Borrowing Cost: Accounting Standard
Brief About AS-16 Borrowing cost
Background:
A Business Enterprises requires fund for either of following 2 purposes:
a) To finance its long term assets like plant and machinery, properties, furniture etc
b) To finance its working capital needs for ensuring smooth functioning of its business activities
In case of business enterprise goes for Expansion .i.e it enters into new line of business or goes into new product line or set up new plant, funds are required
Incase of well established firms/ Entities, funds are financed via internal accruals, but there is time gap between funds/ cash generation and funds/ cash requirement. Therefore even well established firms/ business entities and other entities resort to external financing which is enumerated below
a) Debentures
b) Bonds
c) Loans from banks and financial Institution
The above borrowing involves borrowing and other cost such as
a) Interest and commitment charges
b) Amortisation of premium or discount on issue of debentures or bonds etc
c) Amortisation of ancillary cost i.e stamp duty, registration charges, issue expenses etc
AS -16 deals with how accounting of borrowing cost should be carried out.
Applicability: Applicable to all levels of Enterprises
Objective:
Prescribe accounting treatment for borrowing cost .i.e if loan is borrowed for purchase of Asset, whether interest cost should form part of total cost or not.i.e it should be capitalized
Important terms:
• Borrowing cost:
Interest and other incidental cost incurred in respect of borrowings of fund
• Qualifying asset:
An asset which takes substantial period of time to get ready for its intended use or sale
For example:
Plant and machinery
Inventories wherein more than 12 months are consumed for change
• Substantial period of time:
As per ASI( accounting standard interpretation), substantial period of time means period of one year. It may differ from enterprises to enterprise and from case to case but in normal
Background:
A Business Enterprises requires fund for either of following 2 purposes:
a) To finance its long term assets like plant and machinery, properties, furniture etc
b) To finance its working capital needs for ensuring smooth functioning of its business activities
In case of business enterprise goes for Expansion .i.e it enters into new line of business or goes into new product line or set up new plant, funds are required
Incase of well established firms/ Entities, funds are financed via internal accruals, but there is time gap between funds/ cash generation and funds/ cash requirement. Therefore even well established firms/ business entities and other entities resort to external financing which is enumerated below
a) Debentures
b) Bonds
c) Loans from banks and financial Institution
The above borrowing involves borrowing and other cost such as
a) Interest and commitment charges
b) Amortisation of premium or discount on issue of debentures or bonds etc
c) Amortisation of ancillary cost i.e stamp duty, registration charges, issue expenses etc
AS -16 deals with how accounting of borrowing cost should be carried out.
Applicability: Applicable to all levels of Enterprises
Objective:
Prescribe accounting treatment for borrowing cost .i.e if loan is borrowed for purchase of Asset, whether interest cost should form part of total cost or not.i.e it should be capitalized
Important terms:
• Borrowing cost:
Interest and other incidental cost incurred in respect of borrowings of fund
• Qualifying asset:
An asset which takes substantial period of time to get ready for its intended use or sale
For example:
Plant and machinery
Inventories wherein more than 12 months are consumed for change
• Substantial period of time:
As per ASI( accounting standard interpretation), substantial period of time means period of one year. It may differ from enterprises to enterprise and from case to case but in normal