalisation of borrowing costs should be suspended during extended periods in which active
development is interrupted.
 Borrowing costs may be incurred during an extended period in which the activities necessary to
prepare an asset for its intended use or sale are interrupted.
 Such costs are costs of holding partially completed assets and do not qualify for capitalisation.
 However, capitalisation of borrowing costs is not normally suspended during a period when
substantial technical and administrative work is being carried out.
 Capitalisation of borrowing costs is also not suspended when a temporary delay is a necessary
part of the process of getting an asset ready for its intended use or sale. For example,
capitalisation continues during the extended period needed for inventories to mature or the
extended period during which high water levels delay construction of a bridge, if such high water
levels are common during the construction period in the geographic region involved.

Problem No. 15: (Nov. 2016) M/s. Zen Bridge Construction Limited obtained a loan of Rs.64
crores to be utilized as under:
(i) Construction of Hill link road in Kedarnath: Rs.50 crores
(work was held up totally for a month during the year due to heavy rain
which are common in the geographic region involved)
(ii) Purchase of Equipment and Machineries Rs.6 crores
(iii) Working Capital Rs.4 crores
(iv) Purchase of Vehicles Rs.1 crore
(v) Advances for tools / cranes etc. Rs.1 crore
(vi) Purchase of Technical Know how Rs.2 crores
(vii) Total Interest charged by the Bank for the year ending 31.03.2016 Rs.1.6 crores
 Show the treatment of Interest according to Accounting Standard by M/s. Zen Bridge
Construction Limited.
Solution: Interest on loan to be treated as follows:
Particulars Amount Rs.
To be capitalized
(i) As part of factory shed 1,60,00,000/64X5 1,25,00,000
0

(ii) Equipment & Machinery, (vi) Technical Know-how, 22,50,000

(v) Advance for tools/cranes. 1,60,00,000/64X9
Such assets are assumed to be qualifying asset.
Other assumption can also be taken.
1,47,50,000
To be written off to P&L a/c

Vehicles can’t be considered as qualifying asset because 2,50,000

these are ready when purchased. 1,60,00,000/64X1
Working capital borrowing 1,60,00,000/64X4 10,00,000
12,50,000
1,60,00,000