Introduction: Ind AS 23, or Indian Accounting Standard 23, lays down the principles for the accounting treatment of borrowing costs. It applies to qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale. Proper application of Ind AS 23 ensures that borrowing costs are appropriately capitalized as part of the cost of qualifying assets, rather than being expensed immediately.
Key Concepts of Ind AS 23:
1. Qualifying Assets:
- Qualifying assets are those that require a substantial period of time to be prepared for their intended use or sale. Examples; it be could be property, plant, and equipment and investment property during the construction period, intangible assets during the development period, or “made-to-order” inventories.
- The standard does not apply to inventories that are manufactured or otherwise produced in large quantities on a repetitive basis and take a substantial period of time (for example, maturing whisky), and qualifying assets measured at fair value, such as biological assets accounted for under Ind AS 41.
2. Borrowing Costs:
- Borrowing costs include interest and other costs that an entity incurs in connection with the borrowing of funds, calculated at effective interest method under Ind AS 109.
- It also includes finance charges in respect of finance leases and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
- This standard does not deal with the actual or imputed cost of equity, including any preferred capital not classified as a liability.
3. Capitalisation of Borrowing Costs:
- Ind AS 23 requires borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset to be capitalized.
- Capitalisation should commence when expenditures are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress (may include some activities prior to commencement of physical production).
- Capitalisation should be suspended during periods in which active development is interrupted.
4. Capitalization Rate:
The capitalization rate is the weighted average of the borrowing costs applicable to the entity’s borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset.
If the entity borrows funds specifically to finance a qualifying asset, the actual borrowing costs incurred on that borrowing less any income earned on the temporary investment of such borrowings are used to determine the capitalization rate.
5. Cessation of Capitalization:
Capitalization of borrowing costs ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. If only minor modifications are outstanding, this indicates that substantially all of the activities are complete.
Where construction is completed in stages, which can be used while construction of the other parts continues, capitalisation of attributable borrowing costs should cease when substantially all of the activities necessary to prepare that part for its intended use or sale are complete.
6. Disclosure Requirements:
- Entities are required to disclose the accounting policy adopted for borrowing costs, including the criteria used to determine which borrowing costs are eligible for capitalization.
- They must also disclose the amount of borrowing costs capitalized during the period.
- the capitalisation rate must also be disclosed by the entities.
7. Impact and Challenges:
Proper application of Ind AS 23 ensures that borrowing costs are not expensed immediately but are capitalized as part of the cost of qualifying assets, thereby enhancing comparability and reliability of financial statements. However, determining which borrowing costs to capitalize can be complex and requires judgment. Additionally, fluctuations in interest rates and foreign exchange rates may impact the amount of borrowing costs capitalized.
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