Indian Accounting Standard (Ind AS) 23 Borrowing Costs

Transcription

1 Indian Accounting Standard (Ind AS) 23 Borrowing Costs

2 Core Principle Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense.

3 Definitions Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale

4 (a) Borrowing Costs may Include : Interest expense calculate using effective interest method as described in Ind-AS 109 Financial Instruments: Recognition and Measurement. (b) Finance charges in respect of finance leases recognized in accordance with Ind-AS 17, Leases and (c)exchange difference arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

5 Depending on the circumstances, any of the following may be qualifying assets: (a) (b) (c) (d) (e) (f) Inventories produced over a long period of time Manufacturing plants Power generation facilities Intangible assets Investment properties Bearer plants.

6 Assets that are ready for their intended use or sale when acquired are not qualifying assets.

7 Recognition An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, as part of the cost of that asset. An entity shall recognise other borrowing costs as an expense in the period in which it incurs them.

8 Borrowing costs eligible for capitalisation 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 The amount of borrowing costs eligible for capitalization will be less any investment income on the temporary deployment of those borrowings Cont...

9 The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of entity.

10 Commencement of capitalisation When the entity (a) (b) (c) Incurs expenditures for the asset; Incurs borrowing costs; and Undertakes activities that are necessary to prepare the asset for its intended use or sale.

11 Suspension of capitalisation An entity shall suspend capitalisation of borrowing costs during extended periods in which it suspends active development of a qualifying asset.

12 Cessation of capitalisation An entity shall cease capitalising borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Cont...

13 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, the entity shall cease capitalising borrowing costs when it completes substantially all the activities necessary to prepare that part for its intended use or sale.

14 Disclosure An entity shall disclose: (a) The amount of borrowing costs capitalised during the period; and (b) The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.

15 Case Studies - 1: ABC Ltd is constructing a stadium. As on 31st March 2017, the construction of the stadium is completed to a large extent. The ticket booking office of the stadium is the only area yet to be completed. The accountant of ABC Ltd seeks your advice whether capitalization of borrowing costs should close on 31st March 2017.

16 Case Studies - 2: SUN Ltd borrowed a sum of US $ million on LIBOR (London Interbank Offered Rate) 1% + 4%. Interest payable at end of the FY. Loan was availed at the then rate of Rs. 45 per US Dollar, rate on 31st March 2017 is Rs. 48 per US Dollar. Had SUN Ltd borrowed in India the interest rate would have been 11% pa. Compute borrowing cost eligible for capitalisation

17 Case Studies - 3: X Ltd. began construction of a new building on 1st January, It obtained Rs 1 lakh special loan to finance the construction of the building on 1st January, 2017 at an interest rate of 10%. The company s other outstanding two non-specific loans were: Amount Rs. 5,00,000 11% Rs. 9,00,000 13% Rate of Interst Cont...

18 The expenditures that were made on the building project were as follows: Particulars Rs. January ,00,000 April ,50,000 July ,50,000 December ,20,000 Cont...

19 Building was completed by 31st December, 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 cost in respect of the building.

20 Indian Accounting Standard (Ind AS) 24 Related Party Disclosures

21 This Standard Shall be applied in : (a) Identifying related party relationships and transactions ; (b) Determining the disclosures to be made about those items.

22 A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.

23 A related party is a (i) Person or (ii) A entity That is related to the reporting entity

24 Person A person or a close member of the person s family is related to the reporting entity if that person: (i) Has Control or joint control of the reporting entity : (ii) (iii) Has Significant influence over the reporting entity; or A Key Managerial Person of the reporting entity or it s parent.

25 Close members of the family (a) (b) (c) That person s children, spouse or domestic partner, brother, sister, father and mother; Children of that person s spouse or domestic partner; and Dependents of that person or that person s spouse or domestic partner.

26 Entity An entity is related to our reporting entity if (i) (ii) (iii) (iv) The entity and the reporting entity are members of the same Group The entity is an associate or joint venture of our reporting entity Both entities are joint ventures of the same third party The entity is a joint venture of a third entity and our reporting entity is an associate of that third entity Cont...

27 (v) The entity is controlled or jointly controlled by the same Person identified earlier; (vi) The same person identified above has significant influence over the entity or is a KMP of the entity; (vii) The entity or its group provides KMP services to the reporting entity or to the parent of the reporting entity.

28 Purpose of related party disclosures A related party relationship could have an effect on the profit or loss and financial position of an entity.

29 The following are not related parties : (i) (ii) Two entities simply because they have a common director or a common KMP Two joint ventures simply because they share joint control of a joint venture. a) Providers of finance, (iii) b) Trade unions, c) Public utilities, and d) Departments and agencies of the government. Cont...

30 (iii) A customer, supplier, franchisor, distributor or general agent with whom our reporting entity transacts a significant volume of business, simply by virtue of the resulting economic dependence.

31 Disclosures (A) Relationships Between Parent and Subsidiaries (B) Management Compensations (C) Related Party Transactions

32 (A) Relationships Between Parent and Subsidiaries The reporting entity must disclose it s parent & ultimate controlling entity.

