Exposure Draft of the Accounting Standard (AS) 23, Borrowing Costs (Comments to be received by October 31, 2017)
October, 06th 2017
Accounting Standard (AS) 23
Last date for the comments: 31st October, 2017
Accounting Standards Board
The Institute of Chartered Accountants of India
Accounting Standard (AS) 23
(The Indian Accounting Standards (Ind AS), as notified by the Ministry of Corporate
Affairs in February, 2015, have been applicable to the specified class of companies. For
other class of companies, i.e., primarily the unlisted entities having net worth less than
Rs. 250 crores, Accounting Standards, as notified under Companies (Accounting
Standards) Rules, 2006, have been applicable. However, the Ministry of Corporate
Affairs has requested the Accounting Standards Board of The Institute of Chartered
Accountants of India (ICAI) to upgrade Accounting Standards, as notified under
Companies (Accounting Standards) Rules, 2006, to bring them nearer to Indian
Accounting Standards. Accordingly, the Accounting Standards Board, ICAI, initiated to
upgrade these standards which will be applicable to all companies having net-worth less
than Rs. 250 crores including non-corporate entities. While formulating these Accounting
Standards, the Accounting Standards Board, ICAI, decided to maintain the consistency
with the numbering of Standards of the Indian Accounting Standards).
Following is the Exposure Draft of the Accounting Standard (AS) 23, Borrowing Costs,
issued by the Accounting Standards Board of the Institute of Chartered Accountants of
India, for comments. The Board invites comments on any aspect of this Exposure Draft.
Comments are most helpful if they indicate the specific paragraph or group of
paragraphs to which they relate, contain a clear rationale and, where applicable,
provide a suggestion for alternative wording.
How to Comment
Comments can be submitted using one of the following methods so as to receive not later
than 31st October, 2017:
1. Electronically: Visit the following link
2. Email: Comments can be sent at email@example.com
3. Postal: Secretary, Accounting Standards Board,
The Institute of Chartered Accountants of India, ICAI Bhawan, Post
Box No. 7100, Indraprastha Marg, New Delhi 110 002
Further clarifications on any aspect of this Exposure Draft may be sought by e-mail to
(This Accounting Standard includes paragraphs set in bold type and plain type, which
have equal authority. Paragraphs in bold type indicate the main principles.)
1 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.
2 An entity shall apply this Standard in accounting for borrowing costs.
3 The Standard does not deal with the actual or imputed cost of equity, including
preference share capital.
4 An entity is not required to apply the Standard to borrowing costs directly
attributable to the acquisition, construction or production of:
(a) a qualifying asset measured at fair value, for example, a biological asset
within the scope of AS 41, Agriculture1; or
(b) inventories that are manufactured, or otherwise produced, in large
quantities on a repetitive basis.
5 This Standard uses the following terms with the meanings specified:
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.
5A 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 on the basis of facts and circumstances of the case. In estimating the
period, time which an asset takes, technologically and commercially, to get it
ready for its intended use or sale is considered.
6 Borrowing costs may include:
AS 41, Agriculture, is under formulation.
(a) interest expense calculated in accordance with AS 109, Financial
(b) [Refer Appendix 1]
(c) [Refer Appendix 1]
(d) finance charges in respect of finance leases recognised in accordance with
AS 19, Leases; and
(e) exchange differences arising from foreign currency borrowings to the extent
that they are regarded as an adjustment to interest costs.
The application of this clause is illustrated in the Illustration given in
6A. With regard to exchange difference required to be treated as borrowing costs
in accordance with paragraph 6(e), the manner of arriving at the
adjustments stated therein shall be as follows:
(i) 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 local currency when compared to the
cost of borrowing in a foreign currency.
(ii) 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.
7 Depending on the circumstances, any of the following may be qualifying assets:
(b) manufacturing plants
(c) power generation facilities
(d) intangible assets
(e) investment properties
(f) bearer plants.
AS 109, Financial Instruments, is under formulation.
Financial assets, and inventories that are manufactured, or otherwise produced,
over a short period of time, are not qualifying assets. Assets that are ready for
their intended use or sale when acquired are not qualifying assets.
8 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.
