IND AS 23 - Borrowing Costs Flashcards
What are the scenarios from the scope which are excluded from the scope of the standard on Borrowing cost under IND AS 23?
- The Standard does not apply to actual or imputed cost of equity, including preferred capital not classified as a liability.
- qualifying assets that are measured at fair value, for example, a biological asset accounted for under Ind AS 41.
- inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis even if they take a substantial period to get ready for sale - Since it would then become too difficult to allocate.
What are the borrowing costs that are covered under this standard?
What is the meaning of the term qualifying assets, what all it includes and excludes?
What is the treatment of Exchange differences to be included in the borrowing costs as per IND AS 23?
What is the approach that needs to be followed to determine the extent to which the exchange difference should be treated as borrowing costs?
- the adjustment should be of an amount which is equivalent to the extent to which the exchange loss does not exceed the difference between the cost of borrowing in functional currency when compared to the cost of borrowing in a foreign currency.
- where there is an unrealised exchange loss which is treated as an adjustment to interest and subsequently there is a realised or unrealised gain in respect of the settlement or translation of the same borrowing, the gain to the extent of the loss previously recognised as an adjustment should also be recognised as an adjustment to interest.
What are the borrowing costs that are eligible for capitalization and what are the types of various borrowing costs?
The borrowing costs that are eligible for capitalization are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made.
Two types of borrowing costs - Specific Borrowing and General Borrowing.
What are the general principles for capitalizing of specific borrowing cost as per IND AS 23?
- The borrowings cost eligible for capitalisation would be the actual borrowing costs incurred during the period less any investment income on the temporary investment of those borrowings.
- Notional BC cannot be capitalized - the entity cannot assume that interest that could have been earned on that cash represents forgone benefit and could be capitalised.
- An entity may obtain borrowed funds and incur associated borrowing costs before some or all of the funds are used for expenditures on the qualifying asset - funds are often temporarily invested pending their expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalisation during a period, any
investment income earned on such funds is deducted from the borrowing costs incurred.
What is the treatment of general borrowing cost as per the provisions of IND AS 23?
All borrowings that are not specific represents general borrowings.
When funds are borrowed specifically for a qualifying asset, costs in relation to that borrowing are accounted for as specific borrowing costs until the asset is ready for its intended use or sale; if the borrowing remains outstanding after the related asset is ready for its intended use or sale, _it becomes part of ‘general borrowing_s’.
What is the meaning of the term capitalization rate and is used in which types of borrowings?
- When the funds are borrowed generally for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation by applying a capitalisation rate to the expenditures on that qualifying asset.
- The capitalisation rate is the weighted average of the borrowing costs applicable to all the general borrowings of the entity that are outstanding during the period.
- Borrowing costs in respect of specific funds borrowed for the purpose of obtaining a qualifying asset shall be excluded from calculation of capitalisation rate until substantially all the activities necessary to prepare that qualifying asset for its intended use or sale are complete.
- The amount of borrowing costs that an entity capitalises during a period shall not exceed the amount of borrowing costs it incurred during that period.
What is the method to calculate the borrowing cost as per the provisions of IND AS 23?
What is the expenditure on which he capitalisation rate has to be applied on?
What is the meaning of commencement date of capitalisation?
What are the additional conditions that must be satisfied for commencement of capitalisation as per IND AS 23?
What is the meaning of suspension of capitalisation? and some examples of where it can and It can’t be suspended?
What is the meaning of cessation of capitalisation as per IND AS 23?
- 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 the physical construction of the asset is complete even though routine administrative work might still continue.
- When an entity completes the construction of a qualifying asset in parts and each part is capable of being used while construction continues on other parts - Then when each part is complete that part’s capitalisation has to be ceased while other parts continue.
- An example of a qualifying asset that needs to be complete before any part can be used is an industrial plant involving several processes which are carried out in sequence at different parts of the plant within the same site, such as a steel mill - This is a scenario where all the parts of the QA has to be completed to start the production process etc, hence cannot be ceased until all the parts are complete as well.
What is the requirement for Capitalising borrowing cost in group financial statements as per IND AS 23?