33 B - Management Compensation Disclose KMP compensation in total & for each of the following categories - Short / Long term employee benefits - Post-employment benefits - Termination benefits - Share based payment benefits (Ind AS 102)

34 C Related Party Transactions - Amount of transactions - Outstanding balances - Provision for Bad debts / Write off & write back - Guarantees extended

35 The disclosures required above for RPT shall be made separately for each of the following categories: (a) The parent; (b) Entities with joint control of, or significant influence over, the reporting entity; (c) Subsidiaries; (d) Associates; (e) Joint ventures in which the entity is a joint venturer; (f) Key management personnel of the entity or its parent; and (g) Other related parties.

36 The following are examples of transactions that are disclosed if they are with a related party: (a) Purchases or sales of goods (finished or unfinished) (b) (c) (d) (e) (f) Purchases or sales of property and other assets; Rendering or receiving of services; Leases; Transfers of research and development; Transfers under license agreements; Cont...

37 (g) Transfers under finance arrangements (including loans and equity contributions in cash or in kind); (h) Provision of guarantees or collateral; (i) Commitments to do something if a particular event occurs or does not occur in the future, including executory contracts (recognized and unrecognized); Cont...

38 (j) Settlement of liabilities on behalf of the entity or by the entity on behalf of that related party ;- and (k) Management contracts including for deputation of employees.

39 The standard wants to draw attention to the possibilities that the financials performance / positions may have been affected by - Mere Presence of a Related Party - By Transactions with Related Party - By Out Standing balances

40 AS VS Ind - AS

41 S/L AS16 Ind AS 23 No. 1 Definitions Definitions Borrowing Costs are interest Borrowing costs are interest and and other costs incurred by an other costs incurred by an enterprise in connections with enterprise in connection with the the borrowing of funds. borrowing of funds (para 5) A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for the intended use or sale. Cont...

42 S/L No. AS16 Ind AS 23 Borrowing costs may include: Ø Interest expense calculated using the effective interest method as described in Ind AS 109 financial instruments. Ø Finance charges on finance leases recognised in accordance with Ind AS 17 : leases and Ø Exchange difference arising from foreign currency borrowings to the extent that they are regarded as an as adjustment to interest costs. Cont...

43 S/L No. AS16 Ind AS 23 A qualifying asset is an asset that takes substantial period of time to get ready for its intended use or sale (para 5) Depending on the circumstances, any of the following may be qualifying assets: a) Inventories b) Manufacturing plants c) Power generation facilities d) Intangible assets e) Investment properties f) Bearer plants. Cont...

44 S/L No. AS16 Ind AS 23 2 Does not provide similar scope exclusions Excludes from its scope borrowing costs directly attributable to the acquisition, construction or production of: - A qualifying asset measured at fair value and - Inventories that are manufactured or otherwise produced, in large quantities on a repetitive basis Cont...

45 S/L No. AS16 Ind AS 23 3 Include the following: (a) Interest and commitment charges on bank borrowings and other short term and long term borrowings (b) Amortization of discounts or premiums related to borrowings Requires that Item (a) Interest and commitment charges on bank borrowings and other short term and long term borrowing to calculate interest expense using effective interest rate method as described in Ind AS 109 Financial Instruments: recognition and measurement. Cont...

46 S/L No. AS16 Ind AS 23 (c) Amortization of ancillary costs incurred in connection with the arrangement of borrowings Item (b) and (c) have been deleted as some of these borrowing costs are similar to components or interest expense calculated using effective interest rate method Cont...

47 S/L No. AS16 Ind AS 23 4 Recognition Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Standard. Other borrowing costs should be recognised as an expense in the period in which they are incurred. Recognition According to the Ind AS, an entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs should be recognised as an expense in the period in which they are incurred

48 AS VS Ind - AS Ind AS 24

49 S/L No. AS18 Ind AS 24 1 Determined by level of direct or indirect Prescribes the disclosures necessary control, joint control and significant to drew attention to the possibilities influence or one party over another or that the financial position and common control by another entity. financial performance of an entity However the determination may be may have been affected by the based on leval from rather that existence of related party and by substance. transactions and outstanding Hence scope of the parties covered balances with such related parties. under the definition of related party A related party transaction is a could be less that under Ind AS. transfer of resources, services or obligations between related parties, regardless of whether price is charged. Cont...

50 S/L No. AS18 Ind AS 24 1 Exemption from disclosure for certain The standard defines related parties SMEs having turnover or borrowings and requires the following related below certain limit. No exemption for disclosures: separate financial statements of Nature of relationships between subsidiaries. parents and subsidiaries, even if there were no transactions between those related parties This name of the entity s parent and if different, the ultimate controlling party. Cont...

51 S/L No. AS18 Ind AS 24 Compensation of key management personnel If there has been any transactions between related parties, nature of relationship and information about transactions and outstanding balance with related parties.

52 Thank You