9 Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are included in the cost of that asset. Such
borrowing costs are capitalised as part of the cost of the asset when it is probable
that they will result in future economic benefits to the entity and the costs can be
Borrowing costs eligible for capitalisation
10 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. When
an entity borrows funds specifically for the purpose of obtaining a particular
qualifying asset, the borrowing costs that directly relate to that qualifying asset
can be readily identified.
11 It may be difficult to identify a direct relationship between particular borrowings
and a qualifying asset and to determine the borrowings that could otherwise have
been avoided. Such a difficulty occurs, for example, when the financing activity
of an entity is co-ordinated centrally. Difficulties also arise when a group uses a
range of debt instruments to borrow funds at varying rates of interest, and lends
those funds on various bases to other entities in the group. Other complications
arise through the use of loans denominated in or linked to foreign currencies and
from fluctuations in exchange rates. As a result, the determination of the amount
of borrowing costs that are directly attributable to the acquisition of a qualifying
asset is difficult and the exercise of judgement is required.
12 To the extent that an entity borrows funds specifically for the purpose of
obtaining a qualifying asset, the entity shall determine the amount of
borrowing costs eligible for capitalisation as the actual borrowing costs
incurred on that borrowing during the period less any investment income on
the temporary investment of those borrowings.
13 The financing arrangements for a qualifying asset may result in an entity
obtaining borrowed funds and incurring associated borrowing costs before some
or all of the funds are used for expenditures on the qualifying asset. In such
circumstances, the 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.
14 To the extent that an entity borrows funds generally and uses them 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 asset. The capitalisation rate shall be the
weighted average of the borrowing costs applicable to the borrowings of the
entity that are outstanding during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying asset. 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.
15 In some circumstances, it is appropriate to include all borrowings of the parent
and its subsidiaries when computing a weighted average of the borrowing costs;
in other circumstances, it is appropriate for each subsidiary to use a weighted
average of the borrowing costs applicable to its own borrowings.
Excess of the carrying amount of the qualifying asset over
16 When the carrying amount or the expected ultimate cost of the qualifying asset
exceeds its recoverable amount or net realisable value, the carrying amount is
written down or written off in accordance with the requirements of other
Standards. In certain circumstances, the amount of the write-down or write-off is
written back in accordance with those other Standards.
Commencement of capitalisation
17 An entity shall begin capitalising borrowing costs as part of the cost of a
qualifying asset on the commencement date. The commencement date for
capitalisation is the date when the entity first meets all of the following
(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for its
intended use or sale.
18 Expenditures on a qualifying asset include only those expenditures that have
resulted in payments of cash, transfers of other assets or the assumption of
interest-bearing liabilities. Expenditures are reduced by any progress payments
received and grants received in connection with the asset (see AS 20, 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 expenditures to which the capitalisation rate is applied in
19 The activities necessary to prepare the asset for its intended use or sale encompass
more than the physical construction of the asset. They include technical and
administrative work prior to the commencement of physical construction, such as
the activities associated with obtaining permits prior to the commencement of the
physical construction. However, such activities exclude the holding of an asset
when no production or development that changes the asset's condition is taking
place. For example, borrowing costs incurred while land is under development are
capitalised during the period in which activities related to the development are
being undertaken. However, borrowing costs incurred while land acquired for
building purposes is held without any associated development activity do not
qualify for capitalisation.
Suspension of capitalisation
20 An entity shall suspend capitalisation of borrowing costs during extended
periods in which it suspends active development of a qualifying asset.
21 An entity may incur borrowing costs during an extended period in which it
suspends the activities necessary to prepare an asset for its intended use or sale.
Such costs are costs of holding partially completed assets and do not qualify for
capitalisation. However, an entity does not normally suspend capitalising
borrowing costs during a period when it carries out substantial technical and
administrative work. An entity also does not suspend capitalising borrowing costs
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 that high water levels delay construction of a bridge, if such high
water levels are common during the construction period in the geographical
Cessation of capitalisation
22 An entity shall cease capitalising borrowing costs when substantially all the
activities necessary to prepare the qualifying asset for its intended use or sale
23 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. If minor modifications, such as the decoration of a property
to the purchaser's or user's specification, are all that are outstanding, this
indicates that substantially all the activities are complete.
24 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.
25 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 usable while construction continues on other parts. 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.
26 An entity shall disclose:
(a) the amount of borrowing costs capitalised during the period.
(b) [Refer Appendix 1]
Note: This illustration does not form part of the Accounting Standard. Its purpose is to
assist in clarifying the meaning of paragraph 6 (e) of the Standard.
XYZ Ltd. has taken a loan of USD 10,000 on April 1, 2015, for a specific project at an
interest rate of 5% p.a., payable annually. On April, 2015, the exchange rate between the
currencies was Rs. 62 per USD. The exchange rate, as at March 31, 2016, is Rs. 66 per
USD. The corresponding amount could have been borrowed by XYZ Ltd. in local
currency at an interest rate of 11 per cent annum as on April, 2015.
The following computation would be made to determine the amount of borrowing costs
for the purposes of paragraph 6(e) of AS 23:
(i) Interest for the period = USD 10,000 × 5% × Rs. 66/USD = Rs.33,000.
(ii) Increase in the liability towards the principal amount = USD 10,000 × (6662) = Rs.
(iii)Interest that would have resulted if the loan was taken in Indian currency = USD
10,000 × 62 × 11% = Rs.68,200.
(iv) Difference between interest on local currency borrowing and foreign currency
borrowing = Rs. 68,200 Rs. 33,000 = Rs.35,200.
Therefore, out of Rs.40,000 increase in the liability towards principal amount, only
Rs.35,200 will be considered as the borrowing cost. Thus, total borrowing cost would be
Rs.68,200 being the aggregate of interest of Rs.33,000 on foreign currency borrowings
[covered by paragraph 6(a) of AS 23] plus the exchange difference to the extent of
difference between interest on local currency borrowing and interest on foreign currency
borrowing of Rs.35,200. Thus, Rs.68,200 would be considered as the borrowing cost to
be accounted for as per AS 23 and the remaining Rs.4,800 would be considered as the
exchange difference to be accounted for as per Accounting Standard (AS) 21, The Effects
of Changes in Foreign Exchange Rates.
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.40,000 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.47,600 (Rs.80,600 Rs.33,000)] is
more than the exchange difference of Rs.40,000. Therefore, in such a case, the total
borrowing cost would be Rs.73,000 (Rs.33,000 + Rs.40,000) which would be accounted
for under AS 23 and there would be no exchange difference to be accounted for under AS
21, The Effects of Changes in Foreign Exchange Rates.
Note: This Appendix is not a part of the Accounting Standard. The purpose of this
Appendix is only to bring out the major differences, if any, between Accounting Standard
(AS) 23 and the corresponding Indian Accounting Standard (Ind AS) 23, Borrowing
Comparison with Ind AS 23, Borrowing Costs
1 Paragraph 3 of Ind AS 23 has been modified in AS 23 so as to align the same with
the terminology commonly used in India in context of preference share capital and
presentation requirements in this regard prescribed in AS 109.
2 Paragraph 5A is added in AS 23 to provide guidance on `substantial period'.
3 Paragraph 6(a) of Ind AS 23 has been modified in AS 23 so as to provide that the
interest expense to be calculated as per AS 109. The following paragraph numbers
appear as `Deleted' in Ind AS 23:
(i) paragraph 6(b)
(ii) paragraph 6(c)
In order to maintain consistency with paragraph numbers of Ind AS 23, the
paragraph numbers are retained in AS 23.
4 In paragraph 6A(i) of AS 23, to make the terminology consistent with that used in
AS 21, The Effects of Changes in Foreign Exchange Rates, and for ease of
understanding by the users, the term `functional currency' is replaced with the term
5 It was decided that there is no need to issue AS corresponding to Ind AS 29,
Financial Reporting in Hyperinflationary Economy, for non Ind-AS compliant
companies. Accordingly, paragraphs 9 and 11 of Ind AS 23 have been modified in
6 Paragraph 26(b) regarding disclosure of capitalization rate is deleted in AS 23.
7 Appendix A is added in AS 23 giving Illustration to illustrate the application of
clause 6(e) of AS 23